Going global with equity income

With the hunt for income becoming increasingly strained, top fund managers say investors should not be limiting their income exposure to the UK.

The past few years has seen the hunt for income become increasingly strained. Interest rates remain at an all time low while weak growth and high inflation figures have hit bonds.

Investors looking towards the UK equity income market have also faced problems. UK companies have been hit hard since the crisis of 2008: banks received a battering; dividends were slashed; and last year’s BP disaster near enough destroyed any confidence left in the sector.

As a result investors are beginning to search globally for income.

Fund houses have noted the weakness of the UK equity income sector and several have launched global equity income propositions. Henderson, BlackRock and Martin Currie have all introduced products in the last twelve months.

In fact, Martin Currie converted one of its UK equity income vehicles to a global equity income mandate in November last year. The IMA has also recognised potential, with talk of the introduction of a Global Equity Income sector.

Diversification

So, what is the attraction of a global approach? The main argument is diversification. A global mandate has a much larger universe of stocks to choose from, which. is particularly crucial following the fallout from the financial crisis, said Sonja Laud, manager of Schroders’ Global Equity Income fund.

“During 2008/2009 the top ten dividend payers in the UK were responsible for over 65% of the total income paid of the FTSE 100 index. This caused the UK equity income segment to be heavily concentrated in those names (Royal Dutch Shell, BP, GSK, etc) and allowed for little differentiation among funds,” she said.

“The concentration reached a peak when BP suspended its dividend after the Macondo spill.”

There are around 1,500 listed companies on the stock exchange, according to Stuart Rhodes, manger of the M&G Global Dividend fund. By going global, an investor has more than 15,000 companies from which to choose.

Rhodes does not see the sense in reducing exposure to just one market.

“Why limit your choice to a handful of UK companies? A strong dividend culture is not unique to our country,” the manager said.

He cited the US as an example. The country has more than 90 companies which have continually grown their dividend payments each year for over a quarter of a century, compared with less than ten companies in the UK with a similar record.

Other countries also have climates conducive for dividend growth, he said. Brazil, for example, requires companies by law to distribute 25% of net profit as dividends, while Australia has a taxation system in favour of dividends.

Also 90% of stocks in the global market with a yield over 3% are found outside of the UK, said Alex Robins, manager of the JPM Global Equity Income fund.

Recent analysis from the fund group found 61 companies yielding over 3% within the utilities sector globally, compared with just seven in the UK. In addition, there are 53 yielding over this amount in the industrial sector, compared with just two in the UK.

Robins believes a particular risk to UK portfolios is the target yield. It means funds will usually hold high weightings to large companies such as BP and GSK. This risk has been getting progressively worse over time and is set to continue, he said.

“As the larger companies in the UK get bigger on a global basis, the cash they are generating is far superior relative to other UK companies, and they begin dwarfing them in terms of dividends they pay. This increases the risk involved if one of these companies cuts its dividend. Currently, the top ten companies in the UK pay out 60% of a UK investors’ income. If you look globally, it is around 25%,” he said.

Meanwhile a global approach provides opportunities at a sector level too. Global potential far outweighs UK potential, according to Robins.

The UK is concentrated on three or four sectors for an income stream: healthcare, energy, telecoms, and HSBC to some extent, he said. A global portfolio will reduce this concentration risk.

“You can be much broader in terms of your allocation to industrials and materials, even the commodities sector which typically does not tend to pay a dividend. Globally, there are 25 commodity stocks which pay a dividend of over 3%,” the manager said.