Sarasin: Dividends not to blame for underperformance

Sarasin’s Mark Whitehead has dismissed suggestions that his pursuit of a high yield has led to underperformance in his flagship Sarasin Global Higher Dividend fund.

The fund recently announced it had delivered a yield of 4.7 per cent in 2013, which was the highest yield in the sector and made it the only fund in the IMA Global Equity Income sector to have raised its dividend every year since the fund’s launch in 2006.

But the fund was in the third quartile of the IMA sector in terms of overall performance in 2013 and lagged the MSCI World index benchmark return by 7 per cent.

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Mr Whitehead claimed it was the fund’s style that had led to it lagging the market in 2013 and denied the pursuit of a high dividend was a headwind to capital returns.

The fund focuses on buying what Mr Whitehead termed “high quality” companies, which are businesses with consistent cashflow generation and stable franchises.

These companies tend to be defensive in nature, according to Mr Whitehead, and underperformed in 2013 when investors flocked to risky growth stocks as confidence grew in the global economic recovery.

This focus on quality stocks comes because the fund aims for a premium dividend to the stockmarket, looking to generate a yield that is 80 per cent more than that generated by the MSCI World index.

This leads to a yield of between 4 per cent and 5 per cent, but Mr Whitehead pointed to research from Société Générale which found that 45 per cent of companies that aim for a yield at that amount miss those expectations, cutting or reducing their dividend.

So Mr Whitehead said to avoid those companies cutting their dividends, he ends up “having to invest in high quality companies to get that premium yield to the market”.

He said: “In the short term there will be times when this style underperforms. Last year not only did dividend stocks underperform, but high quality as a style underperformed.”

Mr Whitehead acknowledged that those companies with a 20 per cent premium yield to the market underperformed less than those with an 80 per cent premium yield but said that the higher yielding companies will eventually come back into favour.

The fund has so far beaten the sector average return in 2014, but is still in the third quartile for both one and three years, according to data from FE Analytics.

Mr Whitehead claimed that the companies in his portfolio performed better operationally than the wider stockmarket in 2013 and said investors will eventually realise this when the quality style comes back in favour. The manager pointed out that his holdings generated average sales growth of 4 per cent in 2013, compared to no growth for the MSCI World index.

He also said that improved profit margins meant that sales growth translated into an average 7.8 per cent earnings growth from his companies, compared to 2 per cent from the average stock in the index.