Time to venture out of the comfort zone

Equity income funds that invest outside the UK first started to make their way onshore two and a half years ago. Newton was the first fund house to enter this brave new world, launching its now £281m Global Higher Income fund in November 2005, followed shortly afterward by Resolution Argonaut, with its £414m European Income fund. The concept is nearing its crucial three-year period. But just how have these funds performed? And how popular have they been?

Judging from their respective sizes, both funds have caught the imagination of many UK investors - although they are still far from matching the sizes of some of their UK Equity Income peers.

Performance

Performance suggests some investors may have missed a trick. Over two years to 25 February, the IMA UK Equity Income sector average return, with income reinvested, was 0.96 per cent according to Morningstar. However, Newton's global fund has returned 24.06 per cent over this period, and Resolution's fund posted returns of 17.28 per cent.

Yet recent IMA figures show UK Equity Income remains a favourite, albeit one caught up, to a degree, in the general investment malaise. While the UK All Companies sector recorded outflows of £439m during January, just £23m left the UK Equity Income peer group.

Andrew Merricks, investment director at Hove-based IFA Skerritt Consultants, says he is baffled by these statistics. He has been a fan of global and European equity income since the Newton fund was launched and backed a number of the products from day one. Yet, in comparison to the rest of the IFA community, he accepts he is something of a black sheep. He says the majority of advisers at a recent IFA conference claimed not to have even considered the asset class.

"It is nigh-on scandalous," he says. "Why on earth should we as advisers not have considered it? What hope has the end user got if the adviser community is not looking at it themselves?"

Mr Merricks cites a number of high-profile UK funds that have been well documented as failing to hit the IMA's sector yield target of 110 per cent of the FTSE All-Share. Many managers have argued this is to protect the fund's performance, but, for Mr Merricks, it is a matter of asset allocation. "If you are not going to play the yield game, it is a bit misleading to call it an income fund," he says. "The likes of Martin Currie, who did play by the rules, are one of the ones that came off 23 per cent because that was where the yield was high."

A common complaint among UK income investors is the investable universe is shrinking. For Mr Merricks, this is another argument in global income's favour. "You have more tools in the box - you are not stuck within a fairly limited range of UK stocks," he says. Managers are simply more likely to hit their yield targets because they have a wider range from which to pick their stocks.

As well as the Newton fund, Mr Merricks has invested in the Resolution fund and the JPMorgan Asset Management £51.8m Global Equity Income fund. Both the JPMAM fund - which launched in February last year - and the Newton fund said they had a 4 per cent yield target when they launched, and Mr Merricks is pleased with what they have achieved. "The clients have been well rewarded," he says.