UK equity income funds from Liontrust, Neptune and Rathbones are among the biggest backers of overseas companies within their portfolios, according to research by FE Trustnet.
Under Investment Association rules, funds in the £55.3bn IA UK Equity Income sector must have at least 80 per cent of their portfolios invested in UK equities.
As well as meeting the domestic equities requirement, all funds in the sector are required to have distributable income in excess of 100 per cent of the FTSE All Share at the end of a three-year rolling basis and by 90 per cent on an annual basis.
Source: FE Analytics
Below, FE Trustnet considers the funds from the IA UK Equity Income sector that are making the most use of their ability to look outside of home shores for investment opportunities.
Neptune Income and Neptune Quarterly Income
Neptune Income, managed by veteran UK equity manager Robin Geffen, tops our list of UK equity income funds with the largest exposure to overseas equities representing 18.9 per cent of the portfolio.
The high conviction fund aims to provide a rising level of income with the potential for some capital growth.
“Whichever side of the line you stand on, the whole idea of what should happen with Europe is probably different from just about everybody else’s,” he said. “It is very divisive, it isn’t going away anytime soon. It’s an issue that hangs over the UK in terms of uncertainty.
“We’re very positive about global growth – but investment in the UK is a major issue.”
Part of his overseas exposure derives from the technology sector, where market-leading companies are harder to find in the UK market.
He said: “Technology is a bit of a bugbear of mine because in the UK it accounts for less than 2 per cent of the market. In Europe it is 7 per cent and in the US it is 25 per cent in its purest form.”
One of the fund’s top holdings is Microsoft, which has made inroads into the cloud computing space with revenues growing at around 100 per cent year-on-year.
Since launch at the end of 2012, the Neptune Income fund has delivered a total return of 318.52 per cent compared with a rise of 286.31 per cent for the FTSE All Share index and a gain of 273.48 per cent for the average IA UK Equity Income fund.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
The fund has a yield of 3.59 per cent and an OCF of 0.86 per cent.
Similarly, the Neptune Quarterly Income fund has a high exposure to overseas equities of 18.3 per cent also reflecting Geffen’s outlook market outlook.
Since launch in July 2005 the fund has returned 144.23 per cent compared with a 159.65 per cent return for the index and 147.62 per cent for the average peer. The fund has a yield of 3.64 per cent and an OCF of 1 per cent.
Liontrust Macro Equity Income
Next up is £171.9m Liontrust Macro Equity Income fund which has 17.7 per cent of its portfolio invested in overseas equities.
Indeed, managers Stephen Bailey and Jamie Clark have a 13.1 per cent exposure to US stocks in the fund and a further 4.6 per cent invested in Germany, according to the most recent factsheet. There’s also 1.4 per cent in cash.
Liontrust Macro Equity Income seeks to provide a rising level of income along with capital growth using the firm’s proprietary Macro-Thematic process – which aims to identify and interpret major economic, political, social and cultural developments affecting the UK and the rest of the world.
As such, the process takes a top-down approach to stock selection in the belief that investors are bad at discounting the kind of change that defines macro themes.
The managers note that as a result, the fund can look very different from the market and its peers in the sector.
The pair have managed the fund together for almost 15 years, joining Liontrust Asset Management from Walker Crips Asset Managers in 2012.
Over the past 10 years, Liontrust Macro Equity Income has generated a total return of 104.70 per cent, compared with a 103.15 per cent gain for the average IA UK Equity Income fund and a 101.80 per cent return for the FTSE All Share index.
The fund has a yield of 4.45 per cent and an ongoing charges figure (OCF) of 0.86 per cent.
Rathbone Blue Chip Income and Growth
The £71.7m Rathbone Blue Chip Income and Growth is next on our list with an exposure to overseas equities of 13.93 per cent.
The fund has been managed by Alan Dobbie since 2012 and aims to achieve above average and steadily increasing income with a total return that beats the FTSE All Share index over the medium-to-long term.
The manager believes that investors need to think and act differently to the rest of the market to achieve such returns.
While most of the highly-concentrated portfolio’s 30 stocks derive from the UK market, it has a significant allocation to overseas equities.
Overseas companies within the company include Finnish financial company Sampo Group, the fund’s largest holding at 5.18 per cent of the portfolio.
Another top-10 holding for the fund is Brazilian-Belgian brewer Anheuser Busch-Inbev, which represents 4.51 per cent of the portfolio.
What these stocks have in common with the other UK holdings within the portfolio, according to the asset manager, is that they consistently generate good cash returns on capital expenditure, allocate capital sensibly, are conservatively financed and are undervalued.
Performance of fund vs sector & benchmark under Dobbie
Source: FE Analytics
Since Dobbie took over the Rathbone Blue Chip Income and Growth fund in 2012 it has delivered a total return of 77.62 per cent compared with an 87.27 per cent gain for the FTSE All Share index and a 93.58 per cent return for the average IA UK Equity Income fund, as the above chart shows.
The fund has a yield of 3.99 per cent and an ongoing charges figure (OCF) of 0.84 per cent.
Sister fund Rathbone Income overseen by lead manager Carl Stick also figured highly in our list of funds with the highest proportion of overseas holdings. The fund has 10.81 per cent invested in overseas equities.
Under Stick the £1.3bn fund has generated a total return of 367.23 per cent compared with a 206.71 per cent gain for the average peer group fund and a 143.70 per cent return for the FTSE All Share index.