As investors continue to seek alternative sources of income to traditional bonds and UK equities, some are turning towards global equity income funds.
Net retail inflows into the Investment Association (IA) Global Equity Income sector have been steady but not spectacular in the past 12 months, with the category unable to surpass £200m in a month.
The appeal of these funds is the idea of diversification of income sources and moving away from the UK, where the top-15 dividend payers in the third quarter of 2015 accounted for 62 per cent of total UK dividends. But exactly how global are these income vehicles?
Research conducted by Neptune – using data from FE Analytics – suggests a number of funds within the IA Global Equity Income sector could be considered overweight the UK compared with the MSCI World index, which has 7.7 per cent allocated to the country.
The data shows that at October 5, only one global equity income fund was underweight the UK relative to the benchmark, while 24 out of 36 funds had a double overweight.
In addition, 11 out of 36 vehicles had more than 20 per cent invested in the UK, while the average global equity income fund has 17 per cent.
The research argues this over-concentration leads to significant overlaps with UK income funds, with vehicles in both sectors often holding the same firms.
Neptune Global Income fund manager George Boyd-Bowman says: “I am mindful that many UK investors use global equity income to diversify their domestic exposure, so I am keen to ensure my fund isn’t too UK-focused. That said, I’m relatively cautious in my outlook for UK equities. While the recovery since the financial crisis has been impressive, we believe there are a number of underlying fragilities that many investors are ignoring.”
Stephen Thornber, manager of the Threadneedle Global Equity Income fund, notes that while his vehicle has 16-17 per cent in the UK, this is driven primarily by the fact the country is a good source of income with more strong-yielding companies than many other markets.
He says: “The US and Japan don’t have as strong a dividend culture. You have to go where the opportunities are and there are more in the UK and Europe.”
He adds that many UK firms are not pure plays on the domestic economy. “A lot of the companies are global, so we’re not owning them because they’re UK but because they’re global. Only a small amount of the UK exposure [in the fund] is pure domestic UK. There can be a disconnect between where a stock is headquartered and what drives its returns.”
Henderson International Income Trust manager Ben Lofthouse notes the UK forecast dividend yield from Citigroup at the end of September was 4.1 per cent for the UK, 2.1 per cent for the US and 2.6 per cent for Japan.
He points to the strong dividend and corporate culture in the UK compared with other markets. “That is why a global fund would have more in the UK. For example, an energy company in the UK might pay more than one in the US because of the corporate culture.”
