Funds Centre

Fund Feature - Schroder Global Equity Income

One good thing that may have come out of this financial crisis is a focus on income and the stability of income. With volatility likely to prevail, income could be the pillar that supports many investments in these uncertain times. The UK market has

been the traditional haven for equity income, but investors should not ignore the opportunities that abound further afield.Global income funds are looking particularly attractive considering how grim things look in the UK. There are some excellent opportunities outside of the UK market and one fund we think worth considering is the Schroder Global Equity Income Fund. Launched in May 2007, the fund has not escaped the bumpy ride during the financial crisis but we believe there is a strong case for investing in a global income fund like this.The fund is managed by Sonja Schemmann who believes her strategy that focuses on generating solid dividends should prove rewarding in a recessionary environment. While she appreciates that the bond markets need to move first, shares should follow suit. Therefore, if you believe in the corporate bond story, then you should in shares too.It is interesting to see that the top three shares in this fund yield more than their respective corporate bonds. These include the healthcare company Bristol-Myers Squibb with a dividend yield of 6.2% and its bond yield of 5.8%; the oil & gas company, Total with a dividend yield of 6.1% and a bond yield of 4%; and the telecoms business, AT&T which yields 6.4% versus its corporate bond yield of 5.8%.Purely from a yield perspective these stocks look attractive compared to the companies’ own bonds. In Europe, the difference between dividend yields and bond yields are at historic highs making it an extremely attractive opportunity to invest in some of these shares.The fund itself has a highly disciplined investment approach. The first step involves screening out companies from the MSCI World Index that are less than $2 billion in size to ensure the focus is on larger and more solid businesses. The next step involves removing shares that yield less than 1% relative to their respective markets and sectors.The third step screens the remaining shares on the basis of dividend quality. Stable dividends and those increased in the last 12 months are viewed positively. Sonja Schemmann will not chase high yielding stocks at any cost as she appreciates that some companies with unusually high yields could suggest distress and a troubled business.While yield is clearly important for the fund, so is capital growth. Sonja Schemmann believes companies should have a good balance between offering stable and growing dividends over time, as well as investing some of the profits back into the business in order to improve growth prospects for shareholders over time. Remember though that capital values can fall as well as rise and yields are variable and not guaranteed.Interestingly, the top 20 stocks in the portfolio have not yet had any negative dividend surprises according to Sonja Schemmann. This goes to show that there are companies out there that have entered the recession on a strong footing because of their stable business models. This approach led the fund to be more defensively positioned over the course of the last year into areas like healthcare and utilities.Exposure to the US market has come down from 40% to around 29% as Sonja Schemmann expects the dollar to weaken further. Exposure to Asia has increased to 11% and there remains a large exposure to Europe where there are good quality companies with stable dividends. As this is a globally diversified fund it will be exposed to different currencies and so currency movements could also increase risk.In this environment, dividend stability has never been more important. While dividends are not immune from a recession and some will be cut, they have shown to be more stable than earnings over time.  The fund currently yields 5.1% and we believe this represents a fairly solid yield as there is little exposure to the banks or stocks at a high risk of dividend cuts. The fund therefore has scope to make great progress over the longer term and should not be ignored for investors seeking income and capital growth.Meera Patel, Senior Analyst> Key Features of the Schroder Global Equity Income Fund