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There is a corner for a foreign yield

Philip Scott says there are compelling arguments for seeking income outside the UK, with greater prospects for economic growth and increased emphasis on returning value to shareholders through dividend payments

UK equity income funds are the bread and butter for the vast majority of investment advisers and are the cornerstone of many an investor’s portfolio. It is not hard to understand why.

During times of market turbulence, equity income funds tend to perform better than most. Income will always have investor appeal and reinvesting dividends can have a dramatic effect on returns.

Over the past 20 years, the average UK equity income fund has delivered 424 per cent compared with the 330 per cent average return from the UK all companies sector, according to Morningstar.

But while the value of UK equity income funds has increased, dividend yields have tended to stand still. Investment groups have been spreading their wings further afield in a bid to soak up all the dividend-paying companies on offer.

In Europe as well as the Far East, there is a rapidly growing emphasis on shareholder value and returning cash to investors in the form of higher dividends. Overseas exposure could provide opportunities to invest in countries with a better economic outlook than the UK. Right now, the developing markets of Asia, Latin America and the mature markets of continental Europe are surging ahead.

The impact of these developments means that, in the last decade, the number of companies listed within the FTSE World index yielding more than 3 per cent has risen from around 5 per cent to just under 30 per cent.

Crucially, though, well over 90 per cent of the stocks in the FTSE World index that yield more than 3 per cent now lie outside the UK, according to Whitechurch Securities.

Investment advisers feel that diversifying into global income funds can provide a better balance for client portfolios. Fund managers clearly agree and this year has seen a number of high-profile global equity income launches.

Lazard Asset Management’s global equity income fund, set for launch on October 22, is the latest in a number of high-profile non-UK-biased equity income funds to appear this year. Targeting an ambitious yield of 5 per cent, it will be run by US-based Patrick Ryan.

Hargreaves Lansdown investment manager Ben Yearsley says: “Global equity income is an area which has not been tapped into in the past on any big scale. If you look at Japan, the average yield is around 1 per cent and paying dividends is a growing trend, so there is a big scope for increase.”

JP Morgan launched its global equity income offering on February 7, since when it has returned 6 per cent. Jupiter European income was launched on May 8 and Schroder global equity income fund opened for business on May 18. Recent years have also witnessed launches from investment boutiques such as Neptune.

Yearsley likes the £118m Jupiter Japan income fund which has achieved a return of 11 per cent since launch in September 2005.

Other recommended portfolios include Newton global higher income, Schroder global equity income and Resolution Argonaut European income.

Chase de Vere investments manager Anna Bowes says: “Equity income is my favourite investment sector and I do believe there is a compelling argument for international funds in dividend-paying terms. The UK is so much more developed than many other parts of the world.

“As firms around the globe realise the benefits of paying dividends to shareholders, the benefits will rise for investors.”

One of the pioneers in the global income sector has been Newton with its global higher-income fund managed by James Harries. This fund was launched in December 2005 and is run on a global thematic investment approach with strict yield criteria.

Whitechurch Securities investment manager Gavin Haynes says: “This process has generated a portfolio that is significantly overweight in Asia, Latin America and Europe, where levels of dividend yield continue to improve, but significantly underweight in the US and Japanese markets, where levels of yield remain more muted.”

The Schroder global equity income fund aims for a yield of about 4 per cent. Managed by Sonja Schemmann, it has a yield target of 2 per cent over the MSCI All Countries index. The portfolio construction is not benchmarked and, like the Newton fund, it currently favours Europe, the UK, Asia Pacific (mainly Australia) and emerging markets while being underweight in North America and Japan.

Resolution Argonaut European income has delivered a robust 39 per cent return since launch in December 2005. Oliver Russ essentially runs the portfolio with a best ideas focus, biased towards cash-rich value stocks. He aims to select stocks yielding at least 3 per cent and holds a portfolio of 30 to 50 stocks.

Haynes says: “The reasons for investing in global equity income funds are compelling. In a global economy currently dominated by a relatively low interest rate and low inflationary environment, dividend yield will continue to be an important part of the total return equation.

“Equity income stocks in the UK have produced strong returns over the past five years and it could be time to take some profits and reinvest them overseas.

“With UK economic growth looking fairly pedestrian, these funds will provide increased opportunities to invest in economies with greater growth prospects. The compelling case for global equity income investment is the fact that you are diversifying assets away from a single market.”


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