With yields low or getting lower across a range of asset classes, Craig Rickman asks whether global equity income funds could provide the antidote.
As 2017 kicks off, investors will be hoping equity markets avoid repeating the events of this time last year. Global stockmarkets plummeted sharply in January and February 2016, the first indication that a year of highly unpredictable events was beginning in earnest.
This volatility has had consequences for those seeking regular sources of income. A flight to safety, coupled with nervous central banks cutting interest rates to fresh record lows, has driven down the rates available on bonds – and cash – further still.
These factors present a difficult challenge for investors looking for yield: specifically, how to find the correct balance between risk and the required level of income.
This has become a very delicate balancing act – and one which can sometimes topple over. Property funds, an increasingly popular income-generating asset, illustrated this point last summer when they were forced to suspend trading.
Eight of these products, offering annual yields of around 5 per cent, were gated in July as the rate of redemptions became overwhelming following the UK’s vote for Brexit.
All have now reopened, but in this context it’s no surprise that equity income strategies have remained popular. Equities are riskier than bonds, but are easier to transact than the likes of real estate, and the property fund saga has rammed home the importance of liquidity.
One similarity between equities and bonds is that the values of both have been climbing steadily higher for a number of years. That means yields on offer have been on a downward path when it comes to shares as well as bonds.
In addition, though many UK companies still pay reliable dividends, high profile names such as Tesco, Centrica and Rolls-Royce have been forced to cut payouts in the past two years. As a result, many fund buyers have been broadening their horizons and seeking out global equity income funds.
For a fund to be eligible for Investment Association (IA) or Association of Investment Companies (AIC) Global Equity Income sector status, at least 80 per cent of its assets must be invested globally in equities.
Also, funds in the IA sector must produce a yield 10 per cent higher than that of the MSCI World Index on a rolling three-year basis. Failure to meet this criterion can result in a fund being removed from the sector, as happened to the Schroder Global Equity Income product in March 2016.
The issue faced by managers here is far from simple. On the face of it the solution would appear straightforward – seek out higher-yielding stocks. But higher yields can potentially mean a stock’s value is at risk, so opting for this route could compromise the needs of investors.
Table 1shows the current yields for the 20 top-performing global equity income funds over five years, and indicates the wide range of payouts on offer. The figures encompass the IA’s sector, the Schroder fund – which now sits in the IA Global grouping – and the M&G Global Dividend fund, which opted not to join the income sector upon its creation in 2012.
Questions appear on the last page of this article.