The benefits of staying home: UK funds’ global reach

FE Analytics data shows that in the past five years to 4 September 2013, the IMA UK All Companies sector has outshone the IMA Global sector, delivering an average 54.28 per cent return compared with just 38.54 per cent. This is despite the global economy far outperforming a sluggish UK recovery that has lagged most major global markets.

While this appears counter intuitive, the solution to the riddle perhaps lies in the fact that while the FTSE 100 may well be made up of UK companies, it is a thoroughly global market. Analysts from BNP Paribas estimate that 80 per cent of all earnings of companies in the benchmark index are gained from outside of the UK.

Moreover, with the UK’s economic recovery well under way investors can benefit from the improved sentiment in these businesses’ domestic market as well as the global demographic changes they are exposed to.

Stephen Walker, head of equities research and market strategy at Ashcourt Rowan, explains: “One potential positive for the UK is that it appears likely to continue to punch above its weight on the world stage and the size of the economy encourages British companies to have a very global mindset.

“This leads us into one of our key approaches to emerging markets which is that you don’t have to directly invest there in order to benefit from this ‘super trend’. Companies both large and small in the UK offer a route in to a wide variety of countries worldwide and the UK stockmarket really can be seen as a microcosm of the world.”

Mr Walker adds that the UK offers world-leading consumer goods companies with brands that are considered ‘desirable’ by the rising affluent middle classes in emerging markets such as China and India.

Global cache pays dividends

Fidelity’s Global Consumer Industries fund manager Nicola Stafford agrees that the global consumption theme is an extremely powerful investment strategy over time because of the strong year-on-year returns that leading consumer brands can deliver.

She says: “These companies trade on the established and respected brands they market and sell globally, creating barriers to entry and generating long-term sustainable earnings. They tend to be higher-quality, more cash-generative companies compared to the overall market.

“This is partly because brands like... Johnny Walker (Diageo) and Lucky Strike (British American Tobacco) enjoy established brand loyalty in developed markets and are aspirational brands in emerging markets.

“Leading global consumer brands are powerful assets because they create high barriers to entry. They also generate more stable revenue streams and more consistent earnings growth.”

Mr Walker also suggests that UK franchises with strong technology and research and development underpinnings are well placed to benefit from this shift in spending power from west to east.

In addition, UK stocks offer some of the most attractive yields with the 10 largest companies in the FTSE 100 all paying a dividend to investors. The index as a whole currently has a 3.5 per cent dividend yield.

Rob Burdett, co-head of multi-manager at F&C Investments, explains: “The average UK equity income fund is currently yielding around 3.7 per cent and a number of fund managers we have spoken to expect net dividends to increase in their portfolios. There are a number of hidden gems which provide investors with decent returns and yet remain small in size.”

Henderson Global Investor’s James Henderson, who runs the Law Debenture investment trust, adds: “We remain with a large position in the UK because we can find cheaper, better managed, internationally diversified companies here than we usually can overseas.

“We are only going overseas if we cannot find an opportunity in the UK. For example, Toyota is in the portfolio. The dividend paying culture is usually stronger in UK companies, with often better corporate governance. Also I know more about UK companies and this makes it easier to outperform in my home market.”

Looking further afield

But Rob Morgan, pensions and investments analyst at Charles Stanley Direct, argues that investing solely in UK dividend-paying companies could be short-sighted.

“Typically, UK equity income funds are concentrated round a narrow list of heavyweight stocks such as Vodafone, Glaxo and Shell. While it is possible to explore smaller companies for yield, there are many more dividend possibilities overseas. That’s why many fund groups have launched global equity income funds.”

He cites the Jupiter Global Equity Income fund, managed by Sebastian Radcliffe and Gregory Herbert, as one that has recently caught his eye because of the managers’ willingness to diversify beyond the traditional global names.

“Many global equity income funds have concentrated on, and fared well from, owning international consumer staples stocks such as Nestlé or Coca Cola, after all, they are able to steadily increase their earnings and dividends over time in a relatively predictable fashion. Yet some of these shares have become expensive exactly because of their more predictable nature. So, in the interests of diversification, [the managers] are also keen to build in exposure to more economically sensitive areas, which in their opinion currently offer better value,” Mr Morgan explains.

“For instance, unlike more defensive firms, German engineering firm Schneider Electric has not increased its revenues every year. However, the underlying long-term trend is positive meaning that dividends have still been able to grow over time. Mr Radcliffe and Mr Herbert are also keen to own more growth-orientated firms that may instigate dividends, as well as companies re-introducing them following a period of recovery such as Bank of America.”

For the moment, the argument in favour either UK or Global funds is too close to call having performed almost in tandem since the start of the financial crisis five years ago. There is also the issue of many global funds having large exposures to UK blue chip stocks such as GlaxoSmithKline, Vodafone and BP.

The question advisers should be asking themselves is whether the global portfolio they are allocating to is diversified enough, or would that client be better of in a UK-focused fund that potentially carries less risk.