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Abroad range of income choice

Chris Salih looks at the growing trend for overseas income funds

The UK income sector has produced stellar returns over the past few years but recent figures show that some funds are now missing the yield target of 110 per cent of the FTSE All Share index set by the Investment Management Association.

Add to that concerns about the domestic economy and the direction of inflation and dividend growth overseas in recent years and it could be that investors start looking further afield for income.

A number of overseas equity income funds have been launched in the past two years.

This year has seen global equity income funds from Schroders, JP Morgan and Lazards while Jupiter is offering a series of income funds in Europe, Japan and the US.

Resolution Argonaut European equity income manager Oliver Russ says: “We have seen how successful the UK equity income sector has been and when we looked at European stockmarkets, it was eye-raising to see just how many companies had sustainably high and rising dividend yield. If the story works in the UK, why not in Europe? It also worked because most people now see Europe as a single capital market.”

Schroders set up a global equity income fund in May and fund manager Sonja Schemmann, cites maturing markets, particularly in developed countries,a major part of the rationale behind the launch.

She says: “Until recently, the majority of dividend-paying companies were based in the UK but, as markets across the globe have matured, there are an increasing number of companies that are paying attractive dividends. In fact, 91.8 per cent of stocks yielding more than 3 per cent are found outside of the UK.

“For this reason, we believe there is a lot of potential for income-seeking investors in a globally invested fund.”

Newton and Sarasin are the only two singlemanager vehicles with oneyear track records and they are placed in the first and third quartile respectively.

Informed Choice managing director Martin Bamford believes there is demand for the new portfolios but most people will stick with what they know.

He says: “There is demand but for many it is enough to recognise that UK equity income managers can take advantage of the opportu-nity to invest 20 per cent of their fund outside Britain.”

Chelsea Financial Services managing director Darius McDermott believes that going overseas for equity income is a sensible diversification move. He says: “Two decades ago, it was largely the case that the UK was the only area where companies paid dividends. Now that has changed and very few of the best dividend returns come from the UK.”

McDermott also considers that most global equity income funds are likely to stick to chasing yields rather than the totalreturn nature which has bitten the majority of UK income funds.

He says: “We have yet to recommend anyone’s fund as none has a good long-term track record but that is bound to change over time. I would also look very carefully at which areas managers are searching for yield from and see if they have experience in those markets.”

There are also additional risks. For example, dividends paid in local currency would have to be converted into sterling before it is paid to investors, meaning that if the overseas currencies are weak relative to the pound, it will eat into the dividend returns the fund receives without hedging.

But Hargreaves Lansdown head of research Mark Dampier says currency issues could work in favour of investors, given the strength of the pound over recent times.

He says: “It depends on whether these overseas income vehicles hedge money back in the first place. Nonetheless, the pound has been pretty strong for the past decade but, given the huge debt deficit, the chances are that is likely to weaken in the future. The pound is only reaching record highs against the dollar, it has not done so well against the euro.”

Dampier says that if investors have a smaller pot of assets, they should go into a global portfolio or pick more geographically focused overseas funds, such as Argonaut European income, which is one of his favourites.

Maia Capital Partner Chris Ralph says dividend returns has to be one of the key factors.

He says: “First, it is important for the investment process to be robust but we must ensure that the dividend-paying companies are there to stay for managers.

“We have one overseas equity income fund in our portfolio but we are always looking for new opportunities in that market and, given their growth in the past few years, there are bound to be more to choose from in the future.”

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