Murray International, Guinness Asian Equity Income and BMO Commercial Property Trust are three funds that could help income-hungry UK investors diversify away from domestic stocks, according to Interactive Investor.
Dividends have stalled in the UK, according to the latest Link Group Dividend Monitor, where they experienced their worst results in three years as quarterly underlying dividends – with one-off, special dividends stripped out – fell by 0.2 per cent.
“As the world economy falters and the UK remains mired in its political crisis, we are witnessing a significant slowdown in UK plc’s dividend growth rate,” said Michael Kempe, chief operating officer of Link Market Services.
“This is inevitable given the increasingly lacklustre performance companies are putting in on earnings. Unlike 2016 it is not due to problems in just one sector; it is a more generalised slowdown.”
As such, investors should be mindful that their high yielding UK equity income funds are not ‘walking wounded’, said Interactive Investor’s head of investment Rebecca O’Keeffe, highlighting the different ways to spot them.
“The first is to look at the size of the fund,” she explained. “A significant fall in the value of the fund is indicative of either poor performance, large redemptions, or both.
O’Keeffe added: “Another issue is long-term underperformance, which can be a catalyst for further problems down the line.
“As investors start withdrawing money more quickly, this puts enormous pressure on the fund manager to dispose of liquid assets, potentially the better-performing ones in the portfolio, making it more difficult to turn things around as the quality of remaining assets deteriorates.”
Dzmitry Lipski, investment analyst at Interactive Investor (pictured), said that low interest rates and Brexit-inspired market uncertainty have contributed to a tougher environment for UK income investors.
“Whilst we shouldn’t ignore the UK, it makes sense to diversify,” he said.
Below, Lipski highlighted three funds that investors should consider for a diversified income strategy.
Murray International
First on Lipski’s list is the £1.7bn Murray International Trust, a closed-ended global equity income fund overseen by veteran investor Bruce Stout.
“It is a difficult environment for income seekers who don’t want to take on excessive levels of risk,” said Lipski. “Stout has tackled this by focusing on capital preservation, as well as capital appreciation, looking at both equities and bonds.
“Stout looks for value companies with defensive qualities where he has confidence that the companies will be able to continue to deliver earnings and dividends.
“His aversion to debt-heavy ‘zombie’ companies, kept artificially alive by QE, has often seen him look to emerging markets.”
The Interactive Investor analyst noted that the fund is a high conviction fund that will “deviate significantly from the pack, but one that we rate highly”.
Performance of trust vs sector & benchmark over 3yrs
Source: FE Analytics
The trust has made a total return of 18.64 per cent over three years compared with the average IT Global Equity Income peer’s 30.13 per cent return and a 31.2 per cent gain for the FTSE World ex UK index, in the three years to 21 October 2019.
Murray International has a yield of 4.4 per cent, is 13 per cent geared, trading at a premium to net asset value (NAV) of 5.4 per cent, and ongoing charges of 0.69 per cent, according to data from the Association of Investment Companies (AIC).
Guinness Asian Equity Income
Lipski’s second fund is the $215.7m Guinness Asian Equity Income managed by Edmund Harriss and Mark Hammonds.
“Higher up the risk chain is Guinness Asian Equity Income, focussing on high-quality, dividend‐paying companies in the Asia Pacific region that might have, in the short term, fallen out of favour,” said Lipski. “High portfolio concentration of around 36 holdings means it is high risk, so better as a satellite holding in a well-diversified portfolio.”
Over three years, the fund has returned 16.77 per cent compared with a 15.9 per cent gain for the MSCI AC Pacific benchmark and a 16.87 per cent return for the average IA Asia Pacific Excluding Japan peer. Guinness Asian Equity Income has a yield of 3.68 per cent and an ongoing charges figure (OCF) of 0.99 per cent.
BMO Commercial Property Trust
The final strategy highlighted by Lipski is another closed-ended fund: BMO Commercial Property Trust. The £1.4bn trust is managed by Richard Kirby and invests in UK commercial properties and might be suitable for “contrarian income seekers”, according to Lipski.
“Despite challenging Brexit headwinds for UK property, yields and valuations remain attractive relative to other asset classes,” he said. “And property remains a sound diversifier for income-seeking investors and for diversification purposes – as long as you can take a long-term view and ride out those Brexit jitters.”
Performance of trust vs sector over 3yrs
Source: FE Analytics
Over the past three years, BMO Commercial Property Trust has returned 9.53 per cent over the past three years compared with a 15.37 per cent return by the average IT Property – UK Commercial peer.
The trust has a yield of 5 per cent, is 27 per cent geared, trades at a 10.1 per cent discount to NAV and has ongoing charges of 1.18 per cent, according to the AIC.