Global equity income trusts managed by Aberdeen, Baillie Gifford and JP Morgan are among those that the analysts at Numis Securities think could perform well this year given the current market conditions.
In a recent article, we looked at the UK equity income trusts that these analysts are tipping for 2018. Names such as Edinburgh Investment Trust, Troy Income & Growth and Finsbury Growth & Income appeared on that list.
However, there are a number of headwinds hanging over the UK and, when it comes to equity income investors, the fact that the bulk of the market’s dividends are paid by a relatively small number of companies is a concern.
Numis analysts wrote: “Global equity income funds provide a more diversified source of income than can be found through the UK equity income investment companies.”
With this in mind, we look at the four global equity funds that the broker is tipping for income investors.
Murray International
The first global equity income trust highlighted by Numis is Murray International, which is managed by Aberdeen’s Bruce Stout. The analysts noted that Stout has established an “excellent” long-term track record but pointed out that the portfolio’s low exposure to US and a high weighting to emerging markets and Asia caused it to underperform between 2013 and 2015.
However, it generated strong returns in 2016 thanks to this exposure to emerging markets and Stout’s stock selection while Numis said that 2017’s 13.9 per cent net asset value (NAV) return represents a “solid” year despite the portfolio’s defensive positioning.
Total return of trust vs sector and benchmark over 15yrs
Source: FE Analytics
The £1.6bn trust focuses on companies with healthy balance sheets and strong market positions, with the likes of Taiwan Semiconductor, British American Tobacco and PepsiCo being among the portfolio’s largest holdings. Its income goals are supported by an allocation to fixed income.
Stout runs the portfolio in a defensive manager and has a bearish view on the conditions that have supported the post-financial crisis rally. He said recently: “There is no shortage of reasons to be nervous about the outlook for 2018.
“Stretched equity valuations, increasingly narrow stock markets, numerous un-covered dividends, record low market volatility, artificially low bond yields, unsustainable debt burdens and contracting overall liquidity are to name but a few.
“Great care must be exercised in the allocation of investment capital against such a backdrop, so the portfolio’s defensive strategy will be maintained.”
Murray International has ongoing charges of 0.68 per cent, is trading on a 1.4 per cent premium to NAV and yields 4 per cent, according to the Association of Investment Companies (AIC). It is 10 per cent geared.
Scottish American
Numis continues to back the £511.6m Scottish American investment trust, despite the fact that lead manager Dominic Neary resigned from Baillie Gifford in August 2017. Deputy managers James Dow and Toby Ross then took over as joint managers of the fund, with analysts saying the move has not had any “significant impact” on the portfolio.
“On the face of it, Scottish American’s Global Income mandate fits awkwardly with Baillie Gifford’s focus on disruptive growth stocks. Reflecting its quarterly yield of 3 per cent per annum, a third of the stocks in Scottish American’s portfolio are unique within Baillie Gifford and there is an overlap of just 15 per cent with Monks and 5 per cent with Scottish Mortgage,” Numis said.
“However, [Baillie Gifford’s] global income growth team emphasise that they are looking to invest in stocks with growth potential, as well as income. The focus is on the drivers of cash flow growth over the long term and ‘compounding machines’ represent two-thirds of the portfolio – these are businesses with strong competitive positions, balance sheets and management teams.”
Total return of trust vs sector and benchmark over 10yrs
Source: FE Analytics
Examples of these ‘compounding machines’ include Coca-Cola, Taiwan Semiconductor, WPP, Hiscox and Johnson & Johnson. The portfolio’s biggest geographic exposure is to European equities at 35.1 per cent of assets, with North American stocks accounting for 23.3 per cent and property 14.6 per cent.
Since Dow and Ross took over in August 2017, the trust has outperformed its average peer with a 5.54 per cent total return although this is a very short period to examine performance. It has also beaten the sector average over one, three, five and 10 years.
Scottish American has ongoing charges of 0.87 per cent, is trading on a 3.9 per cent premium and yields 3 per cent. It is 16 per cent geared.
Henderson International Income
Numis’ analysts also like the £296m Henderson International Income investment trust, which is managed by Ben Lofthouse, the head of Janus Henderson’s global income team.
The process behind the portfolio has a strong valuation discipline, which means that there can often be a contrarian bias with allocations to out-of-favour sectors and regions. Reflecting this, the portfolio’s largest regional overweight for some time has been Europe, which has supported performance as the region came back into favour over the past year.
“Henderson International Income has a decent record since IPO, with the NAV up 12.1 per cent per annum on a total return basis,” Numis added.
Total return of trust vs sector and benchmark since launch
Source: FE Analytics
“Although this is a little behind the 13 per cent return from the MSCI World ex UK (in sterling), it is ahead of the peers, Scottish American (10.3 per cent) and Murray International (9.9 per cent) over the same time period.”
The analysts also noted that Henderson International Income is differentiated from its peers by not investing in the UK, adding: “We believe that it is an attractive way to diversify away from UK equity income.”
Henderson International Income has ongoing charges of 0.90 per cent, trades on a 1 per cent premium, is not geared and has a 3.1 per cent dividend yield.
JPMorgan Global Growth & Income
The final one to watch on Numis’ list is Jeroen Huysinga and Timothy Woodhouse’s £417.3m JPMorgan Global Growth & Income trust. The analysts noted that in mid-2016 the trust adopted a policy of paying out a quarterly dividend yield of at least 4 per cent a year based on the NAV at the start of each financial year.
“We could understand the rationale to differentiate JPMorgan Global Growth & Income as it was relatively small relative to its peers and struggled to stand out despite a solid track record under the management of Jeroen Huysinga since September 2008,” they added.
“To date, the change has been a huge success, as the fund has moved from a 14 per cent discount to a premium and has been issuing new shares to meet investor demand.”
Total return of trust vs sector and benchmark since Jul 2016
Source: FE Analytics
Huysinga and Timothy Woodhouse build a high-conviction portfolio of between 50-to-90 stocks through a process that is more focused on bottom-up stock selection than geographical or sector allocation. Top holdings at the moment include Google parent Alphabet, United Health Group and Microsoft.
Numis added that the trust’s income payouts are enhanced by capital reserves, suggesting that it could have different risk characteristics to other members of the AIC’s Global Equity Income sector.
JPMorgan Global Growth & Income has ongoing charges of 0.57 per cent – which rises to 1.23 per cent when its performance fee is included. It is yielding 3.7 per cent, trades on a 1.3 per cent premium to NAV and is 1 per cent geared.