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Multi-manager View

With cash generating poor rewards, especially in real terms, many investors are looking to equity income for returns – and many multi-managers too.

Dividend income may not be as exciting as capital growth, but boring should not be underestimated. The Barclays Equity Gilt Study demonstrates that £100 invested in 1899 would, by the start of this year, have been worth over £24,000 in real terms with the reinvestment of income but only a mere £180 without.

With the price/earnings ratio of the FTSE All-Share index a little below 10, there remains the opportunity that investors could see capital growth too. Over the last 40 years, the average p/e ratio for the UK equity market is closer to 14, underlining the potential. But no one can dismiss the possibility of further market plunges in the months ahead, so for now let us focus on dividend income.

Traditionally, yield-hunters have preferred to trawl the UK market, where companies have long recognised the value of rewarding shareholders with dividends. The average yield from the FTSE All-Share in recent years has typically been somewhere between 3 and 4 per cent but a good UK equity income manager can pick up some opportunities in worldclass UK-listed firms at the moment delivering a yield of over 5 per cent.

This is attractive, but investors should also consider looking further afield. Investing in overseas markets adds risks but many offer higher yields than history perhaps suggests, with emerging markets catching the eye.

T Bailey was relatively early to the emerging market story and has held a comparatively high exposure for over a decade in our global equity portfolio, the T Bailey growth fund – a position that has rewarded investors over that time. Today, we typically allocate 17.5 per cent of the fund to emerging markets (and another 10 per cent to Far East excluding Japan, a region whose prospects are closely tied to those of China).

As emerging market economies become more mature, our attitude towards them is changing. Many of the bigger emerging market companies are now world-leading brands and while they are still capable of generating substantial growth they also deliver yield.

We recently invested in the Somerset emerging market dividend growth fund whose managers are currently estimating a dividend yield of around 3.5 per cent on the portfolio – close to what the FTSE All-Share index typically generates.

Emerging markets are clearly offering more than just capital appreciation and volatility. There is a significant and growing universe of well managed companies in sectors such as technology, retail or telecoms, committed to paying a steady and increasing dividend year after year.

It is worth being pragmatic about rising dividends – they often come with falling capital. But this emerging story offers a portfolio manager more options and that has to be welcomed.

Elliot Farley is co-manager of the T Bailey growth fund



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