The strategy makes sense, given that investors who only used domestic equity income funds would have undoubtedly lost out during BP’s high profile oil spill in 2010 and the infamous collapse of the UK’s banking sector in 2007/2008.
In the next article in the series we compare two of the most high profile income producing global funds; the £8.7bn M&G Global Dividend fund and the £4bn Newton Global Higher Income fund.
The Newton fund, which is managed by James Harries and is in the IMA Global Equity Income sector, has the longer track record having been launched in November 2005. FE Alpha Manager Stuart Rhodes’ M&G Global Dividend fund, on the other hand, was launched in July 2008 and sits in the IMA Global sector so that the manager has a greater degree of flexibility.
While the two funds sit in different IMA sectors, they both attempt to achieve the same objective of delivering an above average, and growing, level of income from a globally diversified portfolio.
According to FE Analytics, Newton Global Higher Income has been the second best performing fund in the sector since its launch with returns of 107.97 per cent, beating its FTSE All World benchmark by more than 30 percentage points in the process.
Performance of fund versus sector and index since November 2005
Source: FE Analytics
However, the majority of that outperformance has come during times of market stress as Harries and his team tend to run a relatively defensive portfolio.
For instance, it was the best performing portfolio in the sector in turbulent years such as 2007, 2008 and 2011. Nevertheless, in strongly rising markets the fund has lagged and in the rebound year of 2009 and in last year’s bull market, it delivered bottom quartile returns.
M&G Global Dividend, on the other hand, has delivered a more consistent total return. It has outperformed the IMA Global sector and its benchmark – the MSCI AC World index – in each calendar year since its launch.
M&G Global Dividend has outperformed the Newton fund in each year since its launch, as well, except in the falling market of 2011.
That means that not only has it delivered top quartile returns in its sector during the cumulative period since its launch, it has also comfortably outperformed Harries’ Newton fund over that time too.
Performance of funds versus sector since July 2008
Source: FE Analytics
Both funds have also done well in terms of their capital preservation characteristics. However, given Newton Global Higher Income’s more defensive nature, it isn’t too surprising to see that it has had a better annualised volatility, maximum drawdown, downside risk and Sharpe ratio than the M&G fund over the last five years.
M&G Global Dividend, however, has generated more alpha relative to its benchmark than Harries’ fund over that time.
When looking at an equity income fund, while total return is clearly very important, its ability to generate income is essential. While M&G Global Dividend has delivered a higher total return, the Newton fund has consistently distributed a higher level of income.
Rhodes wants to be in the Global sector so that he isn’t constrained by a yield target. He says that it is more important to find a growing source of income and therefore won’t simply buy a company with a high dividend yield and will instead invest in businesses that can increase their dividend over time.
Nevertheless, he hasn’t generated as much income as the Newton fund since he launched the fund and, as the table below shows, it has underperformed in that respect over more recent timeframes.
Income earned on £1,000
Source: FE Analytics
M&G Global Dividend currently yields 3.13 per cent, while Newton Higher Income yields 3.8 per cent.
Most investors who are choosing a global equity income fund will probably be using it to sit alongside an IMA UK Equity Income fund.
From that perspective, it is important to note that both funds have minimal exposure to the domestic market. Newton Global Higher Income has 13.17 per cent in the UK, while M&G Global Dividend has 12.98 per cent invested in the UK.
However, that is not to say investors won’t be doubling up their stock exposure if they were to hold either of the two portfolios alongside a core UK equity income fund.
For instance, Rhodes holds popular UK dividend paying stocks such British American Tobacco and Prudential. He also has exposure to Aberdeen Asset Management, Standard Chartered, Compass Group and Reckitt Benckiser.
Harries, on the other hand, counts GlaxoSmithKline – which is a top 10 holding in close to 75 per cent of IMA UK Equity Income funds – in his top 10. He also invests in widely held FTSE-listed companies likes SSE, Centrica, Balfour Beatty, Royal Dutch Shell, Vodafone and BAE Systems.
The expert’s view
Tim Cockerill (pictured), investment director at Rowan Dartington and member of our AFI Panel, rates both the M&G and Newton funds. He also says that it all depends on what the investors wants from their global equity fund and points out that the two could be held together in a portfolio.
“I don’t necessarily see them as competitors,” Cockerill said.
“Newton takes a much more cautious approach and focus more on income, and as your data shows, they have generated more income. For me, when looking at an equity income fund, its income policy is critical.” “However, I see them very much as complementary funds because the M&G fund focuses on steady dividend compounders or on companies where the dividend is on the low side because it is expected to grow. Newton, while they might disagree with this, focus a bit more on the here and now.”
Clearly, both funds have a larger AUM than the average portfolio – especially M&G Global Dividend at close to £9bn – and many have warned about the impact size can have on performance. However, Cockerill says that investors shouldn’t be concerned about either of the two funds’ size at this point in time.
“First of all, Stuart Rhodes invests in mega-caps, or large-caps, and that is where they have been along so he hasn’t had to change his style. That is a very liquid area of the market so, no, I don’t think size is an issue of the M&G fund or Newton Global Higher Income.”
M&G Global Dividend’s clean share class’ ongoing charges figure (OCF) is 0.91 per cent, while the Newton has an OCF of 0.8 per cent.