The M&G Global Dividend fund may have turned five years old last month but manager Stuart Rhodes is far more interested in the future. Here he tells Julian Marr about his hunt for fresh sectoral and geographical opportunities.
What do you look for in a potential investment?
The key for us is not a business’s yield but its dividend track record. We are only interested in a company’s ability to generate excess liquidity across different types of economic environment. Once we are satisfied it has the desire to pay a growing dividend through thick and thin, we will look at whether it can continue to do so in the future. That leads us to our investable universe of about 200 names, from which we construct a portfolio of around 50 stocks to try and deliver our end-investors the best value and diversification we can.
I do not want performance driven by significant asset allocation decisions so I try and keep the portfolio as balanced as possible. The fund is trying to give investors diversified exposure to all sectors and geographies where we can find businesses aligned to our philosophy of increasing dividends. Being a global fund means we do have a lot of choice but it is much easier to achieve our aims with some sectors and geographies than others.
What are your preferred sectors?
Consumer staples has traditionally been a stalwart for the fund but an awful lot of money has been flowing into the sector to benefit from its consistent and growing dividend yields. The consequent upward pressure on share prices means valuations are getting stretched so the fund has shifted more into healthcare, where it has significant positions in Johnson & Johnson, Novartis, Roche and Sanofi, which still look reasonable value.
In the past the fund has struggled for exposure to technology although we are spotting embryonic signs this may be changing. Lots of tech companies have initiated dividends that never used to pay them – for example, security firm Symantec has said it will, from nothing, pay 50 per cent of free cashflow as dividends, which is encouraging.
And which are you avoiding?
The traditional equity income favourites of utilities and, particularly, telcos. The latter’s business models have suffered with the economy, cashflows are not so stable now and dividends have been hit as a result. That demonstrates, rather than just being sucked into the highest yields, we are doing our analysis correctly and making sure we only invest in companies where we can understand why the business will be bigger in 10 or so years – and hence why the cashflows and our dividends will be bigger. Never look at a 7 per cent dividend yield and automatically assume it is cheap.
How is the fund invested geographically?
The US and Australia remain significant hunting grounds but Brazil, which still requires companies to pay at least 25 per cent of profits out as dividends, is now seeing a worrying amount of political interference in some large sectors, such as banking, oil and mining. It has yet to feed through into dividend cuts but we are now cautious on Brazil and, when we do invest there, it is more likely to be in smaller, more low-profile companies.
Other countries starting to contribute to the fund include Canada and South Africa but Asia – certainly beyond Hong Kong, Singapore and Taiwan – continues to be hard work and we are spending a lot of effort trying to get better at identifying potential candidates from the region
Is the market’s enthusiasm for defensive businesses causing the fund problems?
It is not causing problems but it is definitely an issue. When you move into the more cyclical areas to try and find dividend growth, things naturally get riskier but, if that is where the valuation tells us to go, that is where we will go. We run the fund with three ‘buckets’ – ‘quality’, ‘rapid growth’ and ‘assets’ – primarily to ensure we always have areas of value we can buy. With an income fund, it is very easy to have the quality section and just hold the likes of Nestlé and Johnson & Johnson but, if that part of the market moves expensive, then unless you have identified significantly cheaper candidates that are more likely to lead market performance going forward, you have a real problem.
How do you deal with the problem of currency?
Since I find it hard enough to predict what a currency’s drivers will do, let alone the currency itself, I try and naturally hedge as much of our currency as possible – not through derivatives or anything like that but just through avoiding businesses with operations in a single country. I am naturally biased towards global businesses anyway because I much prefer a company with the flexibility to invest capital to whichever regions deserve it, rather than having to deal with whatever hand it is dealt in its own country. It is also easier to access general population growth as a global business.
How would you answer concerns the fund might be growing too big too quickly?
We look at capacity in two ways – one is the liquidity of the portfolio’s underlying stocks and the other is M&G’s ownership of companies the fund is invested in. On liquidity, our strategy has a clear large-cap bias that is helpful for scalability while, on ownership, three-quarters of the portfolio is invested in companies where M&G as a whole owns less than 2 per cent. There is plenty of room to increase existing holdings to our internal limit of 15 per cent. The fund’s capacity is under constant review and we believe the fund can continue to grow without affecting the way we invest.
Can the fund continue to enjoy the sort of popularity that has seen it grow beyond £7bn in just five years?
You could have launched this fund in the 1980s and it would still have been a great way of managing money but, given what has happened in the world over the last five years, it has proved a very successful strategy. Looking ahead, there will be times like now when dividends are massively in favour and waves when they are less so – though not to the extent they no longer exist.
We are currently in a sweet spot that will continue as long as people cannot find sufficient yield in other asset classes, but as long as equities allow investors to enjoy 3 per cent or 4 per cent dividend yields that are increasing, there should continue to be an awful lot of demand for the strategy.
Julian Marr is editorial director of Adviser-Hub