We last looked at Global Equity Income exactly a year ago when we noted its advantages in a rising rate environment, especially when compared to “conventional” global equities. And, it must be said, compared to UK income payers, which we covered last month.

Then we noted that if we were in a period where base rates were due to remain higher than over the previous two decades, then dividend-paying stocks were more likely to outperform. Given that UK investors are generally overweight domestic equities, this could be a way to ride that wave without exacerbating that position.

That story continues to play out.

The accommodative monetary policy, low inflation, and low rates of the first two decades of the century favoured growth stocks such as technology, as it raised the value of future cash flows relative to current ones—that is, the dividends an equity income fund pays today. Higher rates decrease the value of future cash flows in the same way that inflation erodes the value of a pot of cash the longer that inflation runs.

The effects of this are clear when we compare the IA UK equity income sector returns over one and three years (-0.5% and 4.6% respectively) with their UK All Companies equivalents (-2% and 41.7%).

While the UK equity market is characterised by higher dividends—so you would expect it to do well in this environment—on a total return basis, it continues to struggle. While the Global sector has returned (-3% and 48.1%) over these periods—taking a hit over the 12 months as a result of its greater growth bias—Global Equity Income has delivered 1.8% and 50.4%, thus beating the other three.

Unloved UK

This is reflected in flows to the sector, which has attracted £1.6bn over the past year while its UK peer has seen persistent outflows. To place this in context, this is part of the shift of assets from UK to global funds overall. In 2003, Equity Global and Equity Global Income funds combined stood at £20.4m, and their UK equivalents at £95bn, so global funds were 17.7% of total combined assets. By 2021, those figures stood at £271.7bn and £268.7bn, respectively. Global funds were 50.3% of UK and global equity assets combined.

Even the most cursory glance at the table below shows quite a startling result—how far the top-performing fund over three years is in front, with a return of 107%, more than 30 percentage points in front of the next. The name gives a hint: Aptus Global Financials. As you’d expect from this, as of March 2023 it had almost 90% of the portfolio invested in financial stocks. That’s not a problem—if you know you’re taking that level of sector-specific risk. But it does occur to us that this may not be what investors look for in the sector, which is a more diversified exposure. Unsurprisingly, Lipper categorises the fund as “Equity Sector Financials”, where it has also significantly outperformed over three years.

The second-placed fund over three years, M&G Global Dividend, is more typical for the sector, with the top three exposures being Consumer Goods (20.7%), Technology (17.7%), and Healthcare (13.5%). Financials is fourth, with 11.9%.

It’s also worth pointing out that while even the best performing fund over 12 months, TB Saracen Global Income & Growth, lags inflation of the same period, this is an environment where most equity sectors have struggled. Should rates stay higher than they have hitherto been, then this is still a sector to watch.

Table 1: Top-Performing Global Equity Income Funds Over Three Years (with a minimum five-year history)

(Click on image to enlarge)

All data as of March 31, 2023; Calculations in GBP

Source: Refinitiv Lipper

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