Catching up with equity income giants
By investing in stocks that only yield 4 per cent or more and have a market capitalisation of more than £500m, the £101.1m Threadneedle Global Equity Income fund has generated a consistent yield of 5.5-6 per cent a year since launch in June 2007.
Manager Stephen Thornber says that by limiting the number of stocks in which he can invest to 1,500, he has been able to find the most attractive companies with sustainable earnings and growing dividends. The vehicle’s most recent income payment put its yield at 5.9 per cent, and the manager is attempting to boost its payout by 15 per cent this year.
“I want to be investing in effective and dynamic businesses that are growing and increasing their dividend. I look for a minimum of 5 per cent earnings and dividend growth, as well as balance sheet quality. I want confidence that the company has a financial and business structure that can pay the dividend this year and the year after,” he says.
However, the restrictions that these targets place on the fund’s investments can cause the fund to underperform its peers over shorter periods. It recorded a loss of 0.93 per cent in the year to July 12, compared with a positive 0.26 per cent return for its highly competitive IMA Global Equity Income sector, which features outperforming giants such as the Newton Global Higher Income and Veritas Global Equity Income funds.
Mr Thornber puts this down to the fact that as a proportion of its portfolio, the fund holds 9.5 percentage points less than its benchmark index in North America, and more than the index in Europe and emerging markets.
“With my 4 per cent criteria it’s difficult for me to get a big weighting in the US, because the US is a lower yielding market. However, in the past two months the US has been the strongest of the larger markets, so that underweight has hurt me. On the flip side, I’ve been overweight Asia and emerging markets, and they’ve been extremely weak. So my largest overweight positions regionally have been very weak and my largest underweight has been very strong,” he says.
Nevertheless, Mr Thornber says that Threadneedle as a firm remains positive on Asia and emerging markets. While he has been reducing his positions in Europe, he doesn’t intend to do the same in Asia. He has been increasing his current overweight position, utilising the recent weakness in natural resource prices to buy into Asian mining and energy companies. “The Asian markets have been unduly hit and they’re looking quite attractive now, so I’m happy to be overweight and look out for attractively valued opportunities to increase that position. I am very hopeful that those markets will recover and will generate good returns for the fund,” he says.
The manager has recently added US chemical companies Dow Chemical and LyondellBasell to the portfolio, because of “the increasing opportunities” presented by the shale gas boom in the country. US gas production has risen over the past four or five years, resulting in a collapse in the US natural gas price. This may be bad news for the companies that are drilling, but it has been a positive for chemical companies, which are using this cheap gas to their advantage.