Seeking yield in unusual places
The past 12 months have seen Bruno Springael, senior portfolio manager on the €442m (£347m) ING Global High Dividend fund, significantly reduce exposure to economically sensitive stocks offering growth and more towards those sporting enticing valuations.
This kind of move seems bland until you consider that, as a result, Mr Springael and co-manager Herman Klein are moving away from more economically sensitive or cyclical stocks in sectors such as utilities, telecoms, healthcare and energy – traditional dividend payers – and towards securities on low valuations which sit in sectors such as industrials and raw materials – sectors which are not associated with pumping out high yields.
Industrials is now the second largest industry sector in the fund – at 14.93 per cent of the portfolio – although financials, a more dividend-oriented sector, remains the largest on 18.61 per cent and healthcare makes up 12.68 per cent.
According to the fund factsheet, however, the regional and country weights are capped at 15 percentage points more or less than the sector weightings in its MSCI World benchmark index. Similarly, to avoid concentration in a few sectors, the overweight position of a sector relative to the MSCI World index is capped at 10 percentage points.
Utilities firm GDF Suez is the fund’s largest stock weighting at 1.64 per cent. This company supplies energy services across Europe and is engaged in the production, storage, network transportation, distribution and sale of natural gas, liquefied natural gas and electric power and has a dividend yield of 8.3 per cent, as at July 13.
The managers follow a strict investment process that starts with a quantitative screening filter that selects only those stocks with a market capitalisation of at least €1bn and have an average of €3m in trading volume per day.
The latter, which concentrates on the volume of shares bought and sold in a single trading day, allows the manager to assess the liquidity of any given stock and how easy it would be, therefore, to sell in a limited time period.
This initial filter brings the fund’s investment universe down from roughly 38,000 stocks to 3,000.
The managers then further filter the possible holdings based on their dividend criteria. Mr Springael explains: “We only take into consideration stocks yielding more than 2.5 per cent. This leaves us with roughly in excess of 1,000 investment opportunities.”
The second stage of the process, which the managers claim is the most important, is based on a company’s ability to pay dividends and fundamental research.
“We look at the dividend sustainability, the dividend prospects and we apply a whole fundamental layer of qualitative analysis. We have a research team of 26 analysts to help with this and at that stage, the universe is narrowed to between 300-400 stocks. Fundamental analysis will drive this down to around 200-300 stocks that we choose from to end up with a portfolio that is typically comprised of 90 stocks,” Mr Springael says.