After years in the doldrums, could equity income be making a return to favour? Indications on the global front suggest that it might.
April was something of an unusual month, in that both the Equity Global Income and Equity UK Income Lipper global classifications took net money from UK investors, rather than saw redemptions. Netting £657m, it was the first time that Equity Global Income (or any other equity income classification) had appeared in the monthly top 10 money takers since we began publishing the UK fund flow report in November 2020—indeed, a lot longer than that when we run the historic data. Of course, we’re going through a period where value is outperforming growth. Investors still clearly have an appetite for global, but they tempered this month by a tilt away from the more growth-orientated funds that dominate the Equity Global classification. Indeed, Equity UK Income has dragged itself up from its customary position at the bottom of the table to attract a modest but positive £62m (and £267m inflows to passive funds).
Quarterly Flows: Hung and Drawn
Looking at quarterly data back to when markets rallied at the end of the Global Financial Crisis, we can see that Equity Income Global took £514m in Q1 2022. It hasn’t had such a positive quarter as this since Q2 2016, with only four positive (to a much smaller degree) quarters in the intervening period.
Equity UK Income also hasn’t had a positive quarter since Q1 2016. Since then, it’s seen £34.4bn of redemptions, while Equity Global Income has seen a net outflow of £11.1bn since the following quarter (Q2 2016).
In contrast, over recent years Equity Global has been the top money-taking classification. Last year, it saw inflows of almost four times the amount for net equity flows taken as a whole, attracting £19.8bn (2020: £12.4bn). However, while there’s no necessary relationship between global equities and a particular style, funds with a distinct growth tilt have—and still are—attracting the bulk of flows in the sector.
That’s been for good reason. Equity Global returns for the five years between 30 April 2016 and 30 April 2022—that is from roughly the period when we see flows turn against income, whether UK or global—we see that the mean return is 83.5%. For funds where Lipper has sufficient portfolio data to derive style information, we get clearly differentiated performance (table 1). While funds with a distinct value style, according to holdings-based classification (HBC) returned 69.2%, growth-tilted portfolios delivered 121%.
Horses for Courses
Clearly, picking the right horse made a significant difference. And, to continue with my creaky racetrack metaphor, when you change the track so changes the horses’ rankings (don’t press me on this: what I know about the gee-gees wouldn’t even take up the back of a small betting slip). So, over one year to the end of April, we get a rather different result: growth funds are down 6.1%, while the average value fund has returned 5.1%. An 11.2% difference over 12 months within one classification with the variation of just one factor is significant.
While many investors may not feel confident to make stable style picks within one classification, differentiating between “standard” global funds and their income equivalents is rather more straightforward. That’s useful shorthand, as equity funds more reliant on dividend payments for their return will be less adversely affected in a rising-rate environment, as they have a shorter duration. There may me other factors at play, as such funds will likely have a greater weighting to market segments doing rather better of late, such as oil & gas companies, which are generally seen as dividend stalwarts. However, that doesn’t seem to be going on here. I filtered Equity Global Income fund returns over the 12 months to the end of April using Lipper’s responsible investment flag—RI Equity Global Income funds returned 10.4% over the period, while their “conventional” peers returned 8.1%. Somewhat surprisingly, then, while we’re seeing a distinct value-over-growth bias, it doesn’t seem to be explained by the undoubted outperformance of “dirty” stocks. Indeed, despite this, there is still an ESG premium within this classification—although, without digging deeper, we can’t tell what’s driving it.
While it’s too early to declare this a definitive sea change in global equity income’s potential as a cash magnet, there are emergent signs that it is so. It’s less the case for it’s more important (at least for UK investors) cousin, UK equity income, despite the UK market’s historical bias towards income stocks—though that £62m April inflow may mark the early emergence of a green shoot for this classification. The more sluggish response for the domestic sector may be down to the fact that UK investors have a historic bias to the home market, which they’ve been redressing with a rotation into global equities over the past few years.
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