Global funds widen search
The IMA’s global equity income sector reveals the opportunity to go global for income, says Joanne Ellul
The Investment Management Association’s new sector, the global equity income sector, launched on January 1 following last year’s review of its sector classifications.
The sector definition states that participant funds need to invest at least 80 per cent of their assets globally in equities, they must be diversified by geographical region and intend to achieve a historic yield on the distributable income of over 110 per cent of the MSCI World index yield at the fund’s year end.
With investors having to expand their search for income as traditional developed investment markets fail to deliver and returns on cash remain low, the launch of the new sector has been welcomed.
Chelsea Financial Services managing director Darius McDermott says that the creation of the global equity income sector enables investors to compare income funds with their peers rather than being lumped in with global growth funds.
McDermott says: “Many UK investors will automatically think of UK equity income funds when it comes to dividends but it is not necessary to stick to the UK market. Global equity income funds offer much more diversification and indeed better dividends in many cases.”
Legal & General Investments managing director Simon Ellis predicts global equity income is set to become a big trend. “Investors increasingly believe the best source of stable returns in this environment is income but they want diversification across markets to hopefully reduce volatility.”
One of the new sector’s 19 constituents is the JP Morgan global dividend fund. Portfolio manager Alex Robins says the ability to look outside the UK adds significantly to the choice of stocks to invest in. He says: “There are a limited number of high-income stocks if you just look to the UK relative to a global portfolio.”
Robins says the fund has increased the number of stocks in the portfolio from the mid-50s a few years ago to 70 stocks. He says: “I do not want to be concentrated in a small number of stocks, as there is much greater risk to portfolio income if there is a dividend cut within stocks that have a higher weighting. We have a maximum of 2 to 3 per cent in each stock.”
Artemis global income manager Jacob de Tusch-Lec says looking at a global stockpicking universe allows them to consider frequency of dividend payment as a factor in buying stocks. He says: “A lot of companies globally pay dividends once a year, like European companies. So with European stocks you buy them if you are sure about the business model and the ability to distribute the dividend.”
But despite paying dividends annually, he has been adding to his exposure to Europe firms to take advantage of low valuations and has moved from an underweight to a neutral position on the eurozone.
De Tusch-Lec says: “There are value plays popping up with a 8 to 9 per cent dividend yield and with good visibility, they will stick to that yield. There is a risk we have all become so depressed with Europe that we do not respond when there is positive news.”
Schroders global equity income fund manager Sonja Schemmann says she favours Asia and Europe over the US as it is easier to find stocks that yield more than 4 per cent in these regions. There are only 10 per cent of S&P 500 that yield 4 per cent or more.
She says: “I have been adding to Europe as companies are trading at a massive discount. Companies are global in nature and so European companies should rise from any improvement in macro economic data.”
Threadneedle global equity income manager Stephen Thornber also looks for stocks that yield more than 4 per cent and says they are easier to find outside the UK. Income investors can get exposure to emerging markets by holding stocks in Western firms that operate in these markets. However, Thornber says that pure exposure can also be beneficial as economic growth is not diluted.
He says: “I own Vodafone in the fund but I also own DiGi, the Malaysian telecoms company, and I get far more sensitivity to the Malaysian economy through that than I would through Vodafone and its regional investments because Vodafone is such a large conglomerate.
“I like Asia and emerging markets, particularly China, with growth expected at about 8.5 per cent this year.”