Previous FE Trustnet research has highlighted the popularity of the more blue-chip dividend paying FTSE 100 companies with managers in the IMA UK Equity Income sector.
For example, the multi-national pharmaceutical giant GlaxoSmithKline appears in 72 fund’s top 10 holdings.
McClure (pictured) says FE Trustnet that he is concerned about the amount of money piling into a small amount of income generative stocks and says investors must diversify across all market caps.
He manages the five crown-rated Unicorn UK Income portfolio, which has been the top-performing fund in the IMA UK Equity Income sector over both three and five years. It generates its 3.25 per cent yield from a mid- to small-cap weighted portfolio. “I didn’t predict that BP was going to blow up – no one could have, but I sort of knew that the banks would fall in 2008 because of the amount of leverage in the system," he said.
"These events show that the large caps can be just as risky as the smaller end of the market."
For investors who want to diversify their income stream away from mainstay UK Equity Income funds like Neil Woodford’s Invesco Perpetual High Income and Artemis Income, the IMA Global Equity Income sector could be a viable option.
Despite the fact that the average IMA Global Equity Income fund has a yield of 3.35 per cent while the IMA UK Equity Income sector yields 4.04 per cent, there performance has been very similar over recent years.
Performance of sectors over 5 yrs
| Sector | 1 yr (%) | 3 yrs (%) | 5 yrs (%) | 10 yrs (%) |
| IMA UK Equity Income | 18.42 | 33.34 | 33.8 | 151.14 |
| IMA Global Equity Income | 18.48 | 31.63 | 43.04 | 123.97 |
Source: FE Analytics
Chris Spear (pictured), managing director of Spear Financial, is a fan of the income theme and believes using more globally focused funds is a great way to diversify a portfolio.
“We use global equity income funds for loads of our clients and over the last few years we have really seen the benefit of it. One of the funds I particularly like is Newton Global Higher Income.” “Global equity income is a very interesting development,” Spear said.
“Companies around the world need to attract investment and one of the best ways they can achieve that by offering a decent dividend. Even if you don’t want the income necessarily, I have definitely bought into the idea of income reinvested.”
Newton Global Higher Income has a five crown rating and over £3bn in assets under management.
The fund was launched in November 2005 and over that time it has returned 99.78 per cent, beating both the sector and the FTSE World index by more than 35 percentage points in the process.
James Harries manages the fund and has large weightings in the US and Europe, but also has exposure to the Asia Pacific region and Latin America.
Though the fund has a good long term track record, the fund has a yield of 3.98 per cent which is below the average portfolio in the IMA UK Equity Income sector.
With a yield of 4.89 per cent, Sarasin International Equity Income is the highest income paying fund in the IMA Global Equity Income sector. However, despite its yield the fund has underperformed against its peers and its benchmark – the MSCI World index – over one, three and five years.
Threadneedle Global Equity Income is an example of a fund that has delivered consistently high returns, and with a yield of 4.20 per cent, it offers investors a high level of income.
The fund – which is managed by Stephen Thornber – has ranked in the top three performing portfolios in the sector over three and six months and over one, three and five years.
Since its launch in June 2007, Threadneedle Global Equity Income has returned 49.91 per cent, while the MSCI AC World has returned 35.11 per cent and the sector has returned 33.05 per cent.
Performance of fund versus sector and index since June 2007
Source: FE Analytics
Rob Morgan (pictured), analyst at Charles Stanley, likes the five crown rated Veritas Global Equity Income because it has a longer proven track record.
“The global equity income sector is fairly new and because of that there are not many funds that have a long record and have done well. Veritas Global Equity Income is one that has done particularly well and proven to be very popular and has attracted a lot of institutional investment over the years.”
Veritas Global Equity Income is run by the FE Alpha Manager duo of Andy Headley and Charles Richardson.
It has been the best performing portfolio in the IMA Global Equity Income sector over five years, with returns of 66.23 per cent. The Veritas fund has beaten both its peers and the MSCI World index by over 20 percentage points over that time.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
The fund has a running yield of 4.5 per cent and its largest weighting is to Asia Pacific ex Japan, with 24.6 per cent of the £2.4bn fund positioned there.
As well as having exposure to the more developed markets, the Dublin-domiciled Veritas Global Equity Income holds companies in Africa and the Middle East.
The fund has a minimum investment of £30,000 if you invest directly. However, retail investors can access the fund on a number of platforms.
Veritas Global Equity Income has a total expense ratio of 1.18 per cent.