This modest £24m European Equity Income fund from Martin Currie is co-managed by Ross Watson and David Forsyth.
Mr Watson made changes to the strategy in March 2012, having taken over the portfolio a little earlier. His colleague joined him roughly 18 months later.
Mr Watson says: “The key for us is to focus on a portfolio of stocks which, in aggregate, have a yield a bit above that of the market, not dramatically higher yield than the market. At the moment the yield premium is approximately 15 per cent above the [MSCI] Europe ex UK index and that’s a number that’s been pretty consistent. Within that, we focus very highly on stocks that have good potential, good free cashflow and the ability to grow dividends consistently.”
Due to their limited growth potential, the managers will not invest in stocks that yield 30 to 40 per cent above the market. “You find yourself much more restricted by the stocks and particularly the sectors that you can invest in,” explains Mr Watson. The underlying strategy has remained consistent, he adds. “There’s a reasonable spread of yield in the portfolio. We don’t have a minimum level of yield a stock has before we buy it, other than it is forecast to be paying a dividend.”
Mr Forsyth accepts that while it is not always possible to select stocks for the portfolio in isolation, they try to minimise any “macro factor sensitivities”. He says: “It’s very much a bottom-up driven strategy that we try to run with an income overlay. So trying to make too many bets on the macro side, where we have less skill and ability – we try to steer clear of that.
“We’ve been underweight in Spain for a while,” he adds. “We really have tried to challenge all the bottom-up fundamentals of the stocks in that market and justifying not owning them on a stock-by-stock basis. We’re reasonably comfortable with that... We’re overweight in France, but what I would say is it’s very much global companies that are based in France [in the fund].”
Recent changes include buying into phone company Nokia, which the duo believe is bucking the trend among European tech companies by delivering a yield. They point to its strong balance sheet and improved margins. “If we meet management of existing holdings and the story is confirmed and we still see good value in the stock, then we can add to that,” says Mr Forsyth.
Mr Watson adds: “We’re not big traders within the portfolio. Over the last three years, portfolio turnover has been about 25 per cent. It’s not a target, it’s just the way we run the portfolio with relatively long holding periods. We’re not taking short-term views.”
The fund sits at the higher end of a risk and reward scale at level six out of seven, and the accumulation B clean share class has ongoing charges of 1.19 per cent.
The fund has disappointed in the 10 years to February 11 2015, delivering a total return of 90.26 per cent against the Investment Association Europe ex UK sector average of 105.44 per cent. However, performance has picked up notably. In the three years to February 11, it generated a 41.08 per cent return, putting it in the top quartile in line with the sector average return of 41.04 per cent. The managers attribute that to the underlying ideas in the portfolio, rather than macro themes. Mr Watson says: “It’s been the consistent ideas, good cashflows that have been coming through and decent dividend growth over the period.”
The healthcare sector has detracted from performance lately, as Mr Forsyth concedes. “Within healthcare, if you’re looking for yields, there are really only four or five big-cap stocks that you can invest in. The one that has performed best over the last year has been Novartis – they had new drugs coming to the market and there’s been a lot of confidence in that stock and we haven’t owned that one. We’ve owned Roche and Sanofi, so we’ll continue with that stance. That is one area that we have got wrong, and within this fund we are slightly overweight in energy, which has been a detractor over the last six months.”
On the outlook for European income, he says: “We do feel as though we have to see some earnings coming through from corporates to justify some of the valuations that are now in the marketplace, so there is a degree of caution on some of the valuations. We are trying to pick stocks where we can see growth, where we can see upside and where we think valuations are more reasonable.”
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities
The fund has been running for a very long time (since 1985) but is only around the £25m mark in size. This means that the ongoing charge is relatively high for this type of fund, while the current yield of 3.2 per cent is relatively low, making it less appealing. Over the longer term, the fund does outperform its benchmark but also underperforms the peer group, which suggests that there may be better options available.
