Introduction
Mark Vincent, manager of the Standard Life Investments Global Emerging Markets Equity Income fund, observes: “Historically, people have thought of [EM] more as a growth asset class rather than a place to get income. However, over the last 10 or 15 years, the dividend stream has been about a third of total returns. More companies pay dividends in Gem [global emerging markets] now than in developed markets. And we’ve seen payout ratios rise consistently.”
There remain very few funds available to UK retail investors that offer exposure to emerging markets equity income. The asset managers investing in this space include Standard Life Investments, Polar Capital and JP Morgan Asset Management; perhaps current dynamics mean more will follow.
The Henderson Global Dividend Index shows dividend payouts in emerging markets have withstood the recent turbulence in these economies. It reveals emerging market dividends fell in 2015 but only by 8.3 per cent to $106.8bn (£75bn). The report suggests the impact of the economic slowdown in China and the decline in commodity prices on dividends was “more muted” than expected.
The index states: “China makes up the largest share of emerging market dividends. Dividends fell for the first time ever, dropping by 1.5 per cent on a headline basis to $27.9bn, but inched ahead on an underlying basis. China’s large banks make up three-quarters of all Chinese dividends yet, despite the harsh trading conditions, their dividends only dipped 1 per cent year-on-year. Government influence is helping to keep these payouts high.”
| FUND PICKS |
UBS Emerging Markets Equity Income This £37m fund launched in January 2011 with the aim of generating income and achieving long-term capital appreciation through a portfolio of global emerging markets equities. Co-managers Projit Chatterjee and Urs Antonioli run a portfolio of 59 holdings, with Siam Cement, Bangkok Bank and Kimberly-Clark among their top-10 positions. The largest country allocation is to Taiwan at 18.5 per cent, with China accounting for 17.2 per cent and Thailand for 10.9 per cent. The fund’s performance has been in negative territory over one, three and five years to April 6, according to FE Analytics. In the past 12 months, the fund made a loss of 14.6 per cent, worse than many of its peers. Polar Capital Emerging Markets Income This offering has delivered a modest return of 1.1 per cent in the five years to April 6 2016, FE Analytics reveals. But in the past year the fund recorded an 8.8 per cent loss. Managers William Calvert, Ming Kemp and Neil Denman have run the fund since launch in January 2011 and it is now $283m (£198.8m) in size. They typically invest in 50-80 holdings and invest for growing dividend income. China is the portfolio’s largest country weighting at 20.3 per cent. EDITOR’S PICK JPM Emerging Markets Income Richard Titherington, Omar Negyal and Amit Mehta co-manage this £293m portfolio which the factsheet suggests will suit investors “looking to add a primarily emerging markets equity product that offers income and the potential for long-term capital growth to a diversified portfolio”. The fund made a negative return of 10.6 per cent over the three-year period but has rebounded strongly of late. Among its top-10 holdings are Banco Santander and Delta Electronics. The portfolio has 27.4 per cent allocated to financials, making it the largest sector weighting. |
In Russia, dividends fell by 20.8 per cent in 2015 but, on an underlying basis, they were up 45 per cent. Brazilian dividends also fell by 29.8 per cent and saw an underlying decline of 5.2 per cent, with India overtaking Brazil as the third-largest dividend payer in emerging markets.
Economists and asset managers are divided on whether now is the time to buy back into emerging markets, many having pulled out during the volatility of recent years. EM countries face considerable headwinds as commodity prices remain at lows, the US Federal Reserve is unclear of when – and how often – it will raise interest rates this year and China’s GDP growth remains on a downward trajectory.
Alex Crooke, head of global equity income at Henderson Global Investors, advises: “The recent stockmarket volatility underlines the value of income as a source of return. Investing globally is beneficial as owning a range of stocks in different countries lowers longer term risks. Overall, we are positive on the prospects for dividend growth in the year ahead.”
Mr Vincent believes stabilisation in emerging market currencies will help companies pay out dividends. “Last year, the biggest negative for performance for EM generally was currency, so stability there gives a basis on which people can feel comfortable to dip their toe into the asset class again and a basis on which you can start stockpicking,” he suggests.
