M&G’s Rhodes returns to quality street

M&G Investments’ Stuart Rhodes has begun adding to ‘quality’ stocks in his £9.2bn M&G Global Dividend fund as valuations have returned to reasonable levels.

The rising-star equity income manager had spent much of 2014 dumping stocks he considered to fall into the quality category because they were becoming too expensive.

But he said this switch out of quality stocks is “mostly completed” and he has begun to see more “appealing valuations” in that segment of the equity market again.

US pharmaceutical giants AbbVie and Amgen have been added to the Global Dividend fund, along with Norwegian oil and gas company Statoil.

All three stocks fulfil Mr Rhodes’ quality criteria, described as “solid, established companies with reliable growth”.

At the fund’s launch, quality stocks made up more than 60 per cent of the fund but they have slipped back to less than 50 per cent.

Mr Rhodes had instead been buying stocks matching the ‘assets’ theme – economically sensitive asset-rich companies, or the ‘rapid growth’ theme, which are the beneficiaries of economic growth.

The spark for the quality sell-off was the high valuations that many companies had reached, which caused the average valuation of stocks in the Global Dividend fund to be much higher than its benchmark.

Between May 2012 and the start of 2014, the average forward price-to-earnings (p/e) ratio of the fund was on average 4 per cent higher than the MSCI AC World index, though it was closer to 7 per cent higher towards the end of 2012.

That trend reversed abruptly at the start of 2014 as Mr Rhodes sold out of several expensive quality stocks, including tobacco firm Reynolds American, support services firm Compass and consumer goods company Reckitt Benckiser.

Mr Rhodes said he had not sold the stocks because of any concerns about the underlying businesses, but that “after their strong share price performance, we could no longer justify the valuations”.

The other main activity on the fund so far this year, according to Mr Rhodes, has been to add to certain stocks following a hit to their share prices that the manager thinks has been overdone.

Mr Rhodes has added to his holdings in US technology firm Xilinx, Finnish tyre-maker Nokian Renkaat and Aberdeen Asset Management following share price falls.

Those price falls have led the M&G Global Dividend to underperform both the IMA Global sector and its MSCI AC World index in the past year.

In the first nine months of the year, the fund delivered a return of 2.5 per cent, compared with the sector return of 3.2 per cent and the index return of 6 per cent, according to data from FE Analytics.

However, the fund is still top quartile for performance in the sector in the past five years, with a return of 74.6 per cent.