This article was taken from the
Autumn 2024 issue of 1875. To subscribe to our investment publications, please visit
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Many income-seeking investors in the UK have something of a home bias and it’s not hard to understand why. The FTSE 100, renowned for its reliable dividend payers, is forecast to pay out £78.6bn in 2024, in addition to share buybacks, takeovers and special dividends. While the UK provides fertile ground for income investors, looking overseas for income can also be a worthwhile pursuit, with an additional diversification benefit. One of the most popular vehicles for overseas income investing is via an investment trust. Easily accessed, these can help UK investors avoid some of the barriers to overseas markets. Investment trusts also have the option of retaining 15% of their income each year which they can use to smooth returns in years when the market is tougher; a useful feature for investors who require a reliable income. Let’s examine a selection of overseas income-focused trusts and get an idea of their underlying holdings, investment styles and dividend policies.
Murray International Trust is a London-listed investment company, which aims to provide an above average dividend yield, while growing income and capital over the long term by investing chiefly in global equities. Founded in 1907, today the fund is jointly managed by Martin Connaghan and Samantha Fitzpatrick and currently contains 59 holdings predominantly across the US, Europe (excluding the UK) and Asia Pacific (excluding Japan). The trust’s current largest holding is Broadcom, at 4.6% of the overall portfolio. Broadcom is a California-based IT company specialising in semiconductors, software and cybersecurity. The second largest holding is Taiwan Semiconductor Manufacturing Co (TSMC), a globally important supplier of semiconductor currently much in demand for powering AI technology. While the top two holdings have a focus on technology, the trust also has significant exposure to consumer staple stock such as Unilever and Philip Morris, which are often regarded to be non-cyclical due to steady demand for their products.
In March of this year, the Association of Investment Companies announced its list of prospective ‘dividend heroes,’ featuring investment trusts which have managed to consistently grow their annual dividends over 20 years or more. Murray International Trust was listed as a likely future candidate, with a track record of 19 consecutive years of dividend growth. The trust currently trades at a 10.49% discount to the net asset value of its investments and its dividend yield stands at 4.58%.
JP Morgan Asia Growth and Income, founded in 1997, aims to provide a total return from Asian equities, excluding Japan, with a view to providing a regular income while generating capital growth. The fund targets a quarterly dividend, each equivalent to 1% of the underlying portfolio’s net asset value (NAV) at the end of each quarter. The portfolio typically holds between 50–80 investments and contained 65 at the end of August. Similar to Murray International, the fund’s largest sector weightings are technology and financial services. While Murray International’s largest weighting is the US however, JP Morgan Asia Growth and Income’s largest geographical sector is China, followed by India and Taiwan.
The fund’s largest Chinese holding at 9% is Tencent, a technology-focused holdings company best known for its messaging app WeChat. Largely unknown outside China, the app has over a billion monthly users. Tencent is also a significant operator in the entertainment sector via its subsidiaries, with stakes in Universal Music Group and Epic Games, the developers of Fortnite, a popular online multi-player game first launched in 2017 . The Chinese economy overall has seen a rocky few years post-covid. The real estate sector has suffered, with the collapse of property developer Evergrande in January this year impacting on consumer confidence. In September, the Chinese central bank announced a raft of measures designed to stimulate the economy, including a 0.5% rate cut on existing mortgages and the easing of restrictions on borrowing to invest in Chinese equities.
The youngest fund in this roundup, Schroder Oriental Income Fund was launched in 2005 and invests in the Asia-Pacific region, excluding Japan, with an income-focus from equities. It pays a quarterly dividend, which it has managed to consistently increase since inception. In 2022, after 17 consecutive years of dividend growth, it was added to the Association of Investment Companies list of next generation dividend heroes. While the early months of the Covid 19 pandemic in 2020 saw many company dividends suspended by UK companies, the fund was able to maintain its dividend growth trajectory, as dividend flows from Asian companies held up better than those of their UK counterparts. In the latest half year report, Chair Paul Meader said: “The Company has an 18-year track record of progressive and significant dividend growth and, absent a catastrophe, we do not see any reason why this growth should not continue in the future.”
The trust is managed using a ‘bottom-up’ approach, whereby individual stocks are identified first, as opposed to a sector or asset allocation ‘top-down’ methodology. It aims to identify both companies already paying dividends, and those it believes will do in the future. Comparable to Murray International and JP Morgan Asia Growth and Income, the fund’s largest sectors are technology and financial services. It does, however, have a large exposure to Australian equities, of which the biggest holding is Telstra Group Limited. The largest telecommunications company in Australia, it currently has a dividend yield of around 4.6%.
While this is just a small selection of the investment trusts specialising in income from overseas, there are many more. Other avenues for overseas income exist too, such as fixed interest and property. As we have seen, the Asia Pacific region in particular has been making up a growing portion of these portfolios in recent years, supported by strong economic growth and a growing middle class. Overseas companies can also bring a diversification benefit to an income portfolio, introducing different sectors and currencies. While individual investors in the UK may find it difficult to access Taiwanese or Australian markets directly, investment trusts based in the UK can help bring these markets within reach. With easy access to a variety of overseas income funds, investors seeking an income would do well to consider how their own portfolios could benefit.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of writing but may have changed at point of reading.