2017 and the first half of 2018 have not been kind to equity income managers. The low-interest-rate environment should have made dividend-paying shares attractive to investors. But these more defensive stocks have failed to keep up with the cyclical companies that benefit from an improving economic backdrop.
That’s hurt the relative performance of Dan Roberts' Fidelity Global Dividend Fund, although it has largely held onto the gains it achieved in friendlier markets and has rewarded longer-term investors.
The fund has suffered, too, from a lack of exposure to the high-flying FAANG technology stocks which naturally don’t show up on his screens because they are re-investing their profits rather than paying them out to shareholders in the form of dividends.
Looking ahead, the outlook for cyclical stocks may be a bit cloudier as trade wars and a rising oil price raise questions over global growth. That could make this an interesting time to look at this Select 50 fund.
“It’s been a difficult period for us on a relative basis but a lot of the stocks that we own in the portfolio we like because they are relatively immune to the ebb and flow of economic growth. On tech, we do own stocks in this area - about 15% of the fund actually - but they tend to be what I call old tech. We do struggle as dividend investors with the Teslas, Amazons and Netflixes, which are generally consuming capital not returning it so the payment of a dividend is the last thing on their minds. And they tend to trade on very high valuations.”
With a global remit, Roberts has the freedom to roam around the world in search of reliable and growing dividends. That’s a big advantage because sectors tend to cluster in certain geographies and be notably absent from others. Technology, for example, is not a feature of the European markets but is strong in the US and Asia. Asian investors do not have much exposure to healthcare.
Roberts says “If you think about investing in a single country fund, there might be a couple of hundred stocks to choose from; globally there may be ten times as many. So there’s much more opportunity to invest in the best stocks within a sector but also the opportunity to gain access to sectors that may be under-represented in a local index.”
Another key feature of this fund is its focus on capital preservation as well as income. Roberts is a mathematician and a former accountant and this shows in his approach. He is a disciplined, numbers-focused investor with a focus on cash conversion, earnings persistence and balance sheet strength. He follows Warren Buffett’s dictum that the first rule of investment is not to lose money.
Roberts’ approach focuses on identifying good-quality companies on attractive valuations which can thrive and pay a well-covered dividend under a wide range of economic scenarios. This defensive approach should position the portfolio well if the first quarter of 2018 proves to be as good as it gets in terms of corporate earnings growth.
“I want to make sure I don’t overpay; I also want to invest in a resilient business where I can have really strong conviction in our assessment of what a company is worth”, he says.
The leading stocks in the Global Dividend portfolio include financials such as the American regional bank group US Bancorp, Deutsche Boerse and pharmaceutical company Sanofi. Unsurprisingly there are some consumer staples like Procter & Gamble and Diageo. Publishing features heavily via Wolters Kluwer and RELX, the old Reed Elsevier.
Oil and gas’s traditional dividend-paying quality is played through Royal Dutch Shell. Roberts may give the FAANGs a miss, but, as he says, he is not averse to investing in technology, with Taiwan Semiconductor featuring in his top ten holdings as well as traditional sector staples like Microsoft, Oracle and Cisco.
Roberts is keen to avoid value traps, shares which look attractive on the face of it, but are lowly-priced or have a high dividend yield for a good reason.
“We don’t automatically allocate capital to the highest-yielding stocks in the market because that high yield can be a sign of stress in the underlying business and a precursor to a dividend cut. So we spend a lot of time thinking about the relevance of the business model and whether it is susceptible to, for example, technological disruption.”
With some exceptions (notably China), stock markets are standing close to all-time highs, with historically demanding valuations. That makes them look vulnerable in an environment of slowing growth and rising interest rates. The key question looking ahead is how much of the good (and bad) news has been priced in.
Roberts describes himself as cautiously constructive and is looking to build an attractive risk-adjusted return on the bedrock of a good yield and rising level of income. That will protect the portfolio from any decline in overall valuations.
“We’ve said it’s been a relatively difficult period for the fund over the past couple of years and what we have seen is that defensive dividend-paying stocks have de-rated as interest rates have risen and that has thrown up some interesting valuation opportunities. We are seeing decent value emerge in sectors which have sold off.”
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Investors should note that the views expressed may no longer be current and may have already been acted upon. This fund can invest in overseas markets so the value of investments can be affected by changes in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This fund can use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This fund takes its annual management charge and expenses from your capital and not from the income generated by the fund. This means that any capital growth in the fund will be reduced by the charge. Your capital may reduce over time if the fund’s growth does not compensate for it. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.