Global equity income has been an increasingly popular destination for investment in recent years. With returns from cash and yields on fixed income at low levels, the desire for income has encouraged many investors to widen their scope of potential asset classes.
Historically, equity income investors in the UK have limited themselves to UK equity, now they are looking further afield. The question has been raised as to whether a separate IMA sector for Global equity income is needed. Much depends on investors’ time horizons. If holding for the long-term then a comparison of Global growth and Global income is perfectly valid and indeed most equity income managers believe they can at the very least hold their own in the wider sector. However, if investors are comparing the performance of funds in the short term then an IMA defined sector is useful, because the performance profile of income and growth funds is very different.
Using Morningstar’s Global Large-Cap Value Equity peer group (into which most Global income funds fall) as a proxy for the income sector, we can see the differences between the two categories. In 2011, to the end of August, the IMA Global Sector is down 9.78% while the Large-Cap Value peer group is down 8.05%. In contrast during 2010, the IMA sector rose by 15.85% while Large-Cap Value was up 11.34% and similar differences can be found in 2009 and 2008. Why is the performance profile so different? To some extent it is due to sectoral differences driven by the search (or not) for yield. On average, Large-Cap Value funds currently hold 13% in Communication Services, while the IMA peer group hold only 6.3%. In contrast, for Basic Materials, Large-Cap Value hold 4.5% compared to 8.1% held by the IMA peer group. Regardless of whether a standalone IMA sector eventually results, investors need to be able to compare like with like and whilst the comparison of Global Income and Global Growth is not quite apples and oranges it may well be like comparing peaches and nectarines.
By Richard Whitehall
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