Although the £152m BlackRock Global Income fund is towards the smaller end of the Global Equity Income sector, its focus on high-quality investments has helped it achieve its aims, including delivering a yield above the global market average.
Stuart Reeve, who has managed the fund since launch, says: “Currently the global market is yielding roughly 2.5 per cent and the portfolio is yielding close to 3.5 per cent. It is attractive but not the highest yield you could find.” Since January 2013, Andrew Wheatley-Hubbard and James Bristow have accompanied Mr Reeve on the fund.
The manager notes there are three “guiding principles” the team employs in its strategy: a focus on high-quality investments, having long-term objectives (with an average holding period of four to five years or longer), and ignoring the benchmark or index when constructing the portfolio.
“We don’t try to replicate the index or sector weights; we don’t think that is a very sensible way to run a long-term strategy,” explains Mr Reeve. “So we focus on quality, be patient and ignore the benchmark or index. That’s the process.”
This investment approach feeds into other aims of the fund, which include ensuring the companies it invests in can grow their profits, cashflows and dividends over time in a consistent way, thus providing better downside protection.
“When markets are down, we are only capturing about 55 per cent of that, so we are down much less than the market, but the other side is when the markets are going up we are capturing less of the upside – data suggests it is 79 per cent of the upside, and 55 per cent of the downside. So it is a less volatile ride, with yield and sustainable growth. That is the aim.”
The process is fundamentally a bottom-up stock selection approach, although the team does have a strategist and macroeconomist, so once the portfolio is built they can also look at it from a top-down view to ensure it makes sense from their perspective. “It is much more about the stocks and less about the macro factors,” adds Mr Reeve.
In spite of the aim of better downside protection, the risk-reward indicator level of the fund’s Kiid places it at five out of seven, while the ongoing charges are at 1.68 per cent.
Since launch in May 2011 to July 16 2014 the fund has delivered a return of 32.86 per cent, in sterling terms, outperforming the IMA Global Equity Income sector average of 30.58 per cent, according to FE Analytics.
The three-year performance has slightly lagged the sector average but for the year to date to July 16 the fund remains ahead with a return of 3.52 per cent against a sector average of 2.77 per cent.
Mr Reeve notes that in 2013 when markets were very strong the fund lagged the market slightly, particularly within its consumer staples holdings, although this was offset by strong performance from industrial names, large-cap pharmaceutical stocks and a small weighting in technology. He adds that the year-to-date performance has been helped by its position in staple companies, such as tobacco holdings, which have been affected by recent speculation on potential M&A activity, which has pushed all the tobacco names higher.
“Year to date the underweight to utilities has been the main detractor,” explains the manager. “We don’t own any utilities, which is unusual in an income fund, but utilities in aggregate across the world have been quite strong and people I guess are just chasing the yield element of that. But I think the staples and being underweight financials, which have lagged this year, have more than outweighed that.”
He adds: “Quality for us means some specific things; particularly, it means the businesses generate sufficient cash internally to fund all their own investment requirements, to fund capital expenditure, their research and development, and still have some left over to pay shareholders.
“It is why we don’t have anything in utilities because they don’t generate enough cash to fund themselves and pay a dividend; they have to borrow to fund one or the other.”
Expert view
Jake Moeller, head of Lipper Research:
This fund has the second lowest three-year volatility of all funds in the sector. This undoubtedly reflects its higher quality and larger-cap bias. Currently heavily overweight in consumer staples and healthcare, this defensive bias reflects BlackRock’s preference for seeking “sustainable” dividend income rather than multiple expansion. The manager is actively seeking opportunities outside of the US so it is underweight there but unlike some of its peers has a higher concentration of UK stocks. Stuart Reeve and Andrew Wheatley have good reputations in the market and BlackRock has excellent global research resources, but expect relative underperformance if the market gets away.
