Income seekers know that dividend paying stocks are no longer solely found on the FTSE 100. Savvy investors will look to buy up companies from across the globe in a bid to gain access to both inflation beating yield and potential capital growth offered by developing markets.
But if you think a global equity income fund would take care of that for you - you'd be wrong.
Every single one of the top 20 stocks found in a typical global equity income fund is listed in either the UK, US, Switzerland or France. Offering investors no direct exposure to emerging market companies - or even to the non-core Eurozone stock markets. Diversified this is not.
Last month, Morningstar exclusively revealed that leading UK equity income funds' portfolios overlapped by a third. Despite each fund manager following their own personal mandate there were certain stocks that appeared across the board.
There are 19 top rated UK equity income funds, that is those that are rated Gold, Silver or Bronze by Morningstar analysts. Every single one of the funds holds GlaxoSmithKline – making up an average of 5% of each fund’s portfolio. The stock makes up 8% of Fidelity MoneyBuilder Dividend, Invesco Perpetual High Income and Invesco Perpetual Income.
Looking at the global equity income sector the story is remarkably similar - half of the 22 global income funds on the market invest a significant proportion of their portfolios in healthcare company Roche.
Nine of the 22 funds have Pfizer, Sanofi and Novartis in their top 10 holdings, and Shell, Vodafone, Total and Johnson & Johnson all proved popular as well.
And every almost every one of these funds are predominately exposed to just a few stock markets.
You could argue that fund managers need not look outside of the UK and US economies for access to emerging markets - thanks to international revenue streams.
Granted, the FTSE 100 is renowned for deriving 70% of its cash from overseas. The UK blue chip index not a domestically focused stock market – but nor is it large or global enough to warrant such a large representation in these so-called global funds.
The fund industry is representing an historical picture – in previous decades, income seekers had to stick to the UK stock market if they wanted yield. Now, as emerging markets mature and companies both improve corporate governance and their balance sheets companies listed overseas have something to offer income seekers.
Lack of geographical spread also ups your currency risk – should sterling take a hit, a quarter of your fund’s portfolio declines in value.
Allocating so much of your global portfolio to a small handful of countries not only limits your geographical exposure, but your sectorial diversification too.
A quick scan of the typical top 20 stocks reveals that they are grouped into a small number of sectors – predominantly tobacco, pharmaceuticals and consumer staples.
When an increasing number of technology companies, real estate and services stocks all pay attractive dividends why not spread the risk?
One reason why many global equity income funds predominantly invest in the US and UK is because of the index the fund is benchmarked against. Morningstar analyst Richard Whitehall said that most global equity income funds are benchmarked against either the MSCI World Index or the MSCI All Countries Index. The US stock market makes up around 50% of both of these indices.
“The MSCI World does not include any emerging markets – so it is not surprising that so many global equity income funds do not either,” he said. “While investors may be surprised at this, equally they must ask themselves about the suitability of holdings. You wouldn’t want 5% of your fund invested in Papua New Guinea or another minor emerging market.”
For investors that do want truly global exposure, there are some fund managers that do not mirror the MSCI World.
Artemis Global Income (
rated Bronze by Morningstar analysts), run by Jacob de Tusch-Lec is invested in New Zealand, Japan, South Africa and the Middle East.
Lazard Global Equity Income (rated Bronze), run by Patrick Ryan and his team is invested in Canada, Latin America and emerging Europe.
Newton Global Higher Income (rated Silver), managed by James Harries offers exposure to both core and periphery Europe, South East Asia and Africa.
Alternatively, if you are comfortable with the performance of your global equity income fund – but it only offers exposure to the US and UK stock markets you could opt to add a more specialised emerging market income fund to your portfolio.
Newton Asian Income has been awarded a Silver rating by Morningstar analysts and Schroder Asian Income is rated Bronze.
