With markets selling off heavily at the end of February, 2020 has already scarred equity investors, as discussed in this week’s Money section on pp32-33. Panic about the spread of the coronavirus has led to significant drops in major market indices. Worryingly equity income funds, which tend to protect capital more thoroughly than growth funds, have proved less defensive in recent months. For example, the average Investment Association (IA) Global Equity Income fund lost 4.5 per cent over the three months to 3 March – even more than the IA Global sector's average fall of 2.7 per cent. This is notable because the latter sector is made up of growth-orientated funds.
Quality focus
Defensive approach
Strong performance
Income and growth
May lag rising markets
If equity income funds' defensive qualities have not held up recently they have a good historic record of mitigating downside at times when growth stocks look stretched due to their focus on quality, dividend-paying companies. For example, during the sell-off of the fourth quarter of 2018, MSCI World index fell 11.5 per cent and the IA Global sector average was about the same. However, over that period the IA Global Equity Income sector average was a lower fall of 8.9 per cent.
Investors in equity income funds also benefit from a payout that can be reinvested, boosting their total returns, or taken as an income. So you should not write off equity income funds just yet.
Options include Guinness Global Equity Income (IE00BVYPP131), a more cautious play on markets. The fund’s managers, Ian Mortimer and Matthew Page, run a concentrated portfolio of stocks with a focus on both income and growth. The fund’s yield was 2.8 per cent at the end of January.
Analysts at ratings agency FundCalibre point out that the fund benefits from a focus on high-quality stocks that have consistently outperformed in their sector, and its managers seek to identify the best companies before considering the yields on offer. “Its managers’ focus on first choosing the right companies, rather than filtering by dividend yield, gives them a greater chance of finding hidden gems in the markets,” comment analysts at FundCalibre. “They look for growing, rather than high, income.”
The fund's holdings are a collection of its managers' best ideas, and they do not try to stay in line with MSCI World Index. They also hold stocks in equal proportions to reduce stock-specific risk and limit their selections to companies with a market capitalisation of at least £1bn. They aim not to frequently trade holdings so that trading costs eat less into returns.
The fund has held up better than many of its peers in the shorter term, and beaten both the IA Global and IA Global Equity Income sector averages over one, three and five years.
Because this fund's asset allocation is not put together with reference to its benchmark, MSCI World index, and like other equity income funds it focuses on dividend-paying companies, it can at times lag that index and funds with a stronger emphasis on growth investing. And Guinness Global Equity Income has slightly lagged MSCI World index over one, three and five years.
However, this fund should be viewed as a defensive holding that provides income rather than an outright growth investment, and could be held alongside higher-risk growth investments.
So with volatility returning to equity markets, Guinness Global Equity Income could provide some exposure to markets with a vital defensive element and an attractive income. Buy. DB
Guinness Global Equity Income |
Price | 1,411.05p | Mean return | 7.14% |
IA Sector | Global Equity Income | Sharpe ratio | 0.68 |
Fund type | Oeic | Standard deviation | 9.28% |
Fund size | £996.33m | Ongoing charge | 0.88% |
No of holdings | 35 | Yield | 2.93% |
Set-up date | 31-Dec-10 | More details | www.guinnessfunds.com |
Manager start date | Ian Mortimer and Matthew Page: 31/12/2010 |
Performance |
Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) |
Guinness Global Equity Income | 11.94 | 23.15 | 60.45 | |
IA Global Equity Income sector average | 6.92 | 12.38 | 41.19 | 125.86 |
MSCI World index | 11.77 | 21.86 | 66.22 | 176.5 |
Source: FE Analytics as at 4 March 2020 |
Top 10 holdings |
Gallagher, Arthur J | 3.0% |
BAE Systems | 3.0% |
Microsoft | 3.0% |
Novo Nordisk | 3.0% |
CME Group | 3.0% |
BlackRock | 3.0% |
Imperial Brands | 3.00% |
Unilever | 3.00% |
Deutsche Boerse | 3.00% |
Sonic Healthcare | 2.90% |
Source: Guinness Asset Management, 31/01/2020 |
Sector breakdown |
Consumer staples | 25.4% |
Industrials | 19.5% |
Financials | 14.7% |
Healthcare | 14.4% |
Information technology | 14.0% |
Consumer discretionary | 5.1% |
Communication services | 2.5% |
Energy | 2.4% |
Cash | 2.0% |
Source: Guinness Asset Management, 31/01/2020 |