Income funds have an enduring popularity with UK investors, for reasons which readers will be well aware.
UK-listed businesses have a long tradition of returning value to shareholders through dividends. Over time, these payouts have made a very healthy contribution to total returns. Between 1950 and 2000, for example, 60 per cent of returns from markets came from dividends.
The sector attracts some of the very best talent in the fund management industry, ensuring that income funds have retained their popularity not only with those seeking retirement income but from the more cautious investor who values the steady reinvestment of income.
The dividend culture fell out of fashion during the heady days of the technology boom but bounced back during the bear market as investors grew wary of promises of capital growth and rewarded companies that grew their payouts.
Dividend growth in the UK market has been very strong over recent years as a result. Payouts grew by an average of 17.5 per cent during 2004, with growth of over 8 per cent in 2005 and 2006. Forecasts suggest that investors will enjoy similar income growth in 2007.
Investor demand for the return of cash has not been confined to the UK, however. A recent survey by Merrill Lynch found that 53 per cent of fund managers operating in markets around the world want companies to use their corporate cashflow to return cash to shareholders.
Demand for yield internationally is not new. In the last 12 years, high-yielding companies in the developed world have outperformed in two out of every three years. What is relatively new is that management teams outside the UK are recognising not only that good corporate governance requires the return of cash to shareholders but that ageing populations mean that investors will reward them if they do.
Dividends are increasing across markets including Europe, Japan and Asia. European companies have less of a dividend culture than in the UK but yields are very much in line with the UK. Our view is that there is a broad and well diversified range of companies in continental Europe that can grow profits sustainably while being willing and able to grow their dividend payments over time.
Some of the best opportunities for strong capital growth and rising dividends lie in the financials sector. Many companies including Unicredito, Societe Generale and Allied Irish Bank enjoy strong domestic franchises while having the opportunity for overseas expansion. French company Essilor International is the world leader in corrective eye lenses. As well as driving its sales in developed markets by product innovation, it is seeing the emergence of potentially huge markets such as India and China.
There is a similar story of rising yields in Japan. Citigroup puts the prospective yield for 2007 at 1.2 per cent compared with the Japanese 10-year bond yield of 1.7 per cent. This may be low compared with the West but the trend is for yields to rise, potentially to 1.4 per cent in 2008. A similar picture is emerging in North America.
We believe an investment approach that stresses the importance of dividends works across markets and is a good way of generating superior returns for our investors. Attractive yields often go hand in hand with undervalued shares but a company’s attitude to its dividends can be a strong guide to the future prospects of the business as well as to the integrity and capability of the management.
UK income funds may continue to dominate our domestic marketplace for many years but an increasing proportion of advisers are catching on to the long-term prospects for global income and I firmly expect global income products to have a much bigger share of the market in years to come.
Malcolm Millar will manage the Jupiter European income fund due to launch next month.