Past Peak Global Income, Though Diversification Benefits Remain

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Global Equity Income has advantages in an elevated base rate environment when compared to “conventional” global equities.This is because when base rates are higher dividend-paying stocks are thought to be more likely to outperform. The argument runs as follows: The loose 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— such as that realised through anticipated growth—relative to current ones, that is, dividends. 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 for.Indeed, when rates spiked in 2022, equity income stocks outperformed. But, while three-year figures reflect this, with equity income returns ahead of their conventional peers, over 12 months, conventional funds are on average back out in front, as they are over five years and longer.It’s not altogether clear what’s driving this. No doubt it’s in part down to the contribution of the Magnificent Seven stocks in the US. However, it’s even true—albeit to a much smaller degree—in the UK, where magnificence is in shorter supply. Possibly the market is looking through the current rate environment in anticipation of lower rates and pricing accordingly. Or possibly non-dividend payers are managing their cash flows in a fashion better suited to a higher rate environment.Whatever the cause, this recent underperformance has been reflected in the cash UK investors have allocated to global equity income funds. About £6.2bn has flowed into the sector over three years, although this has slowed to slightly more than £500m over the past year. When we last looked at the sector a year ago, 12-month flows stood at £1.6bn, so its charms have waned over the year. Nevertheless, it is still attractive relative to its UK peer, as over the same periods the UK Equity Income sector has seen outflows of about £2.5bn and £7.5bn, respectively. This is part of the broader shift of assets from UK to global funds overall, which has been going on over the course of the century so far.That shift has (excuse the pun) paid dividends for those who have made it. While the UK equity market is characterised by higher dividends on a total return basis, it continues to struggle. This is reflected in relative equity income sector returns: the Global Equity Income sector has returned 13.1% and 29.1% over one and three years, while UK Equity Income has delivered 7.2% and 17.6%. That said, while last year funds in either sector struggled to beat inflation, as inflation has subsided, real returns for both sectors are now in positive territory—although, clearly, global funds are so by a considerably greater margin.Four funds remain on the table below from this time last year: Aviva Investors Global Equity Income, Invesco Global Equity Income (UK), Vanguard Global Equity Income A GBP Acc, and Fidelity Global Quality Income UCITS ETF Inc USD. All four have Lipper Consistent Return scores—the most comprehensive Lipper metric that encapsulates the others—of 5, the highest. It’s interesting that the Aviva fund’s highest sector exposure is to Information Technology (22.4%—something it shares with the Fidelity fund, which has a 26.2% IT exposure), and holding the likes of Microsoft and Taiwan Semiconductor will certainly have helped boost returns. The exposure is in line with that of Industrials, and more traditional dividend paying corners of the market.One could argue that, if current winds prevail, then we’ve seen peak equity income. However, as has been much remarked on, the current rally is rather thinly supported (back to Mag7 again). Global Equity Income portfolios tend to look rather different than their Global equivalents and could be a good source of equity diversification while continuing to spread bets as widely as possible on a geographic basis.
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, 2024; Calculations in GBPSource: LSEG Lipper

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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