Global Equity Income – Is It Time To Look Again?
Income funds come in all shapes and sizes. Whether you are looking for a more stable income stream or one that has the potential to grow over time, there are plenty of options.
As a style of investing, income is sometimes seen as a bit boring and boring. It is typically associated with industries that have lower growth potential, but more predictable revenue streams like utilities, telecommunications, and core consumer businesses.
How is global income doing?
The past five years have been difficult for global investors. During this time, the average IA Global Equity Income sector fund did not perform as well as the global equity market as a whole *. They also underperformed the IA Global sector, where funds tended to favor growth over income.
Percentage of growth, TR Def, ExD, Def, GBP 11/30/2016 to 11/30/2021
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Source: * Lipper IM, as of 11/30/2021.
Past performance is no guarantee of future returns.
At first glance, it might seem disappointing, but it’s hard not to sympathize with revenue managers.
To qualify for the IA sector, funds must outperform the broader global stock market. Naturally, this drives a lot of people into higher income generating industries, which are often associated with more mature, value driven businesses. This makes it more difficult to invest in higher growth sectors, like technology, where many companies use their excess cash to reinvest in the business to fuel future growth, rather than paying a dividend.
A technological headwind
For revenue managers, the performance of tech companies, which have benefited greatly from life in confinement, held back performance. The way we work, consume and interact has changed rapidly and those with the capacity to harness these trends have reaped the rewards.
The United States is home to some of the most innovative technology companies in the world that have collectively propelled the region’s performance well ahead of their global peers during this time. Many funds in the IA Global sector, which are not constrained by performance, have benefited from this trend.
More generally, the United States represents nearly 60% of the FTSE All-World index. But despite the wealth of opportunities available, it doesn’t pay off as many dividends.
Indeed, 30% of the American market does not pay dividends and more than half of its companies do not pay more than 1%. For example, the particularly successful “FAAMGs” – Facebook (Meta Platforms Inc), Amazon, Apple, Microsoft and Google (Alphabet Inc) fall into this bucket.
That’s not to say income managers won’t invest here and there are exceptions to the rule. But, when investing in low-performing companies, they often face a trade-off between the potential for higher income or higher capital growth. Keep in mind that high yielding companies tend to be slightly riskier.
Come back beyond our shores
Domestic investors tended to stay closer to home in their quest for income, but the UK weighed on returns. British companies have historically benefited from a strong dividend culture and generated an attractive return compared to other developed markets. Although listed on the London Stock Exchange, many of these companies generate sales beyond our shores. This means that investors tap into international income streams without also being exposed to the risk of large fluctuations in the exchange rate – also known as currency risk.
Covid-19 has put downward pressure on dividends around the world, but UK businesses were among the hardest hit in 2020. Sectors like oil, mining and banking were hardest hit, the cancellation of HSBC dividends being one of the largest individual reductions in the world.
While UK income investors will be all too familiar with the pain of the past year, dividends in regions like Europe, Asia and emerging markets have largely withstood the impact of the pandemic. While set at a lower level than many global peers, North American dividends have also been fairly unscathed.
This is why a more holistic income search might be a good way to diversify your portfolio.
Global income managers fish in slightly different waters from other global funds seeking capital growth. This means that you can tap into different regions, industries, and investment styles.
To put that in perspective, here is an overview of the sector differences between the FTSE All-World and FTSE All-World High Dividend Yield Indices, which represent companies with above-average returns. Remember that returns are not a reliable indicator of future income. All income is variable and unsecured.
Sector weighting (%)
Scroll down to see the full graph.
Source: FTSE Russell, October 2021.
Sectors such as banking, energy and food, beverages and tobacco represent a large weight in the FTSE All-World High Dividend Yield Index and a much lower weight in the FTSE All-World Index. In contrast, the technology weighting is much higher in the FTSE All-World Index, which helps explain the difference between the two.
The geographic makeup of a global income fund can also be quite different. Not surprisingly, many income managers invest significantly less in the United States, which could complement other global funds.
It is important to remember that funds in this sector are not just for those in need of income. Investors seeking capital growth can always reinvest their income using an Accumulation Share Class (Acc).
This article is not personal advice. If you are unsure whether an investment is right for you, seek financial advice. Investments and the income they generate can go up as well as down, so you may get back less than what you invested. Past performance is no guarantee for the future.
Is income back on the menu?
We discussed some of the reasons why global income funds at the sector level have not yet reached high gear. But what do the prospects look like for the future?
Dividends have come a long way since the darkest days of March 2020 thanks to support from the government and central banks. This, along with the global rollout of a Covid-19 vaccine, has provided many companies with the confidence and ability to turn the revenue tap back on.
The third quarter of 2021 was a record for dividends. During this three-month period, 90% of companies around the world increased or maintained their dividend. Sectors like mining and banking have seen some of the biggest contributors.
If you are interested in global equity income funds, our wealth selection might be a good place to start. You can also read more about the global industry in our most recent Global Equity and Fund Industry Review.
Investing in these funds is not for everyone. Investors should only invest if the fund’s objectives are aligned with theirs and there is a specific need for the type of investment being made. Investors should understand the specific risks of a fund before investing and ensure that any new investment is part of a diversified portfolio.
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