Emerging economies could offer tempting return

Saturday 21 July 2012

It almost sounds like a scam.

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HELEN PRIDHAM

Invest your money in companies in Taiwan and Turkey and receive a regular income. In fact, the suggestion is being made by a respectable financial services company, JP Morgan Asset Management, which has just launched the first Emerging Markets Income fund targeting a yield of 4%, net of basic rate tax. The return sounds pretty good compared to interest on cash.

Until now, the main incentive for investing in emerging economies like Asia and Latin America was the prospect of seeing your capital grow over the long term. And investors have been well rewarded. The average investment in an emerging markets fund over the last 10 years has more than tripled in value despite the problems caused by the global financial crisis. And an increasing number of companies in these countries are now rewarding shareholders with dividends too.UK companies have traditionally been the main source of dividends for income investors. Mike Parsons, head of UK fund sales at JP Morgan Asset Management, says: "Dividend income from UK equities is currently very concentrated. In the first quarter of 2012, 87% of dividends came from just 15 companies, and 58% came from just five companies. As UK interest rates remain at record lows, it is time for investors to start diversifying their income portfolios with exposure to a wider universe of higher-yielding stocks that overseas markets can offer."Many investment trusts have long offered investors the opportunity of earning an income from overseas companies. Trusts such as Scottish American and Murray International have yields of more than 4%. Scottish American has increased its income every year for 20 years, and Murray has grown its dividends by an average of 14% a year in the past five years. Nearly 20% of its portfolio is invested in Latin America and other emerging markets, and 27% in the Asia-Pacific region.The number of global equity income funds is also growing and the Investment Management Association recently created a new sector for them, including funds such as Invesco Perpetual Global Equity Income and Newton Global Higher Income. And there are other more specialist overseas income funds such as JP Morgan US Equity Income.David Thomson, chief investment officer at VWM Wealth in Glasgow, likes the concept of an emerging markets income fund but admits he is a little concerned about the future. "We have seen that more companies are paying dividends in the Far East and the emerging markets and we believe it is a good discipline for company managers. For investors it also means you are getting a return even if stock markets are going nowhere. However, once economic growth returns, I wonder whether these companies will continue paying dividends or start reinvesting in their businesses again."JP Morgan says that its new Emerging Markets Income fund is likely to be orientated towards sustainable growth in telecommunications, consumer and manufacturing industries. Favoured countries are likely to be Taiwan and Turkey rather than India and Korea which are generally lower- yielding markets. Up to 20% of the fund can be invested in emerging market bonds to offset some of the volatility in stock markets.However, Patrick Connolly of independent financial advisers AWD Chase de Vere believes an emerging markets income fund may be a step too far for many income investors.

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Emerging economies could offer tempting return

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