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Global versus UK equity income – home or away?

Jonathon Curtis, Investment Analyst, explores how investing in global equity income could benefit your portfolio and looks at three global income funds with a focus on high-quality companies.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Companies around the world have paid more than $11trn in income to shareholders over the past decade. Overseas dividends have been growing steadily year after year, outpacing those in the UK. With FTSE All-Share dividends particularly under strain from the economic impact of coronavirus, now could be an excellent opportunity to venture overseas in search of income.

This is not personal advice or a recommendation to invest. If you’re not sure if an investment is right for you, please ask for advice.

The backdrop for income

Investment income is getting harder and harder to come by. Rates on government bonds and cash are at rock bottom. The US interest rate is a measly 0.25%. In the UK it’s an even more paltry 0.1%, and in the Eurozone it’s zero. Japan, Switzerland and Denmark have gone a step further and pushed rates into negative territory.

With economies around the world headed for pandemic induced recessions, it seems like these low-to-no rates are here to stay, at least for the time being. Increasing interest rates would make it harder than it already is for businesses to pay their debts, making the current crisis even worse.

This isn’t a recent phenomenon though. Rates have been low since the last recession back in 2008. For over a decade income-seeking investors have had to look beyond the usual safe havens of cash, government bonds and annuities and invest into more volatile asset classes like equities and high-yield corporate bonds.

Is now the time to invest in bond funds?

Although they’re undoubtedly riskier than cash and gilts, shares in dividend-paying companies – known as equity income – have the potential for capital growth as well as provide an income. But, of course they could fall in value too.

Is the UK a dividend haven?

Lots of income investors look to the UK as their main port of call, for good reason.

The UK stock market is home to lots of world-class, industry-leading companies that have long histories of paying out healthy, stable dividends. Some of them have increased their dividend-per-share every year for over two decades.

The FTSE All-Share also offers among the highest yields of the major stock markets. On 31 March, it was 5.5% compared with the FTSE World (excluding the UK) 2.9%. But as we’ve seen, historic yields aren’t a reliable indicator of what you’ll get in the future.

But UK dividends are dominated by a small number of firms in some out-of-favour sectors like banks, oil & gas, mining and tobacco. And while dividends around the world are under strain, UK dividends have come under more pressure than most. Nearly half of companies are already scrapping dividends for this year, and more are expected to follow suit.

HL experts – where are we now with dividends?

That’s down to a number of reasons.

The oil & gas sector makes up a large part of the UK stock market, and even more so for UK equity income. With the recent steep drop in the oil price, this has put a lot of pressure on overall UK dividends.

Negative oil price – how, why, and what it means for investors

The UK also has a big exposure to banks. They’re under regulator instruction to cancel their dividends and instead increase how much cash they hold in the face of mounting business debts.

Lots of UK companies are ‘cyclical’ – their fortunes are intertwined with the health of the economy. Given the dire economic outlook, this means they’re feeling the pain more than companies whose goods and services are generally always in demand.

Yields – high but for how long?

UK yields have risen significantly in recent months as share prices have plunged. They’re now at levels not seen since the 2008 financial crisis. They’re unlikely to be sustainable though, as companies struggle under the weight of the coronavirus economic shutdown.

Yields in the rest of the world have also risen, but by much less and are still well below 2008 levels. Overseas share prices haven’t fallen as much as they have in the UK. Just as importantly though, many think dividends in other parts of the world are more secure than in the UK, although there are no guarantees.

While UK yields look attractive, we don’t think investors should pile in on that basis alone. Although now could be a good entry point for long-term investors, in the short-term there might be more price volatility. And yields could come down if lots more companies cancel their dividends.

Remember historic yields look back at what companies have paid in the past. These figures don’t take in to account the companies that have already announced they’re scrapping dividends – the yield you’ll get by investing now will almost certainly be much lower.

Dividend yields in the UK and the rest of the world

Past performance is not a guide to the future. Source: Datastream to 31/3/2019

Going global

Whether investing for income or not, you should at least think about investing some of your portfolio overseas. And with the current uncertainty on many UK dividends, now could be a good time to explore the rest of the world.

There are of course pros and cons to investing for income abroad. You’ll gain international diversification, so won’t be pinning all your hopes on the UK stock market or just a small number of UK companies. Investing overseas also opens up sectors that the UK doesn’t offer much exposure to, like technology.

Overseas dividends have been growing at a faster pace than in the UK. Over the past decade, they’ve grown 97% compared with 77% in the UK. The US and Japan, which alone make up more than two-thirds of the global stock market and traditionally haven’t had strong income-paying cultures, are becoming more dividend-focused. Japan’s had the highest dividend growth of any major market over the past decade, followed by the US, where 8 out of 10 companies grew income payments last year.

Investing for income globally gives your portfolio exposure to regions and countries which at the moment might have a better economic outlook than the UK. This could translate into greater long-term capital growth, although there’s no guarantee that’ll be the case.

Equity Income performance – Global vs UK

Past performance isn’t a guide to the future. Source: Lipper IM to 31/3/2020

As previously mentioned, starting yields in other parts of the world generally aren’t as high as the UK. That’s because lots of companies in other parts of the world prefer to either reinvest their profits or buy back their own shares (to boost the share price) rather than pay dividends.

While UK dividends are facing challenges, other stock markets aren’t immune from similar difficulties. There have been lots of dividend cuts around the world and there could be many more. There are no guarantees the UK stock market will do any better or worse than others.

There’s also the impact of currency. When investing overseas your returns and dividends are impacted by exchange rate swings. If sterling weakens against other currencies such as the dollar it’ll work in UK investors’ favour. But if it were to strengthen it’ll have the opposite impact. We don’t think you should try to guess which way currencies will move, but you should make sure you’re comfortable with your foreign currency exposure.

Spotlight - Global Income funds

The broader IA Global sector has surged in popularity in recent years, but IA Global Equity Income funds still lag a good deal behind their UK equity income peers. We think that’s a shame as there are lots of excellent global income managers that could help investors diversify their income portfolios. Let’s look at three global income funds with a focus on high-quality companies.

This is not personal advice or a recommendation to invest. If you’re not sure if an investment is right for you, please ask for advice. All investments fall as well as rise in value, so you could get back less than you invest. Past performance should not be seen as a guide to the future.

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Find out what funds are and how to invest

Troy Trojan Global Income

This fund launched just over 3 years ago but its manager, James Harries, has been investing overseas for over two decades and has run global income funds for nearly 15 years. This means he’s more experienced than most other global income managers, and managing through a crisis is nothing new to him.

Harries follows Troy’s ‘house view’ of investing in generally large, stable businesses that have shown their resilience through market cycles. He currently invests a large chunk of the portfolio in companies whose goods and services are nearly always in demand, which has helped the fund’s performance recently. With just over 30 holdings, each one can make a meaningful difference to fund returns, but it’s a higher-risk approach. The manager also has the flexibility to use derivatives to help him invest, which also adds risk if used.

Harries is one of few global income managers to have beaten the broader global stock market over their career. He’s achieved that by holding up better than the market during falls, but he has generally lagged rising markets. The fund held up better than any other in the IA Global Income sector since the coronavirus volatility began on 20 February*. But it still fell in value, and this is over a very short period of time. Remember past performance isn’t a guide to future returns.

Although the fund doesn’t have a yield target, it currently yields 3.2%, which is above the global stock market average yield of 3.0%. Remember yields are variable and not a reliable indicator of future income.

Charges are taken from capital which can increase the yield, but reduces the potential for capital growth.

Annual percentage growth
Mar 15 -
Mar 16
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Troy Trojan Global Income N/A N/A -4.1% 18.3% 2.1%
FTSE World 0.0% 32.9% 2.6% 11.1% -6.0%
IA Global Equity Income -0.8% 26.8% -1.2% 8.4% -9.3%

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2020.

N/A – performance data for this time period isn't available.

Find out more about Troy Trojan Global Income including charges

Troy Trojan Global Income Key investor information

Fidelity Global Dividend

Daniel Roberts, manager of Fidelity Global Dividend, looks for easy-to-understand businesses with strong finances. He invests in both sectors that are currently popular like technology and healthcare, and unloved ones like financial services and utilities. Most of these are from developed parts of the world like North America and Europe, but he can also invest in higher-risk emerging markets.

Roberts can invest in some lower-yielding companies if he thinks they’ll benefit the fund. His aim for the overall portfolio though is to deliver a yield at least 25% higher than the global stock market, though there are no guarantees.

Our analysis suggests Roberts has one of the best stock-picking records in the global income sector. He’s achieved that with only half the exposure to the US than the global stock market. This is impressive given the strength of US companies in recent years.

Since Roberts has managed the fund from the beginning of 2012, he’s delivered greater returns than the global stock market*. He’s done this by holding up better than the benchmark during market wobbles, although the fund has lagged behind the global stock market when it rises quickly. None of this is an indication of future performance though.

Charges are taken from capital which can increase the yield, but reduces the potential for capital growth.

Annual percentage growth
Mar 15 -
Mar 16
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Fidelity Global Dividend 6.2% 23.6% -4.5% 15.3% 1.5%
FTSE All World -0.5% 33.1% 2.9% 10.7% -6.2%
IA Global Equity Income -0.8% 26.8% -1.2% 8.4% -9.3%

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2020.

Find out more about Fidelity Global Dividend including charges

Fidelity Global Dividend Key investor information

Guinness Global Equity Income

Fund managers Matthew Page and Ian Mortimer take the unusual approach of ‘equally weighting’ the portfolio, by investing the same amount in each company. That means each holding can make the same contribution to returns. With around 35 companies though it’s a higher-risk approach than a more diversified one. The managers rebalance the portfolio a few times each year, by trimming the best performers and topping up the laggards.

Page and Mortimer look for companies that have grown by reinvesting profits back into the business. They’ve found lots of opportunities in the healthcare and everyday consumer sectors. The pair tend to avoid companies with lots of debt, need lots of capital expenditure, or are sensitive to the health of the economy. That’s why they invest little-to-nothing in the energy, non-essential consumer and telecoms sectors. They can also invest in emerging marketing which increases risk.

Since the managers launched the fund at the end of 2010, they’ve not done quite as well as the global stock market, but have performed much better than the IA Global Equity index average. Our analysis suggests their performance has been driven more by investing in the right sectors and regions than their stock-pickings skills.

The managers aim for a moderate yield and focus on sustainably growing dividends year after year. The fund’s yield is currently above the global stock market’s average, but remember yields are variable and not a reliable indicator of the income you’ll get in future.

Charges are taken from capital which can increase the yield, but reduces the potential for capital growth. As this is an offshore fund, you are not usually entitled to compensation through the UK Financial Services Compensation Scheme.

Annual percentage growth
Mar 15 -
Mar 16
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Guinness Global Equity Income 2.8% 24.7% 2.0% 13.3% -3.5%
FTSE World 0.0% 32.9% 2.6% 11.1% -6.0%
IA Global Equity Income -0.8% 26.8% -1.2% 8.4% -9.3%

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2020.

Find out more about Guinness Global Equity Income including charges

Guinness Global Equity Income Key investor information


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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