Picking companies that are experiencing strong and sustainable dividend and cashflow growth is key to the investment process, and the team has, so far this year, avoided those companies that have slashed dividend payments.
Lead manager Gerd Woort-Menker notes it is a diversified, high conviction, unconstrained, global equity income portfolio focused on dividend growth that “offers investors the chance to benefit from an improving global economic outlook to deliver a high and rising income stream as companies across the globe begin to increase dividends again”.
The investment process has remained unchanged since the launch of the strategy in 2007, with a sterling share class launched in 2011, as the fundamental research process used by the team identifies the long term earnings power and cashflow generation of each company using a dividend discount model.
Mr Woort-Menker says: “Our forward-looking, cashflow-based stockpicking investment process typically leads us to avoid companies that are cutting dividends. In the past 12 months, this has been a particularly strong time for the portfolio and we have avoided many of the high-profile companies that have cut dividends in 2013. Our process can identify companies with poor balance sheets, where cashflow is under pressure and a dividend cut is imminent.”
The manager, who was joined on the portfolio at the beginning of November by James Davidson, says that by comparing the results of its research process with market prices it identifies undervalued stocks with superior cashflows, underpinning sustainable or growing dividends. “We focus on selecting stocks that will pay out a higher dividend and whose amount of dividend and share price will increase in the mid-to long term.”
The performance of the strategy, based on the sterling hedged share class, has been just ahead of the current benchmark – which changed to the MSCI AC World index on November 1 2013 – over a three-year period. It produced a return of 32.02 per cent, compared with 31.63 per cent from the MSCI AC World, although these were both slightly behind the IMA Global Equity income sector average of 36.16 per cent.
At the sector level, healthcare, energy, telecoms and utilities are among the largest positions within the portfolio, according to Mr Woort-Menker, who suggests the dividend outlook remains good in these sectors. “We expect these industries to distribute growing dividends for 2014 as a result of strong cashflow.
“We also have positions in the financials, industrial cyclical, technology and basic industries sectors, which typically don’t pay the highest dividends. Valuations are attractive and we see good growth in the dividend over the next few years.”
On a regional basis, the team has roughly 35 per cent in US companies and approximately 30 per cent in Europe ex UK. The manager explains: “The European companies we hold have a diversified earnings mix, their cashflow profile and profitability are strong and we believe their dividends are sustainable. We also find selective dividend opportunities in emerging markets. However, our weighting in this region has fallen to below 3 per cent. We have a strong research presence in Japan and last year we added significantly to our Japanese weighting. The stocks we hold in Japan have strong balance sheets and generate significant amounts of excess cash.”
Mr Woort-Menker points out the aim is to provide clients with a high and rising income stream and reports that in the past few years the strategy’s income stream has grown by more than 30 per cent in addition to strong capital growth.
While performance has been patchy, a high dividend yield on the portfolio and a disciplined fundamental research process focused on cashflow and dividends suggests this could play a role for investors seeking to diversify their income portfolio.
VERDICT
Darius McDermott, managing director of Chelsea Financial Services:
“This is a fairly diversified fund of 76 holdings. Roughly a third is invested in the US and a quarter in continental Europe. A lower weighting to the Asia Pacific region (15 per cent) will have helped performance in the shorter term. The fund struggled in the falling markets of 2008 and 2011, which resulted in longer term numbers lagging in third and fourth quartile. Performance has improved in the shorter term. The yield is a respectable 3.6 per cent.”
