For income investors, 2018 proved to be a particularly fruitful period, with global dividends leaping 9.3 per cent to a record £1.37tn.
That’s according to Janus Henderson’s latest global dividend index, which also revealed other signs of encouragement. Underlying growth stood at 8.5 per cent – its best performance since 2015 – and nine out of 10 global companies either raised dividends or held them at the previous year’s level.
This is welcome news for a wide range of investors; the growing number of income drawdown plans being used in retirement suggests that more and more consumers will be relying on equity income as the years roll on.
And despite the Janus Henderson report pointing to a slight slowdown in activity this year, the outlook is still fairly rosy. Headline growth is predicted to slow to 3.5 per cent, but this would still see global dividends reach a new high of £1.41tn.
Home is where the yield is
So which areas are intermediaries favouring?
Despite global equity income managers having access to a wider range of assets than their UK counterparts, advisers are still leaning towards home comforts. According to data from the Investment Association, the Global Equity Income sector has a total of £16.6bn in funds under management, less than a third of the figure held in the UK Equity Income sector (£50.5bn).
For now at least, this faith in domestic shares has proven well placed. UK dividends rose to £19.7bn in the first quarter of this year, according to data from Link Asset Services – a jump of 15.7 per cent from the previous three months. However, this figure is somewhat dependent on one large £2.9bn payout from Shell and a £1.7bn special dividend from miner BHP.
The impact of Brexit on UK shares is also a factor, with lower valuations bumping up the attraction of yields. But as intermediaries are all too aware, failing to diversify can have severe implications for investors. A spread of geographical regions could prove less risky a tactic in future.
By the same token, global income funds may have simply too broad a focus for many intermediaries’ liking. After all, markets such as Japan and the US are more geared towards growth than income. This can present an issue for global income funds as they share similar benchmarks to global growth funds, with US stocks accounting for about half of these benchmarks.
As a result, those who mimic their index by holding a hefty amount in US stocks will do so at the expense of higher yields. Dividend growth, rather than high yields in and of themselves, is the most important variable for income investors. Nonetheless, some may find US-focused global equity income funds don’t offer enough to be getting on with.
Janus Henderson’s report also shows some vast disparity in regional payouts. Emerging markets had the most eye-catching results, with dividends at their highest level since 2014 after rising 15.9 per cent in underlying terms.
And interestingly, Japan and the US also saw record-breaking payouts, with underlying growth of 10.6 per cent and 8.1 per cent, respectively. The latter’s overall payout level, which stood above £500bn for the first time, also constituted a new high.
Europe excluding the UK fared worse than the global average, but still mustered a respectable underlying growth figure of 5.4 per cent. The UK itself recorded 8.8 per cent.
In terms of sectors, mining – as per the previously mentioned payout by BHP – was the fastest climber, with Australia, Russia and the UK particularly noteworthy countries.
Top trusts
The top 20 performing funds and trusts over five years are shown in Table 1, as well as details of how they have fared over one, three and 10 years. The results over all measured periods make for positive reading, but this is largely due to the fertility of equity markets in the decade following the financial crisis. The Dow Jones’s rise from around 8,000 points to more than 26,000 over this period is a case in point.
This performance also stands up to those of other sectors. Data from FE shows that IA Global Equity Income is placed 11 out of 37 sectors in terms of five-year performance (at the time of writing), sandwiched between the European Smaller Companies and Global Emerging Markets groups. Examining performance over the past 12 months alone bumps the sector’s position up to sixth – a sign of income strategies’ defensive qualities.
There are substantially fewer trusts to choose from, but as tends to be the case, closed-ended vehicles punch above their weight in the table. As an additional subject of analysis, this time around we have also included each strategy’s current yield, which makes for notable reading in some cases.
Capital growth and yields move inversely to one another: the highest-yielding fund in the list, Kempen Global Dividend, has a 5 per cent yield but only just sneaks into the top 20 on overall performance.
But the table’s top performer, JPM Global Growth and Income, currently yields 3.9 per cent – higher than any other fund or trust in the top 10. That may be in part because the trust’s stellar performance has not been quite as strong over the past 12 months – though a return of 5.1 per cent does not exactly suggest the wheels have come off.
The most fruitful 12-month period for managers across the sector was between 2016 and 2017, with the average fund or trust rising by more than 25 per cent. The JPM offering almost doubled this figure with growth of 47.7 per cent and continued its run the year after by returning 9.2 per cent while the average fund recorded a loss of 1.4 per cent.
The second-best performer over five years is also a trust, Baillie Gifford Scottish American; it also tops the list over 10 years with an impressive average annual return of 16.5 per cent.
Fund fare
In terms of open-ended funds, Newton’s Global Income comfortably tops the list – growing an average of 12.3 per cent annually over five years. Notably, it is also the best performing fund in the top 20 over a decade, although the universe for this timeframe is significantly smaller.
The fund’s ability to achieve positive outcomes for investors in trickier market conditions is a standout attribute. For example, the vehicle mustered 11.9 per cent during 2015-16 when the average fund lost 1.8 per cent.
Looking underneath the bonnet of the fund reveals some interesting geographical allocations by manager Nick Clay. The most favoured region, in line with the aforementioned benchmark requirement, is the US, but there are also notable allocations in less mainstream markets such as Sweden.
Table 1 also makes for useful reading when contrasted with the fund selection habits of discretionary fund managers: only a handful of the top performers rank among DFMs’ top selections in the sector.
Data from Money Management’s sister title, Asset Allocator, shows three funds rank in both Table 1 and a list of DFMs’ 10 favourite global equity income funds: the Newton fund plus those from Fidelity and Schroders.
Another strategy that also warrants inspection is the Baillie Gifford Global Income Growth. The offering has managed to achieve positive growth in each of the five years, averaging 11.2 per cent a year in the process, which might draw envy from a number of absolute return managers.
In terms of the fund’s top holdings, there are some big name inclusions: Coca-Cola, Procter and Gamble and Microsoft to name a few.
The US again is a favoured region, but the portfolio also sees opportunities closer to home; more than 42 per cent is split between the UK and the rest of Europe.
Blip or trend?
Although last year’s dividend performance is unlikely to be replicated, the outlook for global equity income funds is still promising.
Many investors are now losing their appetite for risk assets: in contrast to dividend investors’ record 2018, growth investors were hit with something of a reality check, as global stock markets experienced their worst returns since 2008. Some of these losses have been recovered in the opening few months of this year, but the heightened volatility could signal that turbulent times are back to stay.
Many investors agree with this prognosis: equity funds saw five months of consecutive net retail outflows between October 2018 and February 2019, a total of £2.5bn exiting the various equity sectors.
Global Equity Income, on the other hand, was a bright spot, recording net inflows in the four consecutive months to January of this year.
However, the £33m of net outflows seen in February, making it the worst month of investor activity since July 2018, suggested investors have seen some warning signs.
It is too soon to say whether this represents a new challenge for the sector, or is simply a pothole on the path to wider acceptance among retail investors.
