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Foreign policy

Income is all the rage at the moment, with sales in the UK equity income sector pulling in £369m in net retail sales in February, the third best selling sector. Corporate bonds are also playing on the income theme and in January the sector took in a staggering £1.4bn in net retail sales followed by £1.1bn in February.

With interest rates at historic lows, groups are being quick to capitalise on the theme and have been launching alternatives to the UK sector, promoting foreign equity income products. But will they draw the attention that providers are seeking with these launches?

In the past few months, launches by groups such as JP Morgan, Invesco Perpetual, Allianz and Standard Life joined the ever swelling ranks of foreign equity income products. In the European equity income camp, there are a growing number of participants, with the most recent two launches in the past month by Allianz and Standard Life.

Those with European equity income funds now include Ignis (Argonaut capital), Invesco Perpetual, Psigma (2CG), Swip, F&C, Newton, Elite (WAY), Jupiter, Royal London and Invesco Perpetual.

Invesco Perpetual recently added a global income portfolio to its range, joining other providers such as Newton, Sarasin, Veritas, Legg Mason, Credit Suisse, Lazards, Elite Bloxham (WAY), Threadneedle, Schroders, JP Morgan and Franklin Templeton.

The US and Japan remain relatively smaller sectors in terms of provider offerings. Jupiter has a fund in each sector but joining them are a small group, including JP Morgan, which launched several months ago, and Morant Wright, which has a Japan income invest- ment trust.

What is the appeal of foreign income? The UK is considered to have the strongest dividend culture globally but the rest of the world seems to be catching up. Considering the world economic situation, it is not hard to see the appeal of dividends. But in light of the global recession, there is a question mark over whether or not companies which are struggling to contend with balance sheet issues can and in a global recession will continue to support shareholder value payouts.

The UK dividend culture is long standing and strong and one of the strongest players – the banks – have ceased to pay out. How can companies in countries where dividend payout policy is not the norm not as established as the UK expect to contend with the pressures of payouts as many companies are vying to survive?

According to Jupiter European equity manager Malcolm Millar, they will do just fine. Millar admits that European companies still do not pay out as high a level as they do in the UK but it is comparable and sustainable.

He says: “European companies are more likely to have a target to pay out a proportion of profits rather than a set dividend level. At the margin, the payouts may follow profit trends but they will be less volatile. Behind that, there is also a cultural shift in Europe concerning shareholder value. Managements are more aware of shareholder interests and part of that is providing a reliable stream.”

Historically, European equities have been an unpopular area for UK intermediaries. In fact, in 2008, there was not a single month when there were not retail net outflows from retail investors in the Europe ex UK sector and four times it was the worst-selling sector, according to IMA figures. So does sticking the title income beside the European name suddenly make it more attractive?

As there is no separate European income sector – as yet – it is difficult to tell just how popular these vehicles are becoming. Argonaut’s portfolio appears to have the lion’s share of the industry takings in this area with a fund exceeding £301m. Psigma’s fund has £700,000 in assets, Invesco Perpetual’s fund has more than £30m, Swip’s has £20m, Jupiter’s portfolio is £16m in size while the Newton portfolio has £32m. F&C’s European growth & income has £134m in assets although the fund was originally launched in 1988 with just a growth mandate and only recently changed its focus towards income.

In terms of performance, the income funds are stacking up reasonably well, with two among the top 10 best performers in the Europe ex UK sector over the 12 months to April 8 and again over six months to that date, according to Trustnet figures.

Millar feels that European equities as a whole have unfairly been out of favour with UK investors for years. He says: “It is surprising, considering how well European equities have done over time compared with other regions. Many investors confuse the macro situation in Europe, which tends to lag the rest of the world, with its stockmarket, which is consistently one of the better performers.”

With investors craving income, he believes now is a good time to draw interest into the European equity arena. “With yields similar to the UK and a market with similar structures and risks, it is a sensible first step when looking abroad,” he says.

Over in the global equity camp, managers are equally enthusiastic about the opportunities being presented for dividend growth.

Mark Whitehead, co-manager of the Sarasin international growth fund, says the yield in global equities is at a now at a similar level to the UK, only available on a broader range of stocks. Whitehead, who has just two UK holdings in his portfolio at the moment, points out that 40 per cent of the UK market’s dividends comes from just five stocks – BP, Shell, HSBC, Vodafone and GlaxoSmithKline. But then the UK market has always been reliant on a few sectors to do most of the “heavy lifting” when it comes to dividend provision, he says.

“Two years ago, if you had told me that you could produce a portfolio with a yield of 5 per cent but were underweight financials, I would have laughed. There is not the same level of sector concentration for dividends in the global area.”

He points out there are 484 companies yielding in excess of 4 per cent in the MSCI World index while Millar says there are three times more stocks in Europe providing a yield exceeding 4 per cent than in the UK.

Whitehead agrees that there has been a mindset change in Europe concerning dividend payments. He says: “Not long ago, companies were more interested in gearing up their balance sheets but today they are more interested in providing a progressive dividend and they are more open to disclosing their dividend policy.”

Outside Europe, Whitehead says there are opportunities in countries which are not so mired in recession and which have tangible income streams such as tthe Pacific region.

He says one of the attractions of looking at companies outside the UK is that, unlike in the mature UK dividend market, companies whose dividend payments are relatively new stand a greater chance of growing these payouts. Some companies in the global market have only recently started paying out dividends and as such there is room to grow.

But while the argument for foreign income is understandable and compelling and there is great interest from providers, it remains to be seen if the funds being launched in this area will garner attention from investors.

Within the global growth sector, the Sarasin fund is the best-performing fund with an income remit and is ranked 28th out of 150 funds over 12 months while over six months it is CS global income ranked 35th followed by Thread-needle’s fund at 39th.


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