There has been a surge of global equity income fund launches in recent years, tapping into investors’ demand for dividend-paying strategies that operate outside the staple UK market.
A number of vehicles have registered strong three and five year numbers for the very first time over the past 12 months or so, meaning that they qualify for all three of FE’s ratings systems: FE Crown Fund Ratings, which highlight excellent funds; FE Alpha Manager, which highlights excellent managers; and finally the FE AFI, which looks at the views and opinions of leading industry experts.
Here are three non-UK equity income funds which investors may wish to consider adding to their portfolio in the closing stages of this ISA season:
Standard Life European Equity Income
FE Crowns: 5
FE Alpha Manager: Yes
AFI Indices: Cautious
This five-crown rated fund is one of only five European portfolios that made it into an AFI portfolio, and the only one that has an income-focus.
Will James, who was recently appointed an FE Alpha Manager, has made a very good start since launching the fund back in April 2009, guiding it to the top-quartile of its IMA Europe ex UK sector, with returns of 70.13 per cent.
Performance of fund versus sector and index since launch
Source: FE Analytics
It’s also a top quartile performer over a one and three year period. Over all three time-frames, Standard Life European Equity Income has been less volatile than both its peer group and benchmark, and has a far lower max drawdown.
James invests predominantly for income, though looks to prop up the fund’s total return as well. According to FE data, Standard Life European Equity Income is currently yielding 3.75 per cent, which is very high for its sector.
The manager holds a concentrated portfolio of stocks and often includes some bond exposure to supplement the income of the fund and dampen volatility.
France, Switzerland and Sweden are James’ largest regional positions. He has little in peripheral countries – Spain has the largest weighting, at just 3 per cent.
The FE Research team are big admirers of the fund, and include it as one of their very few global equity income options in the FE Select 100.
They say they like James’ stringent process of holding 50 per cent of the fund’s assets in companies with a high and stable dividend; 35 per cent in companies that display high levels of dividend growth, and 15 per cent in companies that he believes will surpass market expectations with their dividend payout.
The team say they’ve been impressed by James’ ability to perform strongly in both rising and falling markets:
“James focuses solely on dividends when analysing companies. In particular, he aims to estimate the future dividend flow and compares his own expectations with those of the market.”
“This approach has, as expected, proved successful in falling markets but has also done reasonably well in rising ones.”
“His approach to investing will help to generate a high yield and provide investors with some capital appreciation,” they added.
The early successes of the fund have resulted in mass inflows already, sending assets under management (AUM) to £1.26bn.
It has a minimum investment of £500 and an ongoing charges fee (OCF) of 1.61 per cent.
JPM US Equity Income
FE Crowns: 4
FE Alpha Manager: Yes
AFI Indices: Cautious, Balanced, Aggressive
The JPM US Equity Income fund just misses out on the maximum number of FE Crowns, but it more than makes up for it elsewhere, boasting an FE Alpha Manager and appearing in all three of the AFI’s recommended portfolios.
Jonathan Simon’s £1.26bn was launched in December 2009, close to the bottom of the market for the S&P 500 in the aftermath of the Lehman crash.
Performance of fund versus sector and index since launch
Source: FE Analytics
In spite of its defensive income-focus, it’s managed to beat its IMA North America sector average over this period, paying out a decent yield to investors in the process. Our data shows its yield is currently at 2.31 per cent. While this is low compared to the average UK Equity Income fund, only two portfolios in the North America sector are yielding more.
Simon and co-manager Clare Hart target companies that are yielding at least 2 per cent, as they target an overall yield that is 1 per cent above the market average.
The fund pays out a dividend four times a year, so naturally Simon and Hart look for companies that distribute regular payments to shareholders, to ensure their income stream is reliable.
“As a result, such businesses usually offer leading products, generate substantial cash flows and have sensible management teams,” said the FE Research team.
JPM UK Equity Income is a diversified portfolio of around 100 holdings, investing predominantly in large caps. Wells Fargo, Johnson & Johnson and Chevron are all top-10 holdings.
The managers have total flexibility when it comes to sector exposure. At the moment, their biggest overweight by some distance is financials, at 24.5 per cent.
While the FE Research team rate the fund highly, they warn that it may not be suited to bullish investors, and also point out that there are better yields on offer in other IMA sectors.
They commented: “The fund is unlikely to see much benefit from a market rally because its holdings generate stable earnings over every stage of the economic cycle and so will not take off as sharply in a rebound.”
“The fund’s yield is attractive and consistently reaches its target, but investors should know that it remains lower than that offered in Europe and the UK, although it may be more stable.”
JPM UK Equity Income has a minimum investment of £1,000 and an OCF of 1.68 per cent.
Veritas Global Equity Income
FE Crowns: 5
FE Alpha Manager: Yes, 2
AFI Indices: Cautious, Balanced, Aggressive
This is a five crown-rated option for investors who want an already regionally diversified portfolio.
FE Alpha Managers Andy Headley and Charles Richardson look to generate a high and growing level of income over the medium- to long-term, as well as capital growth. However, their priority is to protect investors’ capital, and so the bulk of the total return tends to come from the income.
This way of investing has been very successful; according to FE data, the fund is a top quartile performer in its IMA Global Equity Income sector over a there and five year period, and since its launch in February 2005.
It has returned 119.56 per cent since inception, significantly outperforming its sector average and MSCI World benchmark, with less volatility.
Performance of fund versus sector and index since launch
Source: FE Analytics
The fund also stands up very well against the vastly popular M&G Global Dividend portfolio – another top-rated global equity income option, which sits in the IMA Global sector.
The £5.6bn portfolio has a slightly better record from a total return point of view over a one and three year period, but Veritas has a significantly higher yield: 4.5 per cent, compared to M&G’s 2.95 per cent.
Veritas Global Equity Income is a favourite with head of multi-manager at F&C Gary Potter (pictured), who told FE Trustnet it was a good option for an investor with a time frame as low as three years.
The £2.4bn portfolio is very popular with professional fund managers, but is not a staple option with private investors, who are perhaps put off by the fact it’s listed offshore.
However, the AFI panellists are a big fan of Headley and Richardson, including it in the Cautious, Balanced and Aggressive portfolios.
The managers are significantly overweight emerging markets, with around a quarter of their assets in emerging Asia alone. They’re currently sitting on 11.5 per cent cash.
It has a minimum investment of £30,000 and an OCF of 1.18 per cent. However, if you’re investing through a platform this minimum investment comes down to either £500 or £1,000, but the OCF rises to around 1.7 per cent.
In the previous article in the series, FE Trustnet looked at funds that tick all the boxes across the four multi-asset IMA sectors.