While currency risk needs to be considered if investing in the sector, funds that are well diversified geographically help reduce much of that risk through investing in a basket of currencies.
Away from the core proposals there are some more specialist funds in the sector. The demand for income has seen Fidelity and UBS launch “enhanced income” products, using the writing of covered calls to boost income generation. Other specialists in the sector include offerings from Premier Asset Management, Legg Mason and Miton that focus upon infrastructure.
Looking ahead
Despite the number of launches over the past five years I see this sector as having significant scope for development. The sector currently has £16.8bn invested with the majority of the monies invested in the largest five funds (Newton Investment Management, Artemis, Pioneer Investments, Columbia Threadneedle Investments and Veritas Investment Management).
This is a fraction of the amount invested in UK equity income funds. However, given the concentration of dividends in the UK stock market and current headwinds for dividend growth across many sectors dominating the UK market, it is likely we will see more invested overseas.
I expect to see continual changes in the structure of funds investing in the sector and how they will differ from broader global stock market benchmarks. For example, although profits have seen increasing dividends payments in the US, following the strong share price performance of US shares, the yield on the S&P 500 has fallen below 2 per cent.
This is leading to most fund managers in the sector looking further afield and reducing US exposure in favour of other markets. As stock markets develop and corporate governance improves in emerging markets, I would expect them to become increasingly important in terms of the global equity income sector. Asia already is a big component of dividend payers.
Finally, there is a misconception that in the hunt for income, high-yield stocks have indiscriminately outperformed, leaving yield stocks in bubble territory. This is not the case and over the past five years the MSCI World High Dividend Index has underperformed the wider MSCI World index.
Global dividend stocks provide good opportunities and this sector is set to remain a hunting ground for core holdings across stock market exposure.
Gavin Haynes is managing director of Whitechurch Securities
