For anybody who is a dedicated follower of fashion, global equity income funds are unlikely to be considered haute couture. However, some investors may be familiar with John Burr Williams’ adage: “A cow for her milk, a hen for her eggs, a stock, by heck, for its dividends.” This has suddenly come into vogue again, as in 2022 we have seen a retreat in the performance and flows of the hitherto growthy, tech market darlings and high P/E momentum companies.
The IA Global Equity Income sector is populated with about 60 funds, some of which have been around for a while – the classification itself extends back to 1989. Offerings such as Janus Henderson Global Equity Income and M&G Global Dividend will be familiar to many advisers and investors. Nonetheless, with around £20bn (IA data as of June 2022) it holds half the assets of the UK equity income sector.
Dividend discipline
Once upon a time, UK equity income was the go-to sector for dividend-hungry investors. However, as global companies have become more disciplined in providing regular payments to shareholders, the opportunity set for fund managers to diversify income holdings away from the traditional petroleum or tobacco companies has grown.
By way of example, data provided by Guinness Global Investors reveals that more than 50% of its global universe of stocks yields above 2%. This was less than 30% in 2000. This considerably deeper pool in which to fish for income allows the evolution of funds with different approaches and styles and, consequently, diversification benefits.
Within this sector you can find funds that invest in smaller capitalisation stocks as well as the big ‘usual suspect’ compounders, funds that have a slightly higher emphasis on dividend growth and those which might invest in cyclical, higher-yielding stocks.
Typically, though, this sector should be more defensive by virtue of the quality inherent in disciplined dividend payers and an inherent value bias, which, having been out of favour for the past few years, has had a timely renaissance in 2022.
The macro picture
Since the rollout of vaccines and the re-opening of economies across the globe in late 2021, news flow in Q1 2022 was dominated by Russia’s invasion of Ukraine. As the year has moved on, this geopolitical event has conjoined with other negative macro sentiments, and higher levels of inflation, increases in interest rates and concerns about global recession culminated in a very poor first half of 2022 for global equity markets.
This overall gloomy backdrop has acted to the detriment of growth stocks as well as those on higher multiples, which are not typically the predominant types of holdings in global equity income portfolios.
Outside of energy stocks, which have benefited from rising prices, dividend-paying stocks have been rewarded as a period of slower growth grips the market, driven by a preference for defensive industrials, consumer staples and utilities.
Performance indicator
In the year until the end of July, the broad-based MSCI ACWI returned -5% (in GBP). By comparison, the IA Global Equity Index has returned -2.4%. The sector has exhibited considerable dispersion during this time with the poorest-performing fund returning -14.5% and the best 5.6%.
Many of the funds in this sector will have been underweight energy stocks, which were the only significant positive support to the market for the first half of 2022.
That said, this classification is one of the few equity-based categories to generate positive net sales. Per the IA data, £189m of net inflows to the end of June 2022 does not seem too bad compared with £2.7bn of net outflows in equities overall.
Additionally, there has been a restoration of dividends for many of the holdings of these funds.
Following the emergence of the Covid-19 pandemic, a number of dividend stalwarts severely cut or ceased paying a dividend. As the parameters of the pandemic stabilised, most companies have resumed paying dividends with some paying excess capital stored during the crisis as special dividends.
Non-bank financials, for example, have produced strong dividend growth over the recent reporting period. The average yield on the sector is currently around 3%.
Funds to watch: 3-year performance
1. The Guinness Global Equity Income Fund, managed by Ian Mortimer and Matthew Page, focuses on companies with a persistent high return on capital and low levels of leverage. These companies are also cheap relative to the market, peers and their own history. The fund aims to provide exposure to businesses its managers believe can sustainably grow their dividends over time. However, at point of purchase, securities must meet a strict minimum yield of 1.5%. The fund has a strong quality bias due to a focus on balance sheet strength, which gives it a very defensive profile. It has had considerable success since its inception, overseeing eight or so major macro-driven drawdowns in which the fund has performed relatively well, including 2022 year to date.
2. The M&G Global Dividend Fund, managed by Stuart Rhodes, is underpinned by the premise that an obligation to grow dividends exerts a discipline on company management. Companies that can successfully deliver consistent dividend payments should attract a premium valuation in the market. The portfolio has a core of solid, reliable dividend-paying companies. These are supplemented with more cyclically sensitive names and those going through a strong growth phase. The combination should allow the fund to remain competitive across a range of market conditions. The manager is also sensitive to valuations and will not overpay in the pursuit of dividend sustainability. This results in a value bias that has held the fund in good stead through 2022.
3. The TB Evenlode Global Income Fund, managed by Ben Peters and Chris Elliott, invests in high-quality, growing, dividend-paying companies and is likely to have more of a defensive profile than the broader global equity market. It is therefore likely to offer a level of downside protection in falling markets, but lag behind when markets are led by lower-quality and more cyclically sensitive companies. Its approach is likely to skew away from certain areas of the market such as telecoms and utilities (due to their highly regulated backgrounds and low pricing power), energy-related (asset intensive and low pricing power) and financials (asset intensive and highly leveraged).
4. The Artemis Global Income Fund, run by Jacob de Tusch-Lec, is an all-cap fund that aims to blend successful stockpicking with an understanding of the macro picture. Although the emphasis of the strategy is on uncovering attractive companies, the manager believes that not taking a top-down view can result in important global trends – and subsequent opportunities – being missed, and so could expose the portfolio to unintended risks. This strategy differentiates itself against its peers by steering away from the more traditional income stalwarts.
Jake Moeller is a senior investment consultant at Square Mile Investment Consulting and Research
This article first appeared in the September edition of Portfolio Adviser Magazine
