After years of record-low interest rates, investors have ramped up their searches for higher yielding products. One obvious choice has become income funds, a trend many asset management firms have realized and embraced by launching an increasing number of income products every year since 2009 across equities, fixed income and multi-asset products. This includes over 840 different equity income-oriented funds competing globally and managing assets of over £600bn (source: Lipper).
With increasing competition, funds need to differentiate themselves to survive, but how much of it is a marketing and branding exercise and how much is true factor positioning? Crucially, do investors know the complete story of what they are really buying? We selected the top three performing European Equity Income funds over the 12 months to end June 2017 and explored their differences.
Analyzing the Peer Group of European Income Funds
We use Style Research Peer Insights and select Morningstar’s European Income Funds peer group of 74 funds as of June 30 2017. The median factor exposures of the peer group versus the FTSE All World Europe index (Figure 1 below) show a strong bias toward a higher dividend payout ratio, high dividend yield (both current and forecast), and a lower market beta.
When we further analyze the peer group’s component funds (Figure 2) we uncover significant differences in their exposure to yield. Some funds focus on stocks that already have an attractive dividend yield, while others are overweight stocks with a strong potential for future dividend growth.
One of the top three performing funds, the Helaba Invest-DividendenPlus Europa-Fonds, shows a significant exposure towards current and forward-looking dividend yield. This fund also has a top quartile position in net debt paydown yield. From a net payout perspective (combining share repurchases and dividend yield) all three funds are in the bottom half versus their peers.
The other two top performing European income funds, the Schroder European Alpha Income Fund and the Credit Suisse MACS European Dividend Value fund, favor stocks with stronger quality characteristics. The Credit Suisse fund is in the top quartile for returns stability and sales growth stability with a bias towards low accruals. Figure 3 shows this fund’s historic tilts to net buyback yield for the three years to end June 2017. Here we see a significant positive tilt towards companies with high net share repurchases, although this has been reducing since January 2017.
The Schroder European Alpha Income Fund exhibits significant, top quartile exposure towards other profitability indicators such as return on assets and other quality factors such as low gearing (Figure 4).
Comparing these three funds to the peer group across other styles and factors, they present a significant difference in market cap bias. Other key differences are observed: the Helaba fund is biased towards traditional value measures such as high book to price, high earnings yield and high sales to price (Figure 5), while the Schroder fund is at the bottom range of the peer group for book to price.
The comparisons above focus on style factors. Looking at the risk profiles of each fund (Figure 6) we can see significant differences in terms of portfolio stock concentration, active share, and predicted tracking error. Although the Credit Suisse fund has the highest stock concentration, its predicted tracking error is typical for this peer group. The Helaba and Schroder funds are in the top quartile for predicted tracking error. In terms of sector exposures, the three funds are very different (Figure 7). For example, Schroder is significantly overweight in Telecoms and Financials, two sectors where Credit Suisse is underweight.
One peer group. Three very different funds.
Despite these three funds being top performers, their portfolio positioning is very different. Only with detailed analysis of factors within individual funds, and how those compare to similar funds and larger peer groups, can investors gain a true understanding of what they might be buying. This is especially critical given the range and sheer volume of product options on today’s fund market and the confusing, competing product messages that asset owners must interpret. Without the ability to assess funds with a factor-based framework, both investors and fund managers could realize too late that their views have been full of blindspots.