UK equity income funds have distributed considerably more income to their investors than global equity income funds over the last five years, according to the latest FE Trustnet study.
A recent FE Trustnet article highlighted that UK equity income funds boast significantly higher returns than global equity income funds over one, three, five and 10 year periods.
However, our latest study shows that domestic funds have also comfortably outperformed their global rivals in terms of income generation; one of the main attributes investors analyse when choosing a yielding fund.
The study highlighted that the average IMA UK Equity Income fund has paid out £307.70 worth of income on an initial £1,000 investment five years ago, while the average fund in the IMA Global Equity Income sector has paid out just £248.96 over that time.
There are a number of funds in the IMA UK Equity Income sector, such as Insight Equity Income Booster, Schroder Income Maximiser and Fidelity Enhanced Income, which can use derivatives to increase the amount of income they pay their investors, This arguably skews the figures in favour of the UK.
Our data shows that the five funds that use derivatives frequently have paid out on average £400.40 worth of income on an initial £1,000 investment made in June 2009.
However, even if you exclude these funds, the IMA UK Equity Income sector has still delivered considerably more income than the IMA Global Equity Income sector over the last five years, as the table below shows.
Source: FE Analytics
Nine of the top-10 best funds for income over five years across the two sectors are UK-focused, and if you exclude those that use call options, eight of the top-10 come from IMA UK Equity Income.
Top income generators include PFS Chelverton UK Equity Income, Unicorn UK Income, Newton Higher Income and JOHCM UK Equity Income. The Chelverton, JOHCM and Unicorn fund in particular have also been top-performers from a total return point of view.
Source: FE Analytics
On the other hand, when combining the two sectors, five of the worst funds for income generation over that time sit in the IMA Global Equity Income sector. They include Invesco Perpetual Global Equity Income, JPM Global Equity Income and Legg Mason Global Equity Income.
Simon Evan-Cook (pictured), senior investment manager at Premier, believes there are a number of reasons why UK equity income funds have been so dominant.
“The UK is quite a quirky market as it has a long history of companies respecting dividends. Compared to other markets, the UK has a very mature dividend culture,” Evan-Cook explained.
“Global funds will usually be benchmarked against the FTSE All World or MSCI World indices and they typically have 50 per cent weighting to the US. In the US, dividends have historically been viewed with disdain as when companies have paid dividends in the past, it can be seen as a sign that it is going ex-growth.”
“Instead, they will tend to re-invest cash for growth. Nevertheless, you have to be a very brave global manager to ignore the US. Then there is also Japan, which isn’t a big dividend paying market, but does make up a large part of global indices.”
The best performing global fund for its income generation over five years has been Liontrust Global Income.
The five crown-rated fund, which is co-managed by James Inglis-Jones and Samantha Gleave, has paid out £380.95 worth of income on an initial investment of £1,000 five years ago. This means its net distribution has been higher than popular UK income funds, which includes the likes of Artemis Income, Invesco Perpetual Income and Trojan Income.
Given the amount of income the £252m Liontrust fund has paid out over the last five years, it isn’t entirely surprising to see that it's been a top quartile performer from a total return point of view over that time, with returns of 94.02 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, up until May last year, Liontrust Global Income – which was previously called Liontrust Income – had been a member of the IMA UK Equity Income sector and switched to a more global mandate to give the managers more flexibility.
One of the principle drivers of Liontrust Global Income’s above average net distribution could well be because the managers' bias to the UK dividend paying market compared to its rivals in the global sector.
Inglis-Jones and Gleave currently hold close to 60 per cent of their fund in the UK, 23 per cent in continental Europe, 9 per cent in North America and 5 per cent in Asia.
The majority of industry experts recommend that investors use global equity income funds to diversify their income stream away from the often concentrated UK market. However, investors who buy the Liontrust fund in order to diversify their income should realise that the managers hold a large number of stocks which are popular with UK managers.
For instance, Inglis-Jones and Gleave’s count widely-held FTSE 100 stocks such as AstraZeneca, Royal Dutch Shell and BHP Billiton as top 10 holdings.
The exception to the rule, however, is the Lazard Global Equity Income fund. It has paid out £335.89 worth of income on an £1,000 investment made five years ago and has typically had a very low weighting to the UK.
The £255m fund, which is headed-up by Patrick Ryan, currently has just 4.2 per cent in the UK and that has remained relatively constant over recent years. However, over a cumulative five year period the fund has underperformed against both the sector and its MSCI AC World benchmark, with returns of 81.66 per cent.
