Mark Dampier: Get rich slowly with global equity funds

The Analyst

The popularity of global equity income funds is a fairly new phenomenon. One or two fund management groups attempted the concept more than 20 years ago, but it failed miserably because most overseas markets provided little dividend income compared with the UK. However, times have changed. Many more areas of the world have now embraced a culture akin to the UK, where there is widespread commitment by companies to provide investors with increasing dividends.

One company that has recently celebrated three years in this sector is M&G, courtesy of their Global Dividend fund managed by Stuart Rhodes. Statistically three years is quite a short period. To get an idea of a fund, or more importantly a fund manager, you really want to see a record of seven years or more. That said, Mr Rhodes has certainly got off to a fine start and when I met him a couple of weeks ago I was impressed with his philosophy regarding equity income investing.

The argument behind investing in companies with growing dividends is well-rehearsed but worth a reminder as too many investors have a time horizon of only a few months. In contrast, the equity income philosophy is very much to get rich slowly. The compounding of dividends over the years to buy more shares has an extraordinarily powerful effect – providing of course you regularly reinvest your income. Growing dividends is a considerable financial discipline for a company too. It requires good management to increase payouts while allowing enough money for investment. Indeed dividend policies can act as a balance, preventing companies wasting money on unproductive projects and instilling a focus on the most profitable ones.

In finding suitable companies for the fund, Mr Rhodes looks for resilient businesses able to survive difficult economic times while growing dividends more or less in line with inflation. He is also vigilant to avoid any company that has become a slave to its own dividend policies, clinging to a record of dividend growth that is ultimately unsustainable. Out of a universe of around a thousand companies, he produces a list of 200 that broadly meet his criteria, and from this he selects a tight portfolio of only 50 names.

For the core of the fund (representing 50 per cent to 70 per cent) he buys good-quality companies, dominant in their respective areas. Although these companies are dependable and likely to see him through good times and bad, they often lag behind when markets rise. To counteract this he likes to invest 20 per cent to 30 per cent of the fund in asset-backed, cyclical companies whose fortunes are much more closely related to global GDP growth. These are more responsive to market moves and include mining companies such as BHP Billiton. Finally, he dedicates approximately 10 per cent of the portfolio to companies growing quickly and increasing dividends very rapidly – albeit from a low base. These are often emerging markets stocks and are frequently expensive, so he attempts to pick them up when markets wobble.

It is from these more economically sensitive areas that the fund has derived its performance edge over the sector since launch, though there will clearly be times when the strategy works less well. It also means something of a compromise in terms of income. At 3.2 per cent, the fund's yield is behind a number of rivals, who produce up to 4.5 per cent. However, I believe Mr Rhodes is an impressively deep thinker regarding income, and is aiming to build a truly long-term record of dividend growth alongside growth in capital. In the long run this strategy could produce better total returns than funds targeting higher yields.

While the fund has increased rapidly in size, Mr Rhodes does not feel constrained by this and believes there is plenty of capacity to grow it further. Clearly it has already proved popular, and it does seem to me to be the type of fund many investors should be looking for, particularly those in retirement, where funds providing income that broadly rises with inflation are highly desirable as part of a retirement portfolio. It also offers important diversity away from the more traditional UK equity income funds that tend to dominate investors' portfolios.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
peopleHowards' Way actress, and former mistress of Jeffrey Archer, was 60
Sport
Romelu Lukaku puts pen to paper
sport
News
Robyn Lawley
people
Arts and Entertainment
Unhappy days: Resistance spy turned Nobel prize winner Samuel Beckett
books
PROMOTED VIDEO
News
people
Life and Style
Troy Baker and Ashley Johnson voice the show’s heroes
gamingOnce stilted and melodramatic, Hollywood is giving acting in video games a makeover
News
i100
Life and Style
Phones will be able to monitor your health, from blood pressure to heart rate, and even book a doctor’s appointment for you
techCould our smartphones soon be diagnosing diseases via Health Kit and Google Fit?
News
people
Extras
indybest
Travel
Ryan taming: the Celtic Tiger carrier has been trying to improve its image
travelRyanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?
Sport
Usain Bolt confirms he will run in both the heats and the finals of the men's relay at the Commonwealth Games
commonwealth games
Life and Style
Slim pickings: Spanx premium denim collection
fashionBillionaire founder of Spanx launches range of jeans that offers 'thigh-trimming construction'
News
Sabina Altynbekova has said she wants to be famous for playing volleyball, not her looks
people
News
i100
Life and Style
tech'World's first man-made leaves' could use photosynthesis to help astronauts breathe
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

    £450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

    Senior Analyst - ALM Data - Banking - Halifax

    £350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

    Java developer - Banking - London - Up to £600/day

    £500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

    Day In a Page

    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices
    Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

    Could smartphones soon be diagnosing diseases?

    Health Kit and Google Fit have been described as "the beginning of a health revolution"
    Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

    Can we learn to love Ryanair again?

    Four recent travellers give their verdicts on the carrier's improved customer service
    Billionaire founder of Spanx launches range of jeans that offers

    Spanx launches range of jeans

    The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
    10 best over-ear headphones

    Aural pleasure: 10 best over-ear headphones

    Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
    Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

    Commonwealth Games

    David Millar ready to serve up gold for his beloved Scotland in the end
    UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

    UCI Mountain Bike World Cup

    Downhill all the way to the top for the Atherton siblings
    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star