Global Equity Income – investment trusts versus funds

It’s a tough time for income investors. Along with massive stock market volatility, they also have to deal with dividend cuts not seen for over a decade. While income usually holds up better than share prices during market falls, the impact of the economic shutdown in response to the global pandemic has meant dividends haven’t been spared this time around.

Hundreds of companies from all parts of the globe have cancelled, cut or deferred dividends. Particularly sobering though are the figures coming out of the UK, which has traditionally been a favourite among equity income investors. It’s now estimated UK dividends could more than halve, wiping off around £50bn in income.

And with more than 90% of global dividends coming from overseas, it’s no surprise investors are increasingly looking beyond our shores in search of income. Although yields are generally lower, it opens the door to lots of companies and sectors you can’t access through UK Equity Income.

We look at how funds and investment trusts from the Global Equity Income sector compare and explore two managers running both a Global Equity Income fund and investment trust.

This article isn’t personal advice. If you’re unsure of the suitability of an investment for you, please ask for advice. All investments and their income fall in value as well as rise so you could get back less than you invest. Income isn’t guaranteed, and past income isn’t a reliable guide to the income you’ll get in future.

Global Income funds – a world of choice

Funds investing in overseas dividend-paying companies have been gaining popularity. Nearly four times as much is invested in the IA Global Equity Income sector compared to around a decade ago.

There are a lot more options available now too. There are funds aiming to deliver a high yield, or a lower but growing income. Some invest in large, stable businesses, while others include a mix of different sizes or unloved companies that might go on to recover. There are also specialist funds, like ones focusing on consumer brands or infrastructure.

But Global Income fund managers have had a tough time trying to beat the global stock market. As the graph below shows over the past five years not a single one has done so*. Global Income fund managers are unable to invest much, if anything, in non-dividend paying companies. Many of these companies, like Alphabet (Google’s parent company), Amazon and Facebook, have driven a lot of the global gains over recent years. On top of this, income from US companies, which make up over half the global stock market, are subject to withholding taxes which drags on returns.

There’s no certainty the global stock market will keep performing better than most Global Equity Income funds or any guarantee of the opposite.

Global Income trusts – few and far between

By contrast to funds, there aren’t many Global Income investment trusts to choose from. You’ll find just six in the AIC Global Equity Income sector and only one has ‘dividend hero’ status – achieved by increasing dividends for 20 years or more in a row. By comparison there are 25 UK Equity Income trusts, and 11 dividend heroes.

We think that’s a shame as investment trusts can be a great investment for income investors, being able to ‘smooth’ dividends by holding back some income for leaner years. Their ‘close-ended’ nature also means managers can focus on investing, without having to manage the inflow and outflow of investor money like funds do.

Over the long-term Global Equity Income investment trusts have outperformed Global Equity income funds*. This is partly down to their use of gearing (borrowing to invest). It can magnify gains but also increase losses shown during the recent market volatility, so it’s a higher-risk approach. Remember past performance isn’t a guide to future returns.

Global equity income funds vs investment trusts over 10 years

Scroll across to see the full chart.

Past performance isn't a guide to the future. Source: *Lipper IM to 30/04/2020.

Funds or trusts – which are better?

There are points for and against investing in funds and investment trusts for Global Equity Income.

But we think it’s more important to focus on who’s running them. It’s the managers who ultimately drive performance, and sometimes this can change.

We think you should look for managers whose investment philosophy and approach matches your own aims.

• Are they focused on income, growth or both?
• How much do they invest in certain countries or sectors?
• Is the yield acceptable to you, taking into account they’re variable and not guaranteed, or do you prefer a focus on aiming to provide a steady growing income?

Always make sure you’re comfortable with the risks involved and the charges. Whether they run a fund or trust should be a secondary consideration. Charges can be taken from capital, which can increase the yield on offer, but reduce the potential for capital growth.

Some managers run both a fund and a trust. In this case you’ll need to compare the portfolios, consider any gearing used by the trust and the trust’s discount or premium.

Let’s look at two managers running both a Global Equity Income fund and investment trust. Remember that income and yields could change given the current pressure on companies and dividends.

James Dow & Toby Ross

James Dow and Toby Ross have jointly managed the Baillie Gifford Global Income Growth fund since January 2015 and Scottish American investment trust since August 2017. They focus on growth and income, as they think that’s the best way to protect investors’ capital. On the income side they’re more concerned with whether dividends will grow each year than how high yields are.

The fund and trust portfolios are fairly similar, currently sharing the same top 10 holdings. The equity portion of the trust and the fund both contain around 60 holdings from mainly developed markets such as the US, the UK and Europe. But the managers also invest in some higher-risk emerging markets. The main difference between the fund and trust is the trust’s portfolio contains a small amount of bonds and directly owned UK property – this can increase risk as property can be difficult to sell.

Scottish American is the only investment trust ‘dividend hero’ from the Global Equity Income sector. It’s increased dividends every year for 40 years, although there’s no guarantee that’ll continue as income isn’t guaranteed. The trust currently yields 3.1%, which is higher than the fund’s 2.6% yield. Remember yields are variable and not a reliable indicator of future income. It also currently trades on a 4.4% premium.

Performance for both the fund and the trust has been very good under the management of Dow and Ross. Since they took them over, they’ve been among the strongest performers in their respective Global Equity Income peer groups. Remember past performance isn’t a guide to future returns and the managers’ record on the trust is over a short period of time.

Scroll across to see the full table.

Past performance is not a guide to the future. Source: Lipper IM *to 30/4/2020

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More on Baillie Gifford Global Income Growth, including charges

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Baillie Gifford Global Income Growth Key Investor Information

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More on Scottish American investment trust, including charges

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Scottish American investment trust Key Investor Information

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Helge Skibeli

Helge Skibeli manages the JPM Global Equity Income fund along with Sam Witherow, and JPMorgan Global Growth & Income investment trust alongside Rajesh Tanna and Timothy Woodhouse. Skibeli is an industry veteran with over three decades to his name. But he’s a relative newcomer to the trust, having only joined around a year ago, and the fund, having taken the reins two years ago.

In both portfolios, Skibeli and his fellow managers look for companies they think can provide both income and long-term growth. Not all the companies the managers invest in provide an income though. Two of the three largest holdings in the trust, Amazon and Alphabet, have never paid a dividend.

Most companies in the portfolios are large and from developed markets like the US, Japan and Europe. But they also invest in higher-risk emerging markets and can hold smaller companies too. They can also use derivatives to help them invest, which adds risk if used.

The two portfolios share many of the same stocks and both invest a lot in technology and pharmaceutical companies. But there are differences. For example, the trust invests more in media, while the fund has a higher exposure to consumer staples.

The trust currently has the higher yield of the two, at 4.0% compared with 2.7% for the fund. Remember yields are variable and aren’t a reliable guide to future income. Since Skibeli became a co-manager of the fund it’s done better than the global stock market benchmark, while the trust hasn’t done as well during his time. But these periods are far too short to draw any meaningful conclusions.

Scroll across to see the full table.

Past performance is not a guide to the future Source: Lipper IM *to 30/4/2020

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More on JPM Global Equity Income fund, including charges

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JPM Global Equity Income Key Investor Information

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JPMorgan Global Growth & Income investment trust, including charges

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JPMorgan Global Growth & Income Key Investor Information

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