BLOG: Going global for income
“Investors seeking an income in this low cash rate environment have traditionally looked towards UK equity income funds, but those that are heavily-weighted towards the big dividend payers have been recently hurt by sterling strength, as well as suffering a slowdown in dividend growth this quarter. Against this backdrop investors may well be planning to look further afield for the best dividends.
“In times of economic uncertainty, with almost zero cash returns, dividends afford an element of protection against equity market volatility and against inflation. Dividend paying companies will also make a concerted effort to ensure a sustained pay-out to shareholders to avoid any possible reputational damage. If you were to look exclusively to the UK for income, this would limit both the stock selection and diversity of funds. By investing globally you broaden your investment opportunities, as well as increasing your exposure to sectors that are under-represented in the UK, such as IT.
“Global funds generate income from as wide a range of sources as possible and do not restrict you to one region. Diversification is key for all portfolios and investors should be willing to look to new markets to find new sources of return.
“Here are a few global income funds worth having a look at. The first is the Aberdeen World Equity Income. This is a team-managed strategy and Bruce Stout, a key member of the team, has considerable experience in income investing after managing the Murray International Trust. Stout and his colleagues select the best ideas from a broad pool, focusing on those companies which meet strict quality and dividend criteria and whose valuations are currently low. They look for companies which create profits over the long term, so turnover in the portfolio is low with companies held for long periods.
“Another option is the Lazard Global Equity Income. Patrick Ryan, the manager of this fund is part of Lazard’s global equity team. The fund is run for both income and capital gain and tends to be less defensive in down markets than other global income products. The manager uses the wider Lazard research team to select ideas for the fund and will select those best ideas which meet the yield criteria to build a portfolio of 60-100 companies. The manager aims to maintain a balance between defensive companies and more cyclical stocks in the portfolio which should support performance in changing market conditions.
“A third option is the Sarasin Global Higher Dividend, run by Mark Whitehead. The standout feature of this fund is its thematic approach. An internal team identifies long term, investable themes and then a team of analysts selects global companies which can benefit from those themes. Mark will consider the yield and potential growth in dividend when selecting his 60-70 company portfolios.”
Dan Roberts, who manages the Fidelity Global Dividend Fund, explains some of the regions he has invested in and the key features of his fund:
“Japan is an area that should not be overlooked. It is home to a number of conservatively-managed companies with strong balance sheets, many of which are leaders within their respective industries or niches. As such, the region provides good opportunities for bottom-up stockpickers. At the market level, it is important to appreciate that Japanese stocks have been steadily de-rated for some 25 years. However, valuations today are now back ‘in the pack’ and the opportunity for stock selection is, in my opinion, very good.
“The US market has performed very strongly and aggregate market level valuations are starting to look expensive, but its size and diversity is still providing opportunities, particularly within sectors such as consumer staples and ‘old tech’. In both cases the US is home to market-leading companies which simply cannot be found anywhere else in the world.”
Stevenson also says, “Some cautionary advice: while dividend payments are attractive to income investors remember that they are never guaranteed, there is always the risk of a cut. Make sure you look under the bonnet of each fund and familiarise yourself with the underlying companies.”