The Allianz European Equity Income fund launched in March 2009 and remains a modest £28.3m in size. Its objective is to achieve a high and increasing income by investing in Europe excluding the UK. Co-managers Joerg de Vries-Hippen and Neil Dwane have run the fund since its inception.
Mr de Vries-Hippen says the focus is on finding stocks with an above-average dividend yield. “This results in a very clear portfolio structure. It’s very reliable as well because at any time, every stock in the portfolio will be an above-average dividend yield stock.”
He adds, however: “You cannot go ahead and buy the highest-yielding stocks on the market because often these tend to be the so-called ‘dividend traps’. They are only high-yielding because the price is low and because there are certain problems in the company, and expectations with regard to the dividend have not been adjusted yet. We need to have a very close look at the company and make sure the underlying quality is good.”
This approach means that the only role macroeconomic factors play is in generating ideas. Ultimately it is about picking the right stocks, Mr de Vries-Hippen maintains.
“We are not only investing in these dividend stocks because of the dividend yield and the payout we can offer based on this, but also because we are convinced these are good companies,” he notes. “There are two major effects that we like about these higher yielding stocks. One is a so-called ‘signalling’ effect, so the dividend and the development of the dividend give a signal about the health of a company. We also like the so-called ‘disciplining’ effect of a substantial dividend. So the companies we are looking at ideally have payout ratios of between 40-70 per cent.”
Mr de Vries-Hippen believes that if the dividend is a substantial payment for the company, this encourages them to be more prudent. “We think this results in less negative newsflow for that company and this might be one of the reasons why these companies actually fluctuate less than the market. And because we are focusing on these companies, our portfolio is also fluctuating less than the market.”
According to the key investor information document, the fund is at level six on a risk-reward profile and has ongoing charges of 2.18 per cent.
The fund has achieved top-quartile performance in the IMA Europe excluding UK sector over one and three years. FE Analytics’ figures show it returned 35.23 per cent in the three years to July 29 2014 against a sector average of 27.52 per cent. Over five years, its performance places it second quartile, having delivered a return of 64.24 per cent in the period to July 29.
Mr de Vries-Hippen attributes this to the timing of its launch. “We actually launched this strategy the day before the European equity markets turned from being negative into positive, which was good timing with regard to the absolute performance but bad timing with regard to the relative performance, because this is the market environment where we would expect the fund to underperform. The stocks that perform best after this turning point are the lower-quality parts of the market and this is obviously where we are not invested.”
He observes that the year-to-date has been its strongest period, as stock selection added to performance. Mr de Vries-Hippen cites the portfolio’s overweight in oil majors after the managers came to the conclusion that the market was sceptical about these stocks due to their large capital expenditure programmes.
“This was something the market actually underestimated in our point of view, and this is a general feature of our strategy. We are counter-cyclical investors,” he says.
“The dividend yield is an entry signal for us but in most cases the interesting situations are when we do our quality assessment and we come to the conclusion there is something the market doesn’t like about these companies that we think is actually better quality.”
Mr de Vries-Hippen notes: “With the oil companies this capex spending was about to change so this [sector] was a strong contributor [to performance] over the course of the past year.”
Expert view
Ben Willis, investment manager and head of research, Whitechurch Securities
“The fund has just gone through its fifth anniversary, and since inception it has been sub-standard. The fund has a tendency to blow hot and cold, with the managers (Mr de Vries-Hippen and Mr Dwane) producing some periods of top quartile performance, only for this to be undone at a later date. Ultimately, now there is a good selection of European equity income funds on offer, I think there are better options elsewhere.”
