Income-seekers should be wary of emerging markets

7 September 2010

Investors looking for income should pause before they plunge their money into emerging market income funds in order to beat poor savings rates, experts warn.

But with interest rates at historic lows and inflation creeping up, the temptation to look for alternative sources of income is strong.

According to financial services provider Fair Investment, 69% of savers are prepared to invest in riskier assets such as emerging markets, in a bid to get better returns.

Tuning into this trend, JPMorgan Asset Management and Aberdeen Asset Management have both recently launched emerging markets investment trusts with an income remit. Unlike traditional income trusts, these don't have a UK bias.

The team at JPMorgan Global Emerging Market Income Trust aims to generate a yield of 4% in its first year and pay a quarterly dividend.

Emily Whiting, emerging markets client portfolio manager at JPMorgan, says: "The drop in the FTSE 100 over the past couple of months and the result of the BP fiasco [the company has suspended dividends for the rest of the year] showed that investors should aim to diversify the income part of their portfolio.

"Only 10 companies account for almost 60% of FTSE 100 dividend income."

Both JPMorgan and Aberdeen – whose Latin American Income Trust aims for a 4.25% yield this year – say the dividend culture in emerging markets is improving as companies start to realise the benefit of rewarding shareholders and encouraging their loyalty.

However, Carl Melvin, managing director of Affluent Financial Planning, is not convinced by the proposition: "It strikes me as being inconsistent – you're trying to get income from what is traditionally a growth investment."

He recommends investors seek income from bond funds, fixed securities and UK income funds rather than high-risk emerging markets.

Andrew Merricks, head of investments at financial advisers Skerritt Consultants, disagrees: "UK dividends have been hit in the last few years, with the banks faring badly and BP doing away with its dividend."

He adds there could be better opportunities for income revenue in emerging markets and thinks the sector's risk profile is decreasing.

But Merricks does observe that the 4% yield from JPMorgan's fund is pretty low: "You could be getting 5% to 5.5% from a UK or global income fund, so its return is not life-changing."

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