If dividend income is your priority you might not need to travel as far as you thought
Since the financial crisis there has been a trend by income-seeking investors to look abroad for their returns.
This has been in part driven by the “dividend hole” that opened up in Britain following the financial crisis. There were widespread dividend cuts, with an alarming 202 London-listed firms cutting their payments in 2009.
Anxious savers turned to globally-invested funds which could shop anywhere for dividend-friendly shares. Keen to take advantage of this trend, fund firms rushed out new portfolios. Five years ago there were only 15 globally-invested income funds, but today there are 34.
In total, British savers now hold £20bn in these funds, which regularly appear near the top of the monthly sales charts.
But are they delivering? Research provided to Telegraph Money suggests not.
Retired financial adviser Bruce Dalton, himself an avid investor and scrutineer of fund returns, ranked the performance of both global equity income and UK equity income funds in terms of the pounds-and-pence income generated, based on a £10,000 investment three years ago.
These figures are difficult to come by as most fund companies quote yield figures only in percentage terms when they talk about income. This makes it hard for investors who prioritise income to know what they’re really likely to get paid.
Mr Dalton’s research found overwhelmingly in favour of UK equity income funds. The average fund, out of the 83 available to British savers, generated £1,610 income on an original £10,000 investment over the three-year period. The average global equity income fund delivered £1,380.
None of the global equity income funds beat any of the top 10 UK equity income funds. The best – Artemis Global Income – was beaten by 14 UK income funds.
The rest disappointed, with only three others out of 23 funds in total, which have a three-year track record, beating the average UK equity income fund’s income payout.
Why global income has proved a disappointment
Fund analysts, including Brian Dennehy, financial adviser and founder of broker FundExpert.co.uk, said global income funds are failing to live up to their billing.
“It is clear these funds are not prioritising income and are not looking to grow the income year after year. These funds are on the whole mediocre – not a good option for savers who want to draw the income regularly to supplement their lifestyle or retirement,” Mr Dennehy said.
Given that global income managers can invest anywhere it is perhaps surprising that stock pickers constrained to just one market fared better.
Tom Becket, a fund analyst for Psigma, the wealth manager, said global equity income fund managers tend to stick to shares listed in America and Europe as these two parts of the market dominate the MSCI All Companies World index. This is the benchmark these fund managers tend to measure themselves against.
Mr Becket said the fear of underperforming the index has led these funds to “load up” on US shares, typically forming 50pc of the portfolio. But in doing so the fund managers are sacrificing income, because US shares tend to yield 3pc or less.
“Investors should view global income funds as more of a ‘growth’ than a pure ‘income’ investment,” he said.
“The fund managers want to beat the index so the focus is more on growing the capital than on delivering the income.”
There are high-yielding shares available elsewhere, such in Asia and the emerging markets, but these funds tend to avoid these areas because their share prices are much more volatile – again posing the risk that the fund’s growth could suffer. On average global equity income funds yield around 3pc to 3.5pc, lower than UK Equity Income funds, which typically yield 3.5pc to 4pc.
Other factors, such as the strong pound, have also negatively impacted globally-invested funds’ income payments to British investors.
Mr Dennehy said British savers should not dismiss overseas markets completely, but should be careful in their fund choice. “Those who do not look overseas are excluding around 80pc of shares that pay dividends. Although the global funds have disappointed there are some Asia funds I rate that offer yields around 5pc, so at least investors know they are trying to generate income.” He cites Newton Asian Income and Schroder Asian Income.
The best income funds for savers
For those who need reliable income more than they need out-and-out top total returns, the best equity income dividend payer over the past three years is the Insight Equity Income Booster fund, which generated £2,980. This is a fund genuinely oriented toward maximising income. It has an 8pc yield.
Other high-yielding funds, the Premier Optimum Income and Schroder Income Maximiser, were second and third, delivering £2,912 and £2,684. These funds yield 6.7pc and 7pc respectively.
For investment trusts, which are similar to funds but listed on the London Stock Exchange, the picture is different. The best payer is the Murray International investment trust. Because it is a company (unlike a unit trust or “open-ended fund”) it can build reserves from which to pay dividends. Founded in 1907, it has had plenty of years to build up its reserves.
If it is difficult to identify “true” income funds, it is also difficult to find those with a record of increasing payments.
According to Mr Dennehy this is difficult to achieve. Over the past 10 years no fund (excluding investment trusts) has grown its dividend payments year in, year out. But a handful had increased payouts in eight of the past 10 years, including Liontrust Macro Equity Income and Royal London UK Equity Income.
Investment trusts, however, have fared much better.
City of London has one of the longest track records for raising income payments each year, raising dividend payments for the past 47 consecutive years.
Another is the Brunner Investment Trust, whose record of annually rising dividends dates back to 1971.