Monday, April 16, 2012

Do global funds live up to their name?

When there's the word "global" in the name of your fund, you'd be forgiven for assuming that it would invest in shares scattered across the world.


But nearly half of the global equity income funds have more than a fifth of their portfolios in British shares. Many are even more biased towards the UK. Home-grown companies make up 42pc of Standard Life's Global Equity Income fund, and nearly 30pc of the Guinness Global Equity Income fund.

Martin Currie and Henderson's offerings do not fare much better at 27pc and 26pc respectively.

With a pool of more than 500 quality global dividend-paying companies to choose from, why do these fund managers insist on filling up their portfolios with stocks that are so often found in UK equity income funds?

In January this year, Royal Dutch Shell appeared in more than half of all the global equity income funds' top 10 holdings. Vodafone appeared in eight funds and GlaxoSmithKline in five.

Fast forward to this week, and although the sector has reacted to the first quarter rally, funds are still overpopulated with familiar names.

Vodafone features in six of the funds' top 10 holdings, while FTSE 100 stalwarts GlaxoSmithKline, BP, British American Tobacco and HSBC are all popular too. (The French oil giant Total appears even more often – seven times.)

Take a look at the performance figures and there is a direct correlation between the funds that have performed the best over the past two years and those that have greater exposure to companies outside Britain.

Invesco Perpetual Global Equity Income has returned 17pc over the past two years and has only 14pc exposure to the UK, compared with Standard Life's 9.7pc return and an exposure of 42pc.

"Investors are looking to overseas equity income funds to diversify away from the UK, where there are few good dividend-paying stocks," said Adrian Lowcock of Bestinvest. "It is worrying that so many global income funds are overweight in the UK and not delivering a truly global approach to income."

Mark Dampier of Hargreaves Lansdown said global equity income funds were worthwhile, but only if they were truly global.

"Twenty years ago if an income-seeking client wanted exposure to emerging markets, it just wasn't possible," he said. "Good global equity funds do genuinely offer something different."

Mr Dampier said exposure to different currencies was good, especially at a time when the British economy was still teetering on the brink of recession.

"Many UK equity income funds had indirect exposure to emerging markets through revenue streams, but over the long term sterling will weaken. Owning UK stocks will not be enough – you need Asian companies to give you diversification."

Mick Gilligan of Killik & Co said it was a good idea for income seekers to look outside the UK for sector diversification as well as geographical diversification.

"A high percentage of the total yield of the FTSE 100 index comes from a small number of index constituents. This concentration leads to relatively high stock-specific risk in UK equity income portfolios seeking a high yield.

Despite many UK companies offering exposure to global revenue streams, sector diversification is limited, with the majority of the higher-yielding UK-listed companies coming from the oil and gas, health care, banking and telecoms businesses," he said.

In America, by contrast, there is an increasingly broad range of dividend-paying companies. Technology giant Apple recently paid a quarterly dividend of $2.65 – its first in 17 years.

Clare Hart, manager of the JPMorgan US Equity Income fund, said: "I can find yield across the market in the US – in almost every sector. I don't have to own only telecoms and utilities."

In Asia you can find dividend-paying companies in the technology, consumer services and basic materials sectors.

You can achieve high yields too: Tiger Brands, a South African food and beverages company, is yielding 4pc, and Ascendas, a Singaporean real estate company, pays a dividend of 7pc.

Mr Gilligan said: "Prospective yields on the major equity markets outside the UK are also attractive when compared with their historical averages.

This year we expect the Euro Stoxx 600 index to yield 4.1pc, the S & P 500 to yield 2.3pc, the MSCI Asia Pacific excluding Japan 3.2pc and the MSCI Emerging Market index 2.9pc. Earnings growth forecasts are also expected to be higher in many overseas markets."

Mr Gilligan likes Veritas Global Equity Income, M & G Global Dividend and Lazard Global Equity Income. Of the closed-ended funds he likes Law Debenture Trust.

Philippa Gee, a wealth manager, warned that while the sector had its merits, investors should not jump on the bandwagon too soon.

"In the global equity income sector, nearly 20pc of the funds available have been launched in the past 12 months, so there is starting to be a 'me too' feel to this.

I am avoiding those more recent additions, instead insisting on looking for at least a three-year history, which is not something I necessarily apply to other sectors," she said.

She tipped Invesco Perpetual Global Equity Income and Newton Global Higher Income, but only as a minority holding.

"While I support the general concept that global dividends are a useful addition for many investors, it is not one that should take up high allocations.

Indeed, I have recently come across people who have 75pc of all their investable assets in this one sector, which worries me."

Mr Dampier tipped specialist fund Newton Asian Income, but said older investors automatically ruled it out just because it had exposure to non-developed markets.

"There is a common misconception that as you approach retirement you should transfer almost all your investments into cash," he said.

"This is nonsense – look how poorly you would have done with just cash over the past three years. Statistics show that for a couple of 65 retiring today, at least one of them can expect to live into their nineties. That is a 30-year investment horizon; I would say it is riskier not being in emerging markets."

telegraph.co.uk

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