Threadneedle: Global equities pay their way in the new world order
Global equities pave their way
Investors’ appetite for income shows no sign of abating in 2013, but with interest rates and bond yields at historically low levels, their eyes are increasingly turning to global equities for dividend income and the prospect of capital performance.
But not all global equities are created equal, and real success lies in picking the right ones, explains Stephen Thornber, Portfolio Manager, Global Equity Income, at Threadneedle Investments.
“Investors have been asking me whether the renewed focus on income means that income stocks are expensive now,” he said. “My response is that, high dividend paying stocks have historically traded at a discount to the broader market, and this discount is actually higher now than it was two years ago.”
Mr Thornber said that Threadneedle’s belief in fundamental, bottom-up stock selection, informed by top-down economic and thematic inputs as a key driver of returns has translated into strong performance from its Global Equity Income strategies.
“Following the GFC many companies strengthened their balance sheets by paying down debt and reducing costs, however recently corporates have been increasingly rewarding shareholders through higher dividend payments.”
In November last year Certitude Global Investors launched the Threadneedle Global Equity Income Fund (Unhedged), an Australian registered investment management scheme which invests in the actively managed Threadneedle Global Equity Income Fund. The Threadneedle Global Equity Income Fund has consistently outperformed its benchmark, the MSCI AC World Index, over 1, 3 and 5 years, providing annualised returns of 19.8%, 15.4% and 5.2% respectively, to 31 January 2013*.
“We look for companies with ‘quality’ income, which for us means three things. Firstly, we insist on a minimum yield of 4%, as every stock has to contribute to achieving a high portfolio yield. Secondly, we seek dynamic companies that are growing earnings and dividends, and lastly we look for companies with a robust balance sheet, which gives us confidence in future dividends and the ability of the company to invest in growth,” Mr Thornber explained.
Meeting these criteria does not mean a stock is automatically held, rigorous fundamental research is conducted to investigate which opportunities are the most attractive. The focus of the investment team turns to fundamentals, such as industry dynamics, competitive advantage, margins, free cash flow generation and quality of management in order to produce a valuation price target.
Mr Thornber finished by saying that risk control was also central to good portfolio construction and by investing globally he is able to construct a portfolio that is well diversified by sector as well as geography. “In Australia the big four banks and BHP account for nearly half of all dividends paid. By investing globally we spread the risk far more widely while still generating a high portfolio yield.”
