EquitiesDec 1 2016

Best in Class: Keep the wolf from the door

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Best in Class: Keep the wolf from the door

Investors could be forgiven for feeling a bit like the villagers in Aesop’s famous ‘the boy who cried wolf’ tale this year. After all, have they not been warned of disaster in the run-up to each political upheaval? 

Brexit was to send UK small and mid caps tumbling; Donald Trump was to preside over global stock market slides. Yet equities seem more buoyant than ever.

Attention has turned to the next major vote on the horizon: the Italian referendum on December 4. The nation is going to the polls over a proposal to change the country’s constitution, theoretically clearing the way for easier-to-implement reforms.

But because pro-EU prime minister Matteo Renzi has promised to resign if he doesn’t win, the vote has somewhat become a gauge of Italy’s enthusiasm for the EU. French and German elections follow in 2017 and anti-EU sentiment seems to be rising. This could put European markets on shaky ground indeed.

There I go again predicting challenges ahead. I’m not alone in this outlook: many asset managers are feeling cautious and cash levels have hit record highs. Given equity and bond valuations, it’s no surprise managers are being selective. 

But if we continue with the analogy, the job of the shepherd is to do what’s best for the flock. In fund management this means striking a delicate balance between shielding investors from the rough markets and making sure they are exposed to the right assets to generate strong returns. Someone who gets this right is Stuart Rhodes, manager of the M&G Global Dividend fund, which he has run competently since launch in 2008.

If you’ve got clients who are similarly holding on to spare cash, a global equity fund could be an appealing way to tempt them into the market. They don’t have to ‘put all their eggs in one basket’ in terms of regions, but they won’t miss out completely if certain areas outperform. 

M&G Global Dividend’s top-three regional allocations are currently US equities, with a weighting of just over 50 per cent, the UK at 14 per cent, and Canada at 11 per cent. 

The fund’s focus on dividend growth, as opposed to dividend yield, naturally leads it to invest in high-quality companies. Mr Rhodes believes dividends provide the ultimate sign of a firm’s capital discipline and its commitment to shareholder value. 

His investors have been well rewarded in terms of both capital and income growth since launch, though total returns struggled somewhat in 2014 and 2015. Yet arguably the most important element in a dividend fund is that it continues to pay a reliable income, and Mr Rhodes has raised his net distribution in every year bar one since 2008. In his view, dividends are the measure that most clearly and objectively reveal the underlying health of a business, and year to date the fund has beaten both sector and benchmark.

The wolf does eventually make its appearance in Aesop’s edifying tale and the poor shepherd boy finds himself faced with the villagers’ disbelief and inertia. Only time will tell if a wolf awaits in today’s market, but with a few good core funds such as M&G Global Dividend, we can help investors to be prepared for wherever the story takes us.

Mr McDermott’s family members have holdings in the M&G Global Dividend fund.

Darius McDermott is managing director at FundCalibre