Global equity income: is leadership about to change?

Funds in the global equity income sector may have side-stepped the Magnificent Seven bonanza, but they have turned in a creditable performance in recent years. They can still lay claim to a place at the heart of investors’ portfolios, delivering predictable income and steady capital growth. Nevertheless, a different type of global equity income fund may pick up leadership as the market landscape changes. 

Over the past three years, the average fund is up 28.3%, and 13.3% over one year*. This puts it comfortably in the top-third of sectors over both periods. However, there has been a notable gap between the top and bottom performing funds – almost 50% over three years*.   

The successful funds have tended to have a ‘growth’ tilt to them. The large global technology companies don’t tend to pay dividends, so global equity income fund managers have had to eek out returns elsewhere, but the sector’s top performers have found opportunities in AI-adjacent areas such as semiconductors. They may also have had a focus on popular areas such as defence. 

In contrast, those who have had exposure to the consumer staples sector, traditionally a stalwart of global equity income funds, have struggled. This is principally a reaction to the launch of a range of weight loss drugs. Markets have concluded – probably prematurely – that wonder drugs such as Ozempic and Wegovy, based on the GLP 1 technology, will dampen demand for food and drink**. Shares prices have been hit accordingly. 

A changed landscape

However, the environment is shifting. The Magnificent Seven are wobbling, and investors are starting to ask more questions about the long-term trajectory of AI. They are also starting to reappraise the impact of the weight loss drugs on the wider market. Inflation is coming down more slowly than expected and interest rates look set to remain higher for longer.

This might favour a different type of equity income investor. The qualities that tend to characterise the companies in more traditional equity income portfolios – pricing power, reliable cash flows, consistent dividends – may be more highly prized by investors.

There are a number of managers that might fit the bill. Among the FundCalibre Elite Rated funds, for example, we would highlight three managers, each with a different approach. They are all capable managers with strong longer-term track records, who have focused on predictable, cash generative companies at a time when the market has wanted something more exciting, which has hurt short-term performance against the sector.

James Harries, manager of Trojan Global Income, takes a notably contrarian view of the current environment. His view is that both AI and GLP-1 may have been over-hyped and that expectations of economic recovery may also be too optimistic.

While he recognises the potential impact of AI, he believes there may be some excess capital spending on infrastructure before the use cases for AI have become clear. This spending may take time to digest and could create some volatility for share prices in the short-term. Equally, the new weight loss drugs are exciting, he says, but questions the idea that they will fundamentally disrupt the business case for branded consumer goods. Consumer staples are currently 36% of his portfolio***.

He believes the economic recovery may disappoint and is concerned about the level of market valuations. He adds: “We have seen the fastest and greatest rise in financial markets for 40 years. Equity markets have only been this expensive a handful of times.” He believes valuations could look particularly vulnerable if there is an economic slowdown. His portfolio has a naturally defensive tilt and has tended to do better in this type of environment.

Ben Peters, manager of IFSL Evenlode Global Income, is more optimistic on the broader economic environment. He says: “Steady corporate and consumer spending outside of the artificial intelligence theme is probably indicative of the ‘real world’ economic situation, particularly in the West. Most companies are maintaining their outlook for steady progress throughout the remainder of the year, and we remain happy with that as long as the valuations continue to make sense.”

The fund steers a less contrarian path to the Trojan fund. It has more nuanced view on the Magnificent Seven, for example, and AI in general. Ben still holds Microsoft***, which he believes is benefiting from the growth in its Azure cloud operating system, while also increasing its capital expenditure on data centres and AI training to make the most of the opportunity. The fund’s highest weighting is in industrials at 24%, with consumer staples and healthcare at 23% and 20% respectively***. He has a relatively low weighting in the US, at around one-third of the portfolio, with 38% in Europe and 23% in the UK***.

The TM Redwheel Global Equity Income, has a different flavour again. Manager Nick Clay has been vocal about the over-valuation in some parts of the technology sector. However, he is leaning in to the semiconductor cycle, with TSMC, Qualcomm and Samsung among his top holdings***. This gives the portfolio a more ‘growth’ flavour than some of its peers, albeit with Nick’s usual focus on valuation. He also has a high weight in the UK, at around 20%***.

Dividend growth?

All three funds prioritise dividend growth, but there are plenty of different ways to achieve that in a market where dividends are relatively abundant. The latest Janus Henderson Global Dividend index shows global dividends rose 5% in 2023 to $1.66 trillion^. It also found that 86% of companies globally increased or held their dividends over the year, with 22 countries seeing record payments^. This is a good time to be an income-seeker in global markets and it is possible to get income from a wide variety of companies.

Read more about record dividends 2023

James Harries says investors need to be aware of dividend sustainability: “Dividend growth has been pretty strong. However, we do believe that some of the more cyclical, less resilient businesses may not grow their dividends as fast.” He says companies across the world have been more cautious on the level of their dividend distributions, ensuring that they are sustainable.

This is a good time to be a global equity income manager. As the market broadens out from its narrow focus on AI and obesity, it may once again start to value companies with pricing power, reliable cash flows and consistent dividends. For investors, the sector offers abundant choice, with a range of capable managers taking very different approaches. There is something to suit all tastes.

*Source: FE Analytics, total return in sterling, data to 21 May 2024

**Source: JPMorgan, 29 November 2023

***Source: fund factsheet, 30 April 2024

^Source: Janus Henderson Global Dividend Index, March 2024