Is it time for advisers to switch from global income funds?

Is it time for advisers to switch from global income funds?

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.

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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.