This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio.
Emma Wall: Hello and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar Fund Analyst, Muna Abu-Habsa.
Hi, Muna.
Muna Abu-Habsa: Hello Emma.
Wall: So, it's our Emerging Markets Week this week, but we'd like to caveat that because we'd like to say to investors you can't look at emerging markets in isolation. You should look at them as part of a broader portfolio and if you're not perhaps comfortable doing emerging market allocation yourself, leave it to a global equity fund manager.
So, today we're going to talk about global equity income funds for those people who are looking for income or indeed looking for growth, they can always take the accumulation stocks.
What we'd like to start by saying though is there are so many global equity income funds out there that you should really think about what you need, what you're looking for, what your risk profile is before you make a decision, shouldn't you?
Abu-Habsa: That's right. Well, global equity income fund managers benefit from having a wide opportunity set from which to select stocks and some are more adventurous than others and will dive into emerging markets to a greater extent than others.
But these types of funds also come with greater performance variability and so may not be suitable for all income-seeking investors. For those that can tolerate some bumpiness, however, we do have three that we rate positively and we can talk about those today.
Wall: Talking about that volatility, perhaps that's why these sorts of funds lend themselves better to people who have a longer-time investment horizon because emerging markets, it will be a bumpy ride but a long-term approach is best?
Abu-Habsa: That's right. So, those funds – all three funds have excellent long-term track record. In the short-term, however, there has been a greater performance volatility relative to their peers.
Wall: So, perhaps we'll hear what the first one is today then?
Abu-Habsa: So, the first one is Lazard Global Equity Income. This is a three-man New York-based team led by Patrick Ryan. The managers have been involved with this strategy since 2005 and like most income or equity income fund managers they emphasise the stability of the dividends, but they also prefer companies with access to growing markets.
So, the way they reflect this in the portfolio they do this through a number of small positions and high-beta emerging market names, carefully balanced by heavy stakes in dividend aristocrats.
Wall: What's the second fund today?
Abu-Habsa: The second fund is Newton Global Income. James Harries has run the fund since its launch in 2005. He has built an excellent track record. Overall, the emerging market names have helped the fund's performance but also its ability to generate an above-average yield.
There has been years, however, such as in 2013 where those names have been a key detractor from returns. What's important to note on this one actually is, the emerging market bias is not structural, so at the moment it's around 2% of the fund. So, that's down from its 20% peak in 2007. So, it changes.
Wall: Having that flexibility will, of course, benefit investors, won't it?
Abu-Habsa: Absolutely. He is a pragmatic manager, so yes.
Wall: What's the third and final fund?
Abu-Habsa: Third fund is, Artemis Global Income. So, that launched more recently in 2010 and it's been managed since by manager Jacob de Tusch-Lec. This is a well-differentiated portfolio from its peers because the manager is very mindful of the correlations and concentrations that exist within the equity income universe.
So, he avoids the obvious names in the global and U.K. equity income investment universe and he instead ventures into names lower down the market cap scale and emerging market names.
Wall: I have to admit a bit of a bias for this fund because I actually hold it in my SIPP after meeting with Jacob. He really impressed me by showing me a graph of other global equity income funds and how concentrated, as you say, that they were in U.S. names and U.K., European names and actually weren't that globally diversified compared to his fund which, as you say, is very strategic.
He only has a certain amount in U.S., emerging markets, across the different regions making sure that investors really do benefit from global income.
Abu-Habsa: Yes. So, if you look at the top 10 holdings in the fund, there will be very few names that you'll recognise there that you see in other prominent equity income portfolios.
Wall: Muna, thank you very much.
Abu-Habsa: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.