Global income funds: Where in the world to look for profits?

By Joe McGrath

Complaints by BP shareholders at the recent annual general meeting over how the company's dividend policy was communicated illustrated the pressure that UK companies are shouldering from dividend-hungry investors in the current climate.

Investors seeking a regular income from their investments have long been familiar with the benefits of funds within the UK Equity Income sector, which invest in British companies to deliver a regular income. But the economic downturn saw how vulnerable UK income funds are as British businesses slashed their dividends or ceased paying them completely. Investors that had pooled all of their cash earmarked for income into British funds found their returns significantly reduced, with banks and oil companies surprising many by cutting dividend payments.

A recent report from MSCI (formerly Morgan Stanley Capital International) highlighted why corporate investors started the trend of looking further afield for income.

In 2010, of the world's 100 top stocks for dividend payments, the UK had just six of them. Taiwan surprised many by topping the list, with 13 of the top 100 companies; Brazil was joint second with the US – both with 10.

The UK was back in sixth, behind Australia and Canada, and only just ahead of Israel and South Africa.

With this in mind, it is easy to see why investors (both individual and institutional) have started to broaden their income sources and, as demand has grown, the investment houses have launched a host of new funds to quench this income thirst.

Those asset management houses that have not launched funds have tweaked mandates or changed strategies to allow their fund managers to go further afield to attain the best returns for investors.

Skandia Investment Group is one of the most recent examples, renaming and restyling its old Equity Income fund to a Global Equity Income mandate. Ryan Hughes, senior fund manager at Skandia, says most income strategies had traditionally generated the majority of their yield from the UK, but the classic income stocks of formerly reliable business have cut their dividends.

He explains: "Dividend growth is coming back, not just in the UK but across the globe. The issue that you have had in the UK recently has been that yield has been dominated by just a few stocks. When BP went through its troubles last year, it made a lot of people see the importance of a diversified approach. Then there were the banks. Only now, people are beginning to realise that there is a global market out there."

Unfortunately for investors, the trade body which groups funds together in different clusters has not been quick to respond to this changing attitude. Despite calls for it to offer an easy-to-spot list of global equity income funds, there is still no definitive sector for open-ended income funds of this type, and they have been scattered between the "global growth" sector and eight other non-UK sectors.

Most investors are likely to have the majority of their equity income portfolio focused on the UK, and analysts believe there is still a good case to leave a healthy percentage invested there. However, one of the attractions of adding global equity income exposure is the diversification among sectors. For example, the US market offers a range of solid companies in the technology sector, which are truly world class and are paying a dividend at a sensible price. Microsoft is one of the most talked-about examples.

Andy Parsons, advice team manager at The Share Centre, says drawing stocks from a global universe makes for a larger opportunity set, meaning there are more opportunities for a fund manager to find yield.

He explains: "The US is a market leader in the information technology arena as well as being innovative in the automobile market. A global approach diversifies an investor's sector exposure and potentially provides access to some of the very best companies in the sectors and assets that the home market bias cannot deliver."

For those investors that don't want to leave their geographical diversification to chance, it is now possible to access country- or region-specific equity income funds with a wide variety of mandates.

In the most recent year, the highest income-generating fund was in the Asia Pacific (ex-Japan) sector, where the Schroder Asian Maximiser delivered a truly stunning 7.3 per cent yield. There was only one fund in the UK Equity Income fund sector to deliver a higher income than this: the Insight UK Equity Income Booster fund.

The highest-yielding return over the past three years within theIMA Global Growth sector wasthe Newton Global Higher Income, which returned an average yieldof 5.2 per cent.

While the Newton Global Higher Income might be the best-performing income fund (in terms of yield) in the Global Growth sector, it isn't the most popular. Institutional and retail inflows show that investors have been opting for the M&G Global Dividend fund instead.

According to data from Financial Express, the M&G Global Dividend fund saw inflows of £504.9m in the six months to the end of March, compared to just £372.1m for the Newton fund.

* This research is taken from the Global Income survey in the Mayedition of What Investment magazine, out in newsagents on Tuesday.