Interest rates are usually an advance signal for the stock market. Falling interest rates are normally good for shares because they spell easy money.
At the moment, that isn’t true because of the credit crunch and the frozen lending markets, but the big doses of medicine handed out by the world’s central banks will surely soon start to turn the tide.
And part of that medicine is lower interest rates, with many economists predicting that UK rates will be under 1% by mid-2009. So investors wanting a decent return on their money will have to abandon cash deposits and turn elsewhere.
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UK companies are favoured
One of the places they have always favored in the past is UK companies paying high dividends. That’s why UK Equity Income funds are usually the biggest-selling funds in any year.
Moreover, the strategy works: over periods of 5 years or more, this type of fund has often done better than funds investing for growth in companies that pay low or no dividends.
The very long-term data also support the contention that dividends are an investor’s best friend.
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It could be safer overseas
But in today’s world investing for dividends in the UK , which is what UK Equity Income funds do, seems a bit parochial.
Moreover, it’s more than a mite dodgy, because banks have historically paid big dividends and accounted for over 20% of all UK dividends in 2007. As a result of the credit crunch and the bank rescue package, though, none of the big banks apart from HSBC will be paying a dividend in 2009.
So investing for dividends on a broader scale seems a good idea, and several fund managers have taken it up. The first was Newton, which launched its Global Higher Income fund at the end of 2005. Since then, Schroder, JP Morgan, Lazard and M & G have also launched similar funds.
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Global dividend funds |
Fund | Launched | Size | Yield* |
JP Morgan Global Equity Income | February 2007 | £38m | 5.0% |
Lazard Global Equity Income | October 2007 | £20m | 4.1% |
M&G Global Dividend | July 2008 | £20m | 3.5% |
Newton Global Higher Income | December 2005 | £360m | 5.3% |
Schroder Global Equity Income | May 2007 | £30m | 5.9% |
* Net of basic rate tax. As at 14/12/2008. Source: Financial Express |
Lots more companies to choose from
The managers all make the same point. There are lots more companies to choose from if you go global. This is important because what you really want to invest in is big businesses with reliable dividends, and there just aren’t that many of these in the UK.
And not only that, if you go global you can find lots of rather boring companies - big oil, big pharma, big utilities – where you can be pretty confident that dividends will rise steadily over coming years.
So the concept seems a good one. But it has yet to really catch on - only Newton has so far attracted serious money to its fund, and did so by promising a bit of spice in the form of exposure to the fashionable developing markets, where it has about 20% of its money invested.
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So far, so good
So far, that has stood it in good stead as far as capital performance is concerned, since Newton’s fund has outpaced its rivals over the past 18 months.
But with all world shares at bargain basement levels, conditions may now favour the funds of Schroder or JP Morgan, which have far bigger chunks of money in the US and Europe.
The knock-on effects of the crunch are still rippling out into the developing world, and it looks likely that the US – as first into the crunch - will be first out of it.
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Expect more income
What you should expect from global equity income funds is a steadily rising income, but that doesn’t mean the capital value will be stable. In fact most of these funds have seen capital values fall 15-20% over the year. But if you are living off the income, you can and should ignore these fluctuations. So long as each year’s dividend payment is bigger than the last, you are winning.
Barring a 1930s style recession, shares in big, soundly financed companies are cheaper today than they have been for decades. Fund managers and analysts are reluctant to recommend people to buy, partly because they know that if prices do fall another 10% - which is possible - they will be heavily criticized, even if prices then zoom up.
We’re now in the ‘funk’ phase of the market cycle where people don’t want to think about the market and where many investors have stopped even looking at their investments because the paper losses make them feel ill. That’s normally a reliable signal of an approaching turn in the market.
When everybody who wants to sell has sold, there’s only one way prices can go. We may not be at that point yet, but we’re surely close. And when the turn does come, the shares that are virtually certain to perform best will be the big, safe, blue-chip companies that form the core of global equity income fund portfolios.
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Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
