Paul Boyne joined Invesco Perpetual in September 2008. He manages the Global Equity Income fund, launched last week. Before joining Invesco he worked at the Bank of Ireland.
Q: Last week marked the launch of the Global Equity Income fund. How easy is it to find dividend-paying companies right now?
A: It is actually quite easy. We have been undertaking research and we have forecast a dividend yield for the market – as represented by the MSCI World index – of about 3.6%. This compares with the peak in dividend yields in 1991 of about 2.7%.
However, given the number of companies revising down or cutting their dividends, part of this up-tick in yields is unsustainable. This is because a lot of yield on the market will be lost from the financial companies. Financials represent about 15-20% of the MSCI World index and on average yielded about 5% or plus.
This means that while it is fairly easy to find companies paying a historically high yield, the thing to bear in mind is that these are often not sustainable. My focus is on finding companies that can sustain their yield.
Q: How do you do that?
A: I screen down the World index by focusing on four things. The first is to look at the dividend cover on a profit and loss basis. Then I look for dividend covered on a cash basis; that is, looking for dividends that can be sustained from the ongoing cash generation of a business.
Then I look at the strength of the company’s balance sheet that is paying the dividend. And fourthly, I look at whether the business has a sustainable return on capital and margin structure.
Q: So where in the world is the fund finding the best income opportunities?
A: Our process is entirely bottom-up focused so we don’t allocate assets by region or sector. As such, both sector and regional weights are the result of stock investment decisions. However, no single sector can account for more than 30% of the fund.
However, on a broad basis yields and income are available within energy, telecoms and consumer staples. In consumer staples you can find businesses generating yields of 8-10% and they have much less volatile earnings streams. Tobacco is one particular example of an area we like. It offers attractive yields and is a sector which generates a lot of cash because its consumers have a certain pricing elasticity, which basically means they will continue paying for cigarettes owing to their desire to smoke.
Q: What areas are you avoiding?
A: Mostly financials. I don’t trust their dividends, I don’t think the dividends are sustainable and I don’t know what their return on equity will be. My style of management is that if I can’t understand something I will leave it alone.
Q: There are many regional income funds – for example Asian, European and UK mandates. What is the benefit of investing globally?
A: If you are willing to invest overseas for income, why restrict yourself to stocks that are listed in just one country. Globalisation has integrated economies and changed the investment landscape. Today we see a range of world-class companies spread across the globe that are able to sustain strong dividend payments. With nine out of 10 of the world’s highest-yielding companies being outside the UK, the global equity income market now offers a real option for income investors looking to complement their UK holdings.
Q: Any initial stock examples?
A: One such leading world franchise is Johnson & Johnson. It has a solid cash flow, a strong balance sheet and a dividend yield of approximately 3%.
In terms of tobacco, less than a year after being spun out of Altria, Philip Morris International is a US company with a strong franchise through its portfolio of well-known tobacco brands. Again, this company has high cash flows, but it also benefits from the geographical diversification of its revenue streams, which currently includes significant emerging market exposure.
Q: How many companies are you investing in?
A: In this fund the range is between 60 and 100. At the moment I am invested in about 70 stocks.
Q: What are the greatest challenges in the income universe and how do you plan to overcome them?
A: It comes back to the question of sustainability: don’t get seduced by a high dividend that turns out not to be real. Ironically, one of the best indicators of market concern as to the sustainability of that dividend yield is the yield of the company itself. If the market no longer believes in the sustainability of the yield the stock can sell off, creating a situation whereby the perceived yield will rise higher and higher. These are the ones to avoid.
Q: What is the target yield for the fund?
A: We don’t have a set target yield. Right now the yield is just over 4%.
Q: Will the fund use any derivatives, such as covered call options, to try to boost returns?
A: We haven’t done so initially. We feel that as a new product it should do what it says on the tin, so we are generating income in a boring and traditional way.
Q: How would you describe your investment style and approach?
A: I am a value investor – that’s my background. I worked on a global value product at Morgan Stanley for 12 years before I joined the Bank of Ireland [in 2004]. To me the key is valuation, it’s the only thing that matters. Great companies don’t always make great investments because the market has priced them accordingly.
A number of my peers talk about holding good companies with good management and strong balance sheets. To me, good is subjective, but companies have to achieve a return on capital. It is this which quantifies whether or not a company has a good management team and a good franchise.
Q: How hard is it to ignore all the noise in the markets?
A: It is hard because emotions go up and down depending on how stocks are performing. My average holding period for a company is three years and one of the key reasons for me joining Invesco is that, as a group, it is also a long-term investor. The pressure on generating performance can cause managers to be more short-term in their focus, but within the income universe the best investment opportunities are those in which you can look out over three-to-five years.