Performance Review 2008
ISIN: GB00B39R2S49
Stuart Rhodes: "Global equities suffered significant losses in the second part of 2008. Having a minimal exposure to US and European banks was beneficial to the fund in this market environment as many stocks in the industry suffered particular large falls. Holdings in defensive industries which make up the bedrock of the fund, such as food producer Nestle and health care companies Johnson & Johnson, helped the fund to outperform.
While concerns about slowing economic growth had an adverse effect on more cyclicals holdings such as Canadian miner Teck Cominco and Australian steel producer Bluescope Steel, the fund could clearly outperform its benchmark over its first months since inception."
Performance Review 2009
Stuart Rhodes: "Over the course of 2009, global equities could recover significantly from their lows seen in early 2009 as hopes of economic recovery especially helped cyclical industries to outperform. The funds` economically sensitive stocks and the companies benefitting from growth in the Emerging markets contributed most to the fund`s strong performance. Examples were the two Canadian companies, Teck Resources and methanol producer Methanex. UK car retailer Inchcape and financial group DBS in Singapore were among other successful positions.
While investors’ risk appetite increased, the fund’s holdings of defensive companies were left behind. Being underweight the technology sector, as we cannot find many companies in this sector which fulfil our requirement of having a strong track record of increasing dividends, also detracted. However, the fund clearly outperformed its benchmark during 2009. This time the cyclical portion of the portfolio which the fund manager had increased early 2009 when valuations had been very attractive, contributed a significant part to the outperformance of the fund."
Performance Review 2010
Stuart Rhodes: "Optimism that the global recovery was becoming entrenched led to further strength in those companies most exposed to an increase in economic activity. Once again stock picking was very effective and the fund could outperform its benchmark in the second full calendar year. Methanex and Teck Resources were again the largest contributors to performance. US steel manufacturer Timken and Brazilian cigarette distributor Souza Cruz were among the other positive performers.
Conversely, growing worries about debt levels in the eurozone led to downward pressure on stocks in the region and the fund’s holdings of French insurer Axa and Spanish telecommunications business Telefonica cost some value. Global bank HSBC was also affected by potential losses from its exposure to European debt while the oil spill in the Gulf of Mexico had a negative impact on a stake in Diamond Offshore."
Performance Review 2011
Stuart Rhodes: "2011 was characterised by extreme levels of volatility, with investor sentiment veering from optimism about economic recovery to fear that the debt crisis in Europe could cause the world to return to recession. Natural disasters and political unrest only added to the uncertainty. Against this background, the fund’s good showing was driven by stock selection, with companies in the US, particularly in the consumer goods sector, making the largest contribution to performance. Tobacco firm Reynolds American led the way, helped by the defensive nature of its business as economic growth faltered. A stake in clothing manufacturer VF was also valuable, with investors responding positively to the acquisition of Timberland, while higher premium levels supported the share price of insurer Chubb. Elsewhere, Swiss pharmaceutical group Roche was another to benefit from having less reliance on growth in the economy.
More disappointingly, rising inflation in Brazil prompted higher interest rates, which weighed on the fund’s stake in Banco do Brasil. Australian Steel producer Bluescope Steel suffered from the strength of the Australian dollar and rising raw material costs while HSBC succumbed to worry about the potential effect of the debt crisis in Europe on its holdings of government bonds from the region. Concern about the strength of the global economy caused a stake in Canadian methanol producer Methanex to lose ground."
Performance 2012 - Year-to-Date
Performance since 2008
Stuart Rhodes: "Since the M&G Global Dividend Fund was launched in July 2008, the portfolio has delivered strong returns and outperformed its benchmark in a variety of market environments. The performance of the fund depends ultimately on successful bottom-up stock selection and the fund manager attempts to identify companies that he believes have the potential to consistently grow their dividends over the long-term.
In order to mitigate the inbuilt defensive bias of dividend strategies, the fund manager picks stocks from three clearly defined areas with distinct dividend characteristics, so that the fund is able to outperform in different market conditions. The three categories are: quality (dividend bankers), assets (cyclical growth) and rapid growth (structural growth). Quality companies are generally large multinationals with good capital allocation skills and stable cash flows that allow them to increase their dividends year-after-year. These form the bedrock of the portfolio (50% - 60%) and generated good performance when concern about the economy caused stockmarkets to fall, particularly in 2008 and 2011.
On the other hand, the manager also invests in cyclical companies with good capital allocation skills. These stocks have a tendency to be sold indiscriminately during times of economic uncertainty, presenting opportunities for stock pickers to gain exposure at cheap valuations. These cyclical stocks ensure that the fund is not restricted to ‘defensive’ companies and gives the portfolio a degree of balance. Companies in the ‘assets’ category have a typical weighting of 20%-30% in the portfolio.
Finally, the manager invests in beneficiaries of structural growth – companies that are growing quickly by virtue of their geography, industry or product line. The market has a tendency to underestimate the pace and sustainability of growth in these companies and therefore allows investors to benefit from strong share-price performance as well as a rapidly rising income stream. The manager would like to find as many of these companies as possible, but holdings in the ‘rapid growth’ category usually make up 10%-20% of the portfolio. Stuart Rhodes was able to use price weakness to increase exposure to stocks in the assets and rapid growth areas in August 2011, enabling performance to be maintained when the equity market recovered later in the year."
Investment Process and Strategy – How does the Fund Manager invest?
Stuart Rhodes: "The fund’s strategy is to identify companies, on a bottom-up basis, that have demonstrated capital discipline by raising their dividend for a decent number of years and have the ability to grow over the long term. A company cannot support a rising dividend stream without long-term growth in the business.
In addition, the company should have a sensible strategy – and a management team capable of implementing that strategy – to ensure that the business grows profitably.
Our investment process focuses on understanding a company’s prospects for dividend growth – it is only when we have confidence in the future dividend stream that we assess whether the stock is available at an attractive yield. By applying this strategy consistently, we believe that the fund can benefit from a favourable long-term tailwind: the combination of superior share-price performance and the accumulation of rising dividends.
The M&G Global Dividend Fund searches for potential investments across all countries, industries and market capitalisation ranges in an efficient and disciplined manner. There are three distinct stages to the investment process: company screening, fundamental research and portfolio construction.
1. Company screening
The investment process begins by filtering the global investment universe of some 15,000 stocks worldwide and eliminating companies that do not pay dividends or have a market value below $1 billion. As a result of this process, the investment universe is trimmed down to about 4,000 companies.
2. Fundamental research
The fact that a company is paying a dividend is not enough, however; the fund manager seeks to invest in companies that can increase their dividends over the long term. Consequently, the investment universe is narrowed further by considering companies’ long-term dividend track record and potential for long-term dividend growth.
A long-term dividend track record is the fund manager’s test of a company’s capital discipline. He typically looks for companies with at least ten years of consecutive dividend growth because the past ten years have included two severe recessions. Companies that have been able to increase their dividend throughout these challenging times have demonstrated good capital discipline and a successful business model. It is also important that a company being considered as a potential investment has good long-term growth prospects because a company cannot achieve long-term dividend growth without long-term expansion in the business. The outcome of this fundamental analysis is that the fund manager has an investable universe of about 200 stocks – stocks that he would like to own at some point, subject to valuation.
3. Portfolio construction
A stock that has passed the screening and fundamental research stages is bought for the portfolio if the stock fulfils the fund manager’s criteria for valuation. The fund manager seeks to hold about 50 stocks in the portfolio, with the weighting of each holding determined by the conviction in the individual investment. A typical stock holding has a weighting of 1-3% in the portfolio. As mentioned above, the fund manager picks stocks from three clearly defined areas with distinct dividend characteristics so that the fund is able to outperform in different market conditions."
Investment Outlook
Markets are likely to see further bouts of volatility due to the on-going sovereign debt problems in Europe as well as fears concerning global growth. This situation, however, continues to provide us with excellent opportunities to pick up interesting stock ideas at compelling valuations. As Stuart’s approach focuses on finding companies from three distinct dividends sources – quality, assets and rapid growth – to build a diversified fund that can perform well in different market environments, bull as well as bear streaks can be used to pick up good companies with the ability to deliver long-term dividend growth at interesting valuations. As many holdings in the fund continue to deliver healthy dividend increases, Stuart is confident that this strategy is an excellent way to build wealth for the long-term investor.
