Blake Hutchins, manager of the Investec UK Equity Income fund, has told FTAdviser it is important “not to just focus on the UK index because there are businesses that are challenged and that will struggle to grow their dividends over time”.
“If you look at the UK market last year in aggregate it was very much flattered by the dollar, so dividends look like they grew 10 per cent but in constant currency terms they actually declined because of dividend cuts, primarily from the mining sector,” he explained.
He pointed out very capital intensive businesses do not have the ability to grow their cashflow consistently and so “will struggle to grow their dividends and unfortunately they do account for quite a large proportion of the UK market”.
But Mr Hutchins observed by avoiding the capital intensive sectors, as he does in the Investec UK Equity Income fund, and instead investing in high quality, recurring revenue and cash generative companies like consumer staples, healthcare, IT, technology and media companies, he is able to deliver dividend growth.
The latest Dividend Monitor from Capita Asset Services has forecast underlying dividends will rise 7.7 per cent to £84.6bn this year, while headline dividend growth is expected to slow to 2.8 per cent, owing to weaker special dividends.
Speaking to FTAdviser, Mr Hutchins said equities generally should perform well in an inflationary environment, particularly those with pricing power.
“There are certain businesses that suffer with inflation because they import cost inflation and they struggle to pass that onto their customers,” he pointed out. “Then there are businesses that absolutely have pricing power.”
He used British American Tobacco as an example of a company with an ability to pass on pricing.
Mr Hutchins, who left Threadneedle in 2014 and joined Investec Asset Management together with Simon Brazier, who was previously head of UK equities at Threadneedle, launched the Investec UK Equity Income fund in February 2015.
He bought into UK carpet distributor Headland in his UK Equity Income portfolio in the past 12 months on the basis “reinvesting back in their business and making efficiency changes” will improve cashflow and therefore dividends.
In the year to May 1 2017, the fund has generated a return of 20.6 per cent, in line with the FTSE All Share’s 20.1 per cent gain and ahead of the IA UK Equity Income sector average return of 16.5 per cent, according to FE Analytics.
Watch the video at the top of the page to see the full interview with Mr Hutchins.
eleanor.duncan@ft.com
