Q Broadly speaking, how do you think equity markets will fare in 2014?
Andrew Jones: Shares have enjoyed a strong rally. Generally, economies are getting better across the world and, while equity returns may not be as strong next year, progress can still be made. Taking into account the 2.5 per cent dividend yield average for global equities alongside an anticipated six to seven per cent growth in earnings, we could see high single-digit returns in 2014.
Q How do you come up with investment ideas?
Ben Lofthouse: We tend not to buy stocks that have a dividend yield of less than two per cent but beyond that we draw on the expertise at Henderson. While we decide on what happens in the fund, there are nine other equity income specialists on the team and Henderson employs more than 100 investment professionals, so we have huge resources on our doorstep.
Q How have you taken into account the US Federal Reserve’s tapering of quantitative easing (QE)?
AJ: Tapering has occurred because the US economy is getting stronger. There seems to be little to be gained by withdrawing support for the economy too early. From a portfolio level we do not want to hold stocks that are not going to grow their dividends, because, with tapering, bond yields will rise. Therefore, so-called bond-proxy equities will struggle. While they may have a reasonably high yield, they do not have much growth potential.
Q With an improving economy, are you worried that companies may divert earnings towards merger and acquisition (M&A) activity rather than dividends?
AJ: It is not something that overly worries us. We think companies are in very good shape overall, balance sheets are stronger and firms are generating good cash flows. We believe corporations will invest appropriately, be it organically or via M&A, while still being able to grow their dividends.
Q How do you see dividend growth across the major regions of the world?
BL: Dividend yields can vary between regions. The US and Japan for example are relatively low, yielding about two per cent, whereas areas in Europe and Pacific ex-Japan offer around 3.5 per cent plus. But good growth is forecast in most territories for the next couple of years, and we think we will witness some companies raising their dividends by around seven to eight per cent, irrespective of where the yield starts, across most areas, as corporations are generally in good health.
Q European equity markets have had a good recent run. Do you have exposure to this region?
AJ: Yes, we have been, and continue to be, significantly overweight Europe, and the fund has benefited because of this. As a result of the difficulty the region has endured, a large valuation gap presented itself as many good international companies listed there were trading at significant discounts. Forecasts for economic growth in Europe are stabilising, and we think the valuation gap can continue to close.
Q How is the fund’s geographic allocation determined?
BL: The geographical allocation of the fund is very much a function of where we find attractive stocks with good fundamentals and appealing valuations. We do not set out with a top-down macroeconomic-based allocation; it is determined on a stock-by-stock basis. In Europe, for example, we have held our exposure there because we believe it is offering good value; if we had not found any opportunities there, we would not hold any stocks from the region.
Q With the recent relative underperformance of emerging markets, are you starting to see more interesting ideas in developing regions of the world?
AJ: We have not had a big exposure to emerging markets overall, because we could find better opportunities elsewhere. But given the recent sell-off, there is now a stronger valuation argument and we are looking at quite a few opportunities, as we are beginning to see more stocks that meet our dividend and valuation criteria. The fund’s largest emerging market exposure is to China.
Q Where are you positioned by sector?
BL: It all comes down to where we can find the stocks that meet our criteria. We have a relatively broad sector exposure across the fund but our favoured area right now is financials, where we are finding relatively attractive valuations and dividend yields. We also have a significant exposure to the pharma sector, via specific companies, whose fundamentals and value still appeal. The fund has a relatively low weighting to utility companies, simply because we do not see a lot of potential within the sector for dividend growth.
Ben Lofthouse and Andrew Jones manage the Henderson Global Equity Income Fund.
