Asking the right questions
For UK investors the big question is where the fund is investing, as a strong bias to one region over another can have a big impact on how its performance is perceived.
For example, the US accounts for over 50% of the world equity market capitalisation, and the UK for less than 10%. Yet many global equity income funds marketed to investors in the UK have a bias towards our own equity market and a lower allocation to the US. If the fund’s benchmark is the FTSE World Index, this can have a big influence on its relative performance.
Another factor is one of style. The overwhelming majority of global equity income funds have a bias to ‘mega-cap’ companies that have a lower exposure to medium and small caps. The reason for this is that such companies can provide the security of dividend that is the very objective of these funds.
However, such a capitalisation bias will affect performance during periods when smaller companies are outperforming.
Similarly, these funds tend to have a value bias or have an explicit value remit. Again, this is not necessarily a bad thing but there are times when growth outperforms value, meaning an opportunity may be missed.
We said at the outset that these funds are popular, but what makes them more attractive than the plethora of other investment opportunities out there?
First, there are a number of reasons why equity is popular. The bond bubble – although some still dispute there is one – is in the early stages of bursting. The Barclays Global Aggregate Bond Index fell by 4% during November, which was its worst performance since its inception. At the same time, fears of an imminent global economic recession seem to have receded and the picture that remains looks to be one that is positive for equities.
The next question is why global equities? The answer is simple: in order to access a wider opportunity set and increase diversification. There was a time when companies based in the UK were renowned for being among those that paid out the highest levels of dividends globally. Yet there are other opportunities to access overseas companies paying secure dividends.
Many of these companies operate in geographic regions that also offer scope for capital growth, which should not be forgotten amid all the talk about income.
