UK equity income funds lag global rivals as dividends recover

A global approach has served income investors best since last year’s Covid-19 sell-off.

The sharp market sell-off at the end of last week served as a reminder that the Covid-19 pandemic is far from over.

As ever, it is impossible to call at this point whether the rising levels of volatility will prove to be short-lived, or if investors should brace themselves for the sort of turbulence experienced during the first three months of 2020.  

On the whole, barring some exceptions, including when markets went south last Friday (26 November), investment funds have been in recovery mode since the start of last April. All the equity-focused fund sectors, besides Latin America, have recouped the heavy losses made during the sell-off.

From the start of the sell-off, a global approach has served investors best, particularly income investors. Data from FE Analytics shows that from 21 February 2020 to 25 November 2021, all 54 funds in the global equity income sector have generated positive returns. The average fund is up 17.7%.

In contrast, just under 15% of the UK equity income sector remains in the red, with the worst-performing fund down 10.5%, which is Premier Miton Monthly Income. The average fund in the sector has returned 5.2%.

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The best performer among UK equity income funds is Premier Miton UK Multi Cap Income, up 26.6%.

In the global equity income sector, 10 funds have posted higher returns: Premier Miton Global Sustainable Optimal Income (36.9%); Baillie Gifford Responsible Global Equity Income (32.2%); Baillie Gifford Global Income Growth (31.7%); Courtiers Global (ex UK) Equity Income (27.9%); JPM Global Equity Income (27.8%); TB Chawton Global Equity Income (27.6%); Liontrust Global Dividend (27.4%); HSBC Global Equity Income (27.1%); Aegon Global Equity Income (27.1%); and TB Guinness Global Equity Income (26.8%).

In the UK equity income sector, there are 11 other funds in the sector that have posted losses. They are: Premier Miton Optimum Income, Premier Miton Income, SPDR® S&P UK Dividend Aristocrats ETF, Aberdeen ASI Income Focus, BNY Mellon Equity Income, BNY Mellon Equity Income Booster, Unicorn UK Ethical Income, BMO UK Equity Income, HSBC Income, Man GLG Income and TB Guinness UK Equity Income.

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Two of the UK equity income funds in the red, Premier Miton Optimum Income and BNY Mellon Equity Income Booster, aim to generate much higher dividend yields than a typical UK equity income fund. The funds use a com­plex strat­egy to mag­nify the in­come, which involves buying derivatives. In ef­fect, the manager sells in­vestors’ rights to some fu­ture cap­i­tal growth in re­turn for cash, which is used to boost the “nat­u­ral” in­come pro­duced by the fund’s as­sets.

The trade-off of a high dividend yield is that total returns tend to lag during a rising market as some capital growth has been sacrificed.

However, two funds that adopt the same strategy have fared well. RWC Enhanced Income and Schroder Income Maximiser, produced sector-beating gains of 16.6 and 9.7%. This was down to them both having a value-focused investment approach, which paid off over the period.

The four funds have dividend yields ranging between 6% and 7%. This is notably higher than the FTSE 100 index yield of around 4%.

UK versus global: the current backdrop

UK dividend payments rose by almost £40 billion in the third quarter of 2021, according to the latest UK Dividend Monitor report from Link Group. This year’s third-quarter dividend payments are higher than the equivalent period in 2019, when a total of £25.5 billion was paid out.

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However, UK dividends are still lower than they were pre-pandemic, with most sectors having paid less year-to-date than they did in 2019.

Nonetheless, the large increase in payments represents the continued economic recovery since the pandemic lows.

Global dividends have been recovering at a faster pace, and are expected to recover to pre-pandemic levels by the end of this year.