UK Equity Income funds are a staple among the vast majority of UK investors, thanks to the sector's array of proven options run by star managers. It has almost 100 constituents, with total assets exceeding £67bn. Among the largest funds operating in the sector are the £13.9bn Invesco Perpetual High Income and £5.9bn Artemis Income portfolios.
However Page, who runs the Guinness Global Equity Income fund, thinks that the universe these managers operate in is too small and unreflective of the burgeoning global market. The fact that the FTSE 100 has itself become increasingly internationalised in recent years provides further evidence that the concept is outdated, he says.
"Is it an outdated concept these days? Yes, I think maybe it is," he said.
"UK income funds came about because people living in this country wanted to invest their money in familiar, domestic-facing companies, without exchange rate risk and the like."
"In this day and age, when the UK index is so global anyway, I think the very reasons why the funds were launched in the first place are now irrelevant."
"As well as this, you’ve got the general arguments for going out of a UK fund and a global fund, which are very well rehearsed. You’ve got more of a universe to choose from, so there’s more diversification on offer, and there’s also less sector bias."
The manager points out that the IMA Global Equity Income sector has grown considerably in recent years, which shows that UK investors are beginning to see the merits of broadening their horizons.
"When the sector launched, it had about £5bn of money in it, but today the sector is closer to £20bn. When you think how big the UK Equity Income sector is, there’s a lot of potential there," Page added.
According to data from FE Analytics, there have been positive net flows of £1.5bn in the last 12 months. The bestselling fund overall – Newton Global Higher Income – has taken just shy of £600m. Only six Global Equity Income funds have experienced outflows over the period.
These figures do not include M&G Global Dividend, because it sits in the IMA Global sector. Stuart Rhodes’ £7.4bn portfolio is one of the very largest of its kind and has taken £2.4bn of assets in the last year alone.
The much larger IMA UK Equity Income sector has also seen net inflows, though not as much (just under £1bn).
Page argues that the lack of diversification in the UK market, and particularly the FTSE 100, could put many investors at risk if certain sectors fail to perform. He points out that a handful of sectors – namely healthcare, tobacco, and oil and gas – dominate the index, and are also among the biggest dividend payers as well.
Managers who do not venture far away from their benchmark could get hit hard if one of these were to come under pressure, he says, as was seen when the banks suspended dividend payments during the financial crisis.
"It all depends on what part of the market the UK Equity Income manager is in: if you’re well diversified and aware of dividend risk, then you probably don’t need to worry, but if you’re actively benchmarked to the FTSE – which a lot of funds are – then there is a big risk," Page explained.
"There is the risk of underperforming and also the risk of not preserving capital if an area of the market does have a rough time."
Page points out that the sector concentration in the MSCI World index is far lower, meaning that even benchmark-hugging Global Equity Income funds should be better insulated than their pure-UK rivals.
Looking at past performance does little to back up Page’s claims. The IMA Global Equity Income and IMA UK Equity Income sectors have almost exactly the same annualised volatility over one, three and five years, and the average max drawdowns are also very similar. There is little to separate the two when it comes to overall performance.
Performance of sectors over 3yrs
Source: FE Analytics
It is worth bearing in mind that global equity income managers have the flexibility to invest in emerging markets, which tend to be much more volatile than their developed market rivals, which may have skewed the results somewhat.
Page’s $64m Guinness Global Equity Income portfolio has been very effective from a risk/adjusted return point of view, though. He has guided the fund to the top quartile of the IMA Global Equity Income sector since its launch in December 2010, with below-average volatility. Guinness Global Equity Income has also beaten its MSCI World index benchmark with less volatility over the period.
Performance of fund, sector and index since launch
Source: FE Analytics
The fund is currently yielding 3.2 per cent.
Page says that his fund benefits from the fact he has a much larger universe of stocks to choose from compared with a UK Equity Income manager. UK companies account for less than 10 per cent of the MSCI World index, meaning that he has far greater flexibility to deliver a sustainable income, with some capital growth on top.
The manager explains that he targets companies that have a sustainable competitive advantage, which he finds by filtering out those that have delivered 10 years in a row of CFROI [cash flow return on investment] in excess of 10 per cent.
Next up, Page and his team determine whether the company has a strong balance sheet and capital mass, which leaves a universe of around 400 stocks. He then whittles this down to 35 stocks according to valuation, making his fund one of the most concentrated of its kind.
"Our 35 positions are equally weighted, which is unusual," he said. "I think we’re very good at identifying businesses, but not in a position to say when that business will begin to perform well. That’s merely at the whim of the market."
He does not use yield targets, believing that a focus on quality, stable, cash-generative companies is a far better way of finding those capable of consistent dividend growth.
Page explains that he allows top-performing holdings to make up to 4 per cent of the portfolio, but scales the position back if it gets any higher than this.
The fund can invest up to 20 per cent in emerging markets, but at the moment has a developed-market focus. The UK and US make up the bulk of assets, with a weighting of 51 and 31 per cent, respectively. Continental Europe accounts for most of the remaining assets.
"Over the last two and half years or so of running the fund, we’ve seen more value in developed markets with exposure to emerging markets," he explained. "We’re racking our brains to try and find opportunities in emerging markets, because they have underperformed, but we’re all about finding companies that can add value, and we’re not finding enough of them."
Like many of his rivals, Page believes that there is now a lack of value in defensive dividend-payers, particularly those in the consumer goods sector. He has sold out of PepsiCo, Kraft and Pfizer in recent months, using the proceeds to buy more domestically facing companies such as tax preparation US firm H&R Block.
Like FE Alpha Manager Nick Train, he thinks Unilever remains attractively valued.
Page runs Guinness Global Equity Income with Ian Mortimer. The fund has ongoing charges of 1.99 per cent and a steep minimum investment of £100,000, though this is waived by most platforms.
Mark Dampier, head of research at Hargreaves Lansdown, agrees that the case for global equity income funds has increased in recent years, but doesn't think investors should give up on UK equity income funds because of this.
"The reason why the UK was popular was because it was the only market that had an established dividend culture," he explained. "Europe tried to have a go in the late 1980s but because it was a fixed income market first and foremost, it didn't really work."
"Then you had Japan and Asia but they don't really have the culture for it, and it's the same with the US."
"Yes, in recent years the rest of the world has caught up with the UK, but I still think you should be looking at between 40 and 60 per cent of your UK income portfolio in the UK and Europe. First of all because you pay your bills in sterling and so you have the currency advantage, but also because you tend to find that the best fund managers work in UK and European sectors."
"You can argue until you're blue in the face about asset allocation, but in my experience I've found the best fund managers running UK funds often outperform even if other markets are doing better."
