With investors continuing to hunt for yield, global equity income funds remain in the spotlight. The popularity of the funds is a phenomenon that started following the financial crisis in 2008, when investors rushed into safe haven assets. Dividend stocks provided a welcome shelter from the storm. With central banks across the globe in a dovish mood since then, extensive QE programmes put pressure on bond yields, providing another reason for investors to rush into equity income funds.
Since the trough of the financial crisis in March 2009 until July 2016, the Morningstar category Global Equity Income has seen a total net inflow of €43.2 billion. This pushed total assets under management to €82.6 billion, which is an increase of 1,200% from the €6.3 billion that was invested in global equity income funds in March 2009. This significant growth dwarfs the 248% organic growth achieved by equity strategies in general.
Global Income Fails to Deliver
Despite their popularity, global dividend funds have had difficulty beating the MSCI World Index over the past three years. Only five out of 38 strategies in the IA sector Global Equity Income managed to achieve a superior performance versus this benchmark. It has been a difficult environment as higher-yielding stocks lagged the broader market, while value stocks trailed growth stocks. In addition, US stocks, which have historically been a strong underweight versus the MSCI World Index, outpaced European stocks, which have typically been popular among equity income portfolio managers for their higher yield and lower perceived valuations.
Looking at sector performance, two important sectors for equity income strategies faced significant headwinds in the past three years. Financials, often a core position in dividend funds, underperformed as a result of declining interest rates, tighter margins, higher capital requirements and regulatory pressure. Adding to the uncertainty was the exposure of banks to potential non-performing loans in the energy and mining sectors, while the pile of non-performing loans on the books of Italian banks caused further market stress. The natural resources sector is also going through a rough patch, with commodity prices falling to historical lows across the board.
Despite this year’s rebound of some major commodities, including oil and iron ore, many natural resources companies have had to cut their dividend and even the dividend of oil majors is under scrutiny from investors. The challenging environment causes differences in portfolio positioning among portfolio managers of equity income strategies. Where some are attracted by the low valuations and higher yields, others remain shy on adding these fallen angels to their portfolio. It is one of the factors causing the large dispersion of 23% from January to the end of August, among equity income funds, evidencing the need of thorough fund selection.
3 Top Global Equity Income Funds
Looking at the funds in the IA sector Global Equity Income, we find a variety of dividend funds. Although all funds construct a portfolio that has a higher yield than the broad market, their approach can differ meaningfully. We highlight some offerings that exhibit their own dividend style, one that is Gold rated and two that are Silver rated by Morningstar analysts.
The Veritas fund holds a Gold Morningstar Analyst Rating, which is based on our high conviction in its management. Charles Richardson and Andrew Headley, who previously worked together at Newton, have been at the helm since the fund’s launch in 2006 and have run the institutional version since 2003. The fund's standout characteristic is the extent to which the managers aim to deliver real returns to investors. They invest in companies with durable competitive advantages and strong, sustainable cash flows that can lead to dividend payments.
Yield is one of the considerations, but the managers are not prepared to invest in high yielding companies that are unlikely to contribute to capital growth. Finally, they also use a thematic framework to help identify industries globally that they believe will benefit from long-term structural drivers.
Deutsche Invest I Top Dividend
This fund has built a strong track record under the leadership of Thomas Schüssler since 2005. This conservative dividend strategy focuses on quality companies that are able to pay out sustainable and preferably growing dividends, are financially sound, generate stable cash flows and have a strong competitive advantage. The giant/large-cap dominated portfolio of approximately 70 stocks is held for the long term, evidenced by 20% average annual turnover in the past five years.
Cash-like positions are actively used to change the characteristics of the portfolio. With an allocation of 4.5% to cash and 7.4% in US Government bonds, the fund’s positioning is very conservative, which is further demonstrated by its 53.6% allocation to defensive sectors, versus a category average of 33.8%. The fund earns a Silver rating.
This fund earns a Silver rating based on its solid approach, which has a bit more flexibility than traditional dividend funds. Stuart Rhodes, at the helm of the fund since its July 2008 inception, has served investors well, albeit with a higher level of volatility. Unlike some dividend strategies in which the investment process centres on relative yield, Rhodes targets companies growing the absolute level of the dividend.
This steers the fund to the faster-growing, more cyclical part of the universe. Rhodes balances these higher-beta dividend payers with conventional income sectors. This high-conviction approach has had a difficult period since mid-2014 but we believe Rhodes has continued to implement his process consistently despite it being out of market favour.
A version of this article has appeared in Money Marketing magazine
