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Everyone loves a bit of extra money – particularly when times are financially tight. It’s why income funds are popular, especially when the cost of living rises.
But where are the managers of equity income funds currently positioned? What are their favoured stocks and sectors? Have they made many changes?
Here we take a look at how a variety of income-focused equity portfolios covering different parts of the world are tackling the current backdrop.
Equity income funds look to invest in companies that pay dividends – effectively, a share of their profits – that can be redistributed.
Each fund takes a slightly different approach – some invest in companies that pay a consistently high dividend, for example. Others might look for a lower but growing dividend. This means you will need to read a fund’s prospectus to find out exactly how it works.
There are different types of equity income fund. While some are global in focus, others concentrate on a particular market. Here we take a look at a fund in each of these areas.
Let’s start with our home market. There are plenty of interesting funds in this area and one that we like is GAM UK Equity Income. This portfolio, which is managed by the very experienced Adrian Gosden, invests in companies of all sizes, including those listed on the Alternative Investment Market (AIM).
According to its most recent factsheet, the fund has 44.4% in FTSE 100 names, while 33.9% hail from the FTSE 250 and 10.4% from AIM. There are also a further 5.9% in small caps*. Financials is the favoured sector, accounting for 30.5% of funds under management, followed by 13.8% in industrials and 11.8% in consumer staples*. The largest individual stock positions, meanwhile, are in pharmaceutical giant GSK with a 4.9% share of the fund and HSBC Holdings, which weighs in with 4.7%*.
In his most recent quarterly update, Adrian emphasised one of the reasons for investing in UK equities was that they were lowly valued compared to other global markets. “The second is there’s great diversity in the UK market from banking through to pharmaceuticals, through to oil and gas,” he added.
The BlackRock Continental European Income fund, which looks to identify undervalued businesses across the region, is a strong contender in this area. Its manager, Andreas Zoellinger, focuses on stocks that offer reliable, sustainable dividends, along with potential dividend growth, protection against inflation, and a lower level of risk.
The 10 largest stock positions in the fund, which account for just under 37% of assets under management, include Novo Nordisk, the Danish pharmaceutical company*. There’s also Nestlé, the Swiss food and drink provider; Sanofi, the French healthcare business, and Volvo, the Swedish multinational manufacturing corporation*.
As far as the geographical breakdown is concerned, France accounts for just under a third of assets, followed by 15.7% exposure to Switzerland and 11.8% to Denmark*. Industrials, financials, and healthcare are the most significantly represented sectors, followed by consumer discretionary, consumer staples, and technology*.
China was the strongest market in Asia during July, according to the most recent commentary from the Guinness Asian Equity Income fund. This encouraging performance, which represented a bounce back from a weaker June, was led by gains in the consumer discretionary sector. This sector accounts for almost 20% of assets under management in the portfolio, the third highest after financials and information technology, both of which are around 26%**.
This fund, which is co-managed by Edmund Harriss and Mark Hammonds, has two key characteristics: a well-defined and disciplined process, and its equally weighted stock positions.
We like the managers’ approach of focusing on companies that can sustainably grow their dividend into the future. The fund also looks very different from its benchmark and peers. Currently, the fund has 36 holdings. The 10 largest positions, which together account for 30.9% of assets, include Shenzhou International, the Chinese clothing manufacturer**.
Energy giant ConocoPhillips was one of the largest contributors to performance in July for the JPM US Equity Income, according to the fund’s most recent commentary***. “The stock rallied as the oil prices increased due to a falling US dollar and supply cuts by the world’s biggest oil exporters (Saudi Arabia and Russia),” it stated.
While the short-term impacts of the pandemic have abated, the JPM team believes limits on labour supply growth and other uncertainties such as a possible recession will influence investor sentiment.
“While the economy teeters on the edge of recession, we remain balanced and continue to monitor incremental risks that could represent headwinds for US equities,” it added***.
This fund aims to provide an income by investing at least 80% of the portfolio’s assets in US equities in any economic sector. We see this as a core equity income holding investing in the world’s largest stock market and like how its manager, Clare Hart, keeps an astute eye on risk management.
Alongside the aforementioned ConocoPhillips, the fund also has holdings in Exxon Mobil, as well as a string of healthcare companies that includes Johnson & Johnson and United Health***.
Of course, rather than focusing your attention on one region, you could buy a global income fund whose manager will have greater geographical freedom. An example is Fidelity Global Dividend. This is a core global income fund that invests in companies offering a healthy and sustainable dividend yield.
Europe excluding-UK accounts for the largest regional exposure with 42.6%, followed by 30.5% in the United States and 14.4% in the UK, according to the most recent factsheet*. Its 10 largest overweight positions include Unilever, the UK consumer group; Omnicom Group, the US media business; and Iberdrola, the Spanish utility company*.
The fund aims to pay a regular and growing income, while preserving capital. It is unconstrained in terms of where it can invest. This means it may avoid some countries or sectors. We see this as a well-diversified, lower risk fund that may suit investors seeking a stable, and potentially rising, global income.
*Source: fund factsheet, 31 July 2023
**Source: Guinness Global investors, August 2023
***Source: JP Morgan Asset Management, 31 July 2023
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