Just yesterday I spoke to a global equity income fund manager who said he had issues with the governance, or lack thereof in Asia, for example.
The IMA Global Equity Income Sector was only established on the 1 January, but it has already got off to a flying start.
In statistics released by the IMA today, the sector was fourth in terms of net retail sales in February and was the only solely equity sector to be represented in the top five selling sectors.
This suggests investors are open to the idea of a generating an income globally and are finally moving away from the preconception that UK companies pay the highest or most reliable dividends.
Just as well, because in actual fact 92 of the world’s top 100 yielding companies are listed outside the UK.
Sector limits
To qualify for the Global Equity Income Sector, fund must have at least 80% of their assets in global equity. They must also be diversified by geographical region and intend to achieve a historical yield on the distributable income in excess of 110% of the MSCI World Index yield at the fund’s year end.
Funds in the sector must be diversified by geographic region, but there are no regional limits in place to ensure for example, Asia is proportionately represented.
Research sent through from ING Investment Management today shows EM dividend yield has already overtaken key developed markets such as Japan and the US.
Looking at the MSCI, the firm highlights that dividend yield in EM stands at an average of 2.98%, which is higher than Japan at 2.62% or the US at 2.11%.
Income and growth
Manu Vandenbulck, senior investment manager, ING Investment Management, said: "What is often missed is the dividend potential of emerging market equities. In terms of earnings growth, they show almost double the earnings growth of developed markets and have outperformed the latter significantly over the past decade.
"Yet this is not reflected in the valuations, with emerging market equities still proving cheaper than those in the developed world."
Vandenbulck argues that as well as paying out dividends, high-yielding stocks in EM are also likely to show higher growth.
"Since 1997, Asian stocks with the highest pay-out ratios during a year have achieved the highest compound average EPS growth rates during the next three years. Picking dividend-yield stocks with growth characteristics may lead to sustainable growth and long-term outperformance."
Clearly, it would be daft to completely disregard corporate governance risks in emerging markets, but with a period of stagnant growth, low interest rates and low-yielding bonds up ahead, income from equities is as important as ever.
Managers might insist they can get exposure to EM through globally-focused stocks, such as Coca-cola, or Heinz.
This isn’t just about EM exposure though, it’s about investing in stocks with great yielding potential.
I just hope developed market prejudices do not get in the way.
