Sam Morse has reshaped the portfolio of Fidelity European Values since taking over as manager last year, with a focus on dividend growth rather than high yield
Since taking over as manager of Fidelity European Values at the start of last year, Sam Morse has reshaped the portfolio, focusing on dividends growth rather than high yield.
Morse spent 2011 slowly turning over 60 per cent of the portfolio to run the mandate in a similar vein to the £2.4bn Fidelity European unit trust, which he has been running since December 2009.
“A fair amount of restructuring was required,” Morse says. “The turnover was quite high last year as I shifted the portfolio, as I already had a template where I wanted to end up. The turnover is normally 25-30 per cent per annum, in line with a three- to -five-year investment horizon.”
“My process is different [to predecessor’s Sudipto Banerji] as I focus very much on dividend growth. In the early-to-mid 1990s, I ran equity income funds in the UK, which were more growth and income than high yield, so I have always been focused on dividend growth rather than yield.
“There is a lot of evidence that companies which are growing dividends consistently outperform the stockmarket. In the last three years the MSCI Europe ex UK companies which have grown their dividends have gone up 40 per cent on average, while the market has barely risen. Companies which have cut or held their dividends have gone down. The problem is not many companies have grown their dividends.”
Morse considers three criteria when selecting stocks. These are: positive fundamentals, for example a good track record for dividend growth and what future returns the company is likely to achieve in the next few years; cash generation and strong balance sheets – Morse avoids companies with heavy leverage as he says it may jeopardise dividends going forward.
Two of the funds largest holdings are consumer goods company Nestle (6.6 per cent) and the healthcare provider Novo Nordisk (4.5 per cent).
“Nestle is not an imaginative holding but it has grown its dividend consistently for 50 years (in Swiss franc terms) and I am confident it will grow its dividend yield going forward. It has a strong balance sheet and low level gearing. The company is forecasting 5 to 6 per cent sales growth going forward and its earnings growth is growing faster than sales.
“Europe is so out of fashion that there are lots of companies like that sitting on attractive yields. Even in the stop/start economic environment they will continue to deliver total returns.”
“Novo Nordisk is the global number one in insulin production, so it is a play on the rise in diabetes around the world. It recently developed a new insulin drug, Victoza, which has the side effect of reducing weight, and it may be launched into the market for obesity, but this has not been factored into the share price, although it will continue to grow steadily on insulin. It has a dividend of 2 per cent or so, but it is growing its dividend at a good clip, and buys back shares each year.”
Morse says that one of the problems with investing in companies such as these “steady growers” is they can get left behind when the market rallies. “But over a longer period as the excitement waxes and wanes Nestle and Novo Nordisk will recover ground,” he adds. “Over one year I can offset the defensiveness with stockpicks.”
Indeed, over one year the £578m trust has returned 15.4 per cent versus the AIC Europe sector average of 12.6 per cent, as at 25 October according to Morningstar.
Morse credits holdings in Norwegian media group Schibsted (2.5 per cent) and clothing manufacturer Hugo Boss (1 per cent) with contributing to recent returns.
“Schibsted is like the Daily Mail in that it was a newspaper group which developed its online business. It has had a lot of success with its online classified advertisements business, like Gumtree in the UK.”
“Hugo Boss was a big holding but we reduced it as it was fair value rather than attractive. It is an internal turnaround story. It was taken over in 2007 by Permira and suffered as a business in the financial crisis, but they brought in new management who recognised that the margins were lower than the peer group average. So they shortened lead times and got better data to design and order accordingly.”
Morse is quite pragmatic when addressing investors’ perceptions of European equities.
“There is a lot of negativity towards Europe and equities, so European equities are at the bottom of most people’s shopping list. But if you are selective you can find absolute returns over the next three to five years. Despite the ups and downs of the last year, the market has moved forward quite nicely. The FTSE Europe ex UK index is up 12.5 per cent to the end of September, while the trust’s NAV is up 22.6 per cent and its share price is up 26 per cent. Considering a year ago we had nott heard of LTROs or OMT, the share price is staggering. Overall, value will out.”