Go global for higher dividend yields

Global equity income funds are a relatively new, but potentially popular addition to the options available through unit trusts and open-ended investment companies.

Their emergence has been encouraged by investors' continuing thirst for a growing income - where equities have the strongest credentials - combined with the increasing difficulties of extracting it from the UK stockmarket.

Sarasin & Partners, which launched Sarasin International Equity fund in May 2006, puts the case well. "The fund looks outside the UK because the UK equity market is no longer the highest yielding global market.

"Back in 2006 it offered a world-leading yield. But dividends have subsequently seen greater growth in Asia (excluding Japan) and continental Europe than in the UK market.

"While the US, Japan and Canada offer the lowest yields on aggregate, there are still sector-specific yield opportunities," says Mark Whitehead, who manages the Sarasin International Equity fund.

Another reason for looking overseas, as Whitehead explains, is the diminishing choice of higher yielding UK companies.

Over 75% of the FTSE 100's dividends are expected to come from just 20 companies this year, with the top three alone accounting for a third of UK dividends. This makes it very hard for UK income funds to build sensibly diversified portfolios.

Sarasin's fund is limited to a maximum 10% exposure to the UK as well as to the emerging stockmarkets, so it's more internationally oriented than some of its competitors.

Its portfolio is equally divided between 50 companies and these are chosen according to a thematic approach.

Whitehead imposes the stipulation that his holdings must have a clearly stated commitment to paying a good dividend. Over its three-year life, however, it has outperformed the Global Growth sector average, and it has a very competitive yield.

THS (Taube Hodson Stonex, a London-based boutique, which invests globally on a long-term basis using in-house research) Growth & Value has a much lower yield, even if investors buy its A shares - which have lower charges in return for an upfront fee of 5%.

However, it has demonstrated its ability to grow its yield as well as its capital over a number of years.

The fund is top quartile within the Global Growth sector over five years, but suffered from having too much in banks in 2008, and too much in cash in 2009.

THS is currently upbeat, on the grounds that the co-ordinated actions of central banks and governments have restored confidence to financial markets, although it admits there are problems ahead, such as the level of government borrowing and inflationary pressures.

James Harries, who manages Newton Global High Income, is less confident.

With government fiscal and monetary stimulus measures expected to diminish, and a resumption of debt-fuelled growth unlikely to occur, he thinks the market as a whole is looking optimistically priced and fears that many companies will struggle to maintain their payouts in 2010. Share selection will therefore be critical.

"We believe the companies best placed to deal with this sort of environment are larger ones with strong balance sheets, reliable dividends, sustainable franchises and, preferably, some exposure to fast growing emerging markets," Harries says.

The Newton fund is concentrated in less than 70 holdings, and has strong buy and sell disciplines. Shares must yield at least 25% more than the FTSE World Index when they are bought, and must be sold when the yield is less than average.

Its income payouts, which are quarterly, have so far risen every year, and Harries expects another increase for the current year.

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