Join our community of smart investors

Ride out the storm with global income

Equity income is a favoured option in times of turmoil, but diversify your risk with a global rather than a UK fund, such as M&G Global Dividend. BUY
September 6, 2011

With equity markets in an apparent meltdown, for investors who want to stick with this asset class, the obvious answer is large-cap defensives that will at least pay dividends amid the turmoil. Traditionally, investors have favoured UK equity income, but with five companies accounting for around 40 per cent of UK dividends you incur serious concentration risk - especially as your portfolio is probably already stuffed with UK shares and funds.

IC TIP: Buy at 122p
Tip style
Income
Risk rating
Medium
Timescale
Long Term
Bull points
  • Strong total returns
  • Reasonable yield
  • Diversified portfolio
  • Promising fund manager
Bear points
  • Short-term track record

Savvy investors are increasingly turning to overseas equity income, which can offer excellent yields while reducing risk by diversifying your portfolio. One of the most promising recent additions to this sector is the M&G Global Dividend Fund, run by upcoming fund manager Stuart Rhodes.

This fund makes a virtue of the fact that it does not chase the highest dividend of the day, but focuses on total return and, as a result, is one of the best performers in Investment Management Association's (IMA) Global fund sector. Over three years, M&G Global Dividend is among the top 10 performing global funds in terms of total return, beating many growth funds, in line with its objective to maximise total return, as well as deliver a yield above the market average.

The fund still offers a yield of more than 3.5 per cent, making it one of the higher yielders in the Global sector.

This reflects Mr Rhodes' conviction that the best dividends tend to come from the best operators in the industry with the best return on capital. He targets companies with capital discipline that have the potential to increase dividends consistently, but are undervalued by the market. Dividend yield is not his primary consideration when selecting a share.

Mr Rhodes chooses companies on their merits rather than by sector or geography, perhaps a reason why the fund's largest geographic exposure is the US - not a market traditionally associated with income. Mr Rhodes has pointed out that the low yield here is the market average and if you drill down to company level there are some excellent opportunities. His previous position between 2007 and 2008 as deputy fund manager of the M&G American Fund may play a part in his knowledge of good companies in this market.

Mr Rhodes firstly narrows down potential investments with a filter on return on capital and dividend growth. He then undertakes qualitative analysis with the rest of M&G's global equity team, and meeting company management is a key part of this.

Over one year, the fund's performance has slipped to around 36 out of more than 190 global funds, but this is still comfortably within the first quartile and a good result considering M&G Global Dividend is an income fund being compared to mainly growth funds. The fund also aims to grow and sustain distributions over the long term rather than chasing short-term success.

The fund has a short-term track record as it is only three years old and it is Mr Rhodes' first mandate as lead manager. However, fund analysts at Bestinvest calculate that since its launch the average monthly return relative to the benchmark index has been +0.35 per cent. "Statistically, we estimate the probability that this fund manager is adding value, rather than being lucky, is 98 per cent," they say.

Even though initial performance has been strong, you may prefer to see more of a track record. But we think this could be an opportunity to catch a star manager at the start of his career. BUY

M&G GLOBAL DIVIDEND A Inc NAV (GB00B39R2M86)

PRICE122.74pSHARPE RATIO0.04
SIZE OF FUND£1.35bn*6 MTH PERFORMANCE-8.31%
No OF HOLDINGS47*1 YR PERFORMANCE1.11%
SET UP DATE18 July 20083 YR PERFORMANCE13.23%
MANAGER START DATE18/ July 2008*TOTAL EXPENSE RATIO1.67%*
TURNOVER29.7%*YIELD3.57%
VOLATILITY6.95MINIMUM INVESTMENT£500*
TRACKING ERROR3.7MORE DETAILSwww.mandg.co.uk

Source: Investors Chronicle, *M&G.

Performance data as at 6 September 2011.

Top 10 holdings as at 31 July 2011

Banco do Brasil3.8
HSBC3.6
Novartis3.5
DBS3.4
Chubb3.3
Kon DSM3.2
Prudential3.1
BHP Billiton3
Methanex3
Roche Genusscheine2.8

Geographical breakdown

Country%
US32.5
UK14.6
Switzerland8.1
Australia6.6
Brazil6.3
Canada5
Spain3.8
Hong Kong3.6
Other15.9
Cash3.6