By and large, companies used the credit crunch and subsequent recession to sort out their balance sheets and cashflows whereas many Governments, heavily indebted because of the banking crisis, have not. As a result, every day these days there is news about a crisis in US/Euroland Government debt.
But we need to move on. The recent sharp fall in share prices around the world has meant that so-called equity income funds now offer a return close to that available on high yielding corporate bond funds. The latter have performed well in terms of capital appreciation over the past 2 years and so their returns have come down to around 6%-7%. In terms of tax efficiency, they are still a better bet because 20% tax on interest within an ISA wrapper can be reclaimed whereas 10% tax on dividends cannot.
Nevertheless, I am switching my attention to high yielding equity income funds to diversify portfolios. Indeed, I may well soon start to switch corporate bond funds to equity income funds. The reason for the switch is not the fear of rising interest rates because prospect of that have been severely dampened. My only fear about corporate bond funds is that the current credit defaults – ie the chances of a company not paying interest on time and not paying back the capital on maturity – are low but could rise if there comes a wave of major mergers which throws out a large amount of fixed interest debt to help pay for those mergers. That is not happening yet.
What I like about high yielding equity income funds is that there is every chance of a rising dividend income which is not likely on a fixed interest fund. As said before, with dividends taxed at 10% within an ISA wrapper (and only at 10%) they are not as tax efficient as corporate bond funds which pay out interest.
Bit it’s not just only the UK that offers equity income funds.
Probably as little as 4 years ago, the UK was the only major market for equity income funds and most of them will today have holdings in, for example, Vodafone, Shell, tobacco companies and utilities. Now, however, the idea that investors like dividends has gone around the world and no more so than in Asia.
If you are looking for a high income then are suggestions for three funds which you might consider. All have excellent capital growth records in terms of first and second quartile rankings within their sectors. The three funds are:-
| Fund | Recent Gross Dividend Yield |
Where Invested |
| Newton Asian Income | 5.88% | Asia |
| Liontrust UK Income | 5.40% | UK |
| Threadneedle Global Equity Income | 5.40% | UK/Overseas |
By investing in all three funds, you actually achieve a balanced and diversified global equity income portfolio. The problem with investing in UK equity income funds is that most of the funds have the same holdings so there is not much diversification.
The key features of these three funds are:-
Newton Asian Income
This fund has an overweight asset allocation in Australia (which is quite difficult to achieve via collective investments) and an overweight position in financials. That is not as risky as it sounds because, by and large, emerging markets including Australia were hardly touched by the credit crunch
This fund has very little investment directly in China and nothing in Japan. It pays dividends quarterly.
Liontrust Income Fund
This fund has a good track record. It is a typical but higher yielding UK equity income fund. Top holdings at end-July were Vodafone, AstraZeneca and BP. This fund pays dividends half-yearly.
Threadneedle Global Equity Fund
This fund invests both in the UK and overseas. As at end-July 2011, the Pacific ex Japan accounted for 27% of the fund (more than double its index weighting), North America 24% (half its index weighting) and Europe 20% (17%). The investments are also quite different led by, for example, a royalty on the BP Prudhue Bay Oil field. This fund pays dividends half yearly.
If you would like factsheets on these funds and some idea of their performance via charts, please e-mail me. As I am having some problems with my enterprise account, please e-mail me at nigel.bolitho@gmail.com.
To Come – Two Contrarian Investments in Terms of Contrarian Sector and a Contrarian Country – to be posted shortly after the Bank Holiday
