UK investors have traditionally turned to the home market for equity income, as the UK has been one of the highest paying and most reliable sources. However, the collapse of bank dividends during the financial crisis highlighted how this market is dependent on just a few companies, and this continues to be the case. The Capita Dividend monitor reports that in 2016 five companies alone accounted for 38 per cent of the UK dividend total, up from one-third in 2015. If any of these companies cancelled their dividends, this would have a highly detrimental effect on the overall total, and most likely a number of UK equity income funds.
- Good long-term performance
- Global diversification
- Benefits from weak sterling
- Reliable income stream
- Short-term underperformance
- Currency risk
But diversifying your income with a global equity income fund should help maintain a more reliable income stream, as you are accessing a much bigger universe of stocks and reducing concentration on individual markets. A global fund also offers exposure to companies not available in the UK, and in some cases sectors that are not well represented on the home market, such as technology and automotive.
Options include Artemis Global Income (GB00B5N99561), which over five years has returned 124.3 per cent, outperforming its benchmark, MSCI All Country World Index's return of 91 per cent, and the Investment Association Global Equity Income sector average of 77.7 per cent. It also has a yield of just under 3 per cent.
The fund aims for a rising income combined with capital growth mainly from overseas equities, but can also invest in fixed interest. Artemis Global Income can invest in companies of all sizes and its largest geographic exposures are Europe excluding the UK and North America, which account for 38.6 and 34.4 per cent of assets, respectively.
The fund's manager, Jacob de Tusch Lec, aims to diversify its sources of income by investing across three different types of income-producing companies. These include 'quality yield' companies with relatively low yields, but consistent dividend growth; 'cyclical yield' companies that are sensitive to the economic cycle and can provide high yield and high growth in rising markets; and 'value yield' companies that tend to have low dividend growth, but higher yields. Mr De Tusch Lec adapts to changing economic conditions by shifting the allocation between these three types of stocks.
He assesses companies by looking at their free cash flow yield rather than just their dividend yield, which means he can also invest in mid-caps, which may be able to grow their dividends over time. And he invests with a value bias looking for cheaper, out-of-favour equities. This can be a good approach as equity income shares can be relatively expensive due to their popularity with investors seeking an attractive yield amid low interest rates and poor returns on bonds.
"The manager has a very good investment process and clear idea of what he's aiming to do," says Ben Yearsley, director at Shore Financial Planning. "And given that the UK has a lot of issues right now with the Brexit negotiations and the possibility that sterling will depreciate further, this fund offers good diversification and insulation for UK investors."
However, Artemis Global Income has failed to outperform its benchmark over one and three years. And, although its overseas earnings would benefit if sterling weakens further, if it strengthens this will probably have a negative impact. And the fund's value bias and mid-cap tilt also mean it is likely to experience higher volatility.
But Mr Yearsley adds: "This fund has been through a tough time in recent years, but picked up quite considerably last year."
And Artemis Global Income's strong long-term performance record suggests long-term investors will be rewarded. So if you're looking to diversify your income and are prepared to hold for the long term, Artemis Global Income's good long-term record and good investment process mean it remains a good option. Buy. EA.
Artemis Global Income Fund (GB00B5N99561) | |||
|---|---|---|---|
| Price | 100.85p | 3-yr mean return | 15.36% |
| IA Sector | Global Equity Income | 3-yr Sharpe ratio | 1.36 |
| Fund Type | Unit Trust | 3-yr standard deviation | 10.25% |
| Fund size | £3.54bn | Yield | 2.90% |
| No of Holdings | 90 | Ongoing Charge | 0.81% |
| Set up date | 19/07/2010 | More details | www.artemis.co.uk |
| Manager start date | 19/07/2010 | ||
Source: Morningstar as at 03/04/17
Performance
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) |
|---|---|---|---|
| Artemis Global Income | 30.5 | 51.2 | 124.3 |
| IA Global Equity Income sector average | 26.1 | 40.4 | 77.7 |
| MSCI ACWI index | 32.2 | 54.7 | 91.0 |
Source: Morningstar as at 31/03/17
Top 10 holdings as at 28/02/17 (%)
| Storebrand | 4.2 |
| Western Digital | 3.1 |
| BHP Billiton | 2.9 |
| EI Towers | 2.3 |
| General Motors | 2.3 |
| Zions Bancorp | 2.2 |
| Rai Way | 2.1 |
| Banco Do Brasil | 2.1 |
| INWIT | 2.1 |
| Synchrony Financial | 2.1 |
Source: Artemis
Sector breakdown as at 28/02/17 (%)
| Financials | 36.0 |
| Industrials | 12.4 |
| Consumer Discretionary | 12.1 |
| Telecommunication Services | 11.4 |
| Materials | 10.4 |
| Information Technology | 8.1 |
| Energy | 4.6 |
| Healthcare | 1.9 |
| Consumer Staples | 1.7 |
| Utilities | 1.5 |
Source: Artemis
IC Tip rating
| Tip style | Income |
|---|---|
| Risk rating | High |
| Timescale | Long term |
