Wealth managers turn to Europe for income

With 50% of the FTSE 100’s income coming from only seven companies, it is hardly surprising wealth managers are looking overseas for new prospects.

Although parts of continental Europe have traditionally lacked a strong culture of income investing, a number of commentators say the situation is changing and globalisation has brought a stronger emphasis on dividends and shareholder value.

Leading the way, Oliver Russ (pictured above), Ignis Argonaut European Income manager, cites the growing number of dividend-paying firms in Europe as an incentive to seek income on the continent rather than the UK. Citywire A-rated Russ said: ‘In Europe, we have about 19 telecoms to choose from, and they are all doing better than BT. Like utilities, these dividends are safe and they are cheap. A lot of utilities depend on high power prices, which has come down a lot. The returns by European telecoms are stable and dividend cuts are really not on the agenda.’

Neil Dwane, RCM’s chief investment officer for Europe, also highlights what he sees as more attractive and sustainable dividends for European companies in relation to their UK counter-parts. Dwane and Joerg de Vries-Hippen also manage the Allianz RCM European Equity Income fund, which was launched in March.

Although AstraZeneca and GlaxoSmithKline, which are yielding about 9% and 6% respectively, look interesting, Dwane points to the patent expiry risks they face in the near term. In contrast, he sees European funds such as Sanofi-Aventis and Novartis, which are yielding about 5% and 4%, as looking more attractive in spite of their lower yields. This is because there is substantially less patent expiry risk for both, translating to greater longer-term dividend growth potential.

Dwane said: ‘With a yield of 6%, GlaxoSmith-Kline is less likely to grow its dividend over the next few years.’

Moreover, there could be advantages to investing in a euro-denominated product, he says, pointing to what he sees as a strong likelihood that sterling could weaken further this year against the euro.

Meanwhile, for Mick Gilligan, head of research at Killik & Co, it is the currency diversification offered by the Europe excluding UK market that makes European equity income products look appealing in the current environment.

Gilligan said: ‘As a sterling investor, you can buy overseas earnings but it takes a while for that to be factored in. In Europe, you have some diversification benefits because you gain access to currencies such as the Swiss franc and the Swedish krona alongside the euro.’

Yet for a number of wealth managers, it is an allocation call they are not yet comfortable making. The currency call may not necessarily pay off and they are not yet ready to increase their equity exposure, even if European dividends look enticing.