The FE Alpha Manager (pictured), who has run the hugely popular fund since its launch in July 2008, is concerned by valuations in high quality companies, particularly in the US, and has been recycling his profits into cheaper areas such as emerging markets. “We are currently seeing good value opportunities in Asia and emerging markets, but it’s getting harder to find value in the US,” said Rhodes, who has recently sold out of Chubb, CME, BlackRock and Mattel.
The last of these has had a particularly bad time of late, which Rhodes managed to avoid thanks his decision to sell late last year.
“The fall shows the importance of not being complacent with valuation, because you can get a nasty correction,” he said.
M&G Global Dividend prioritises dividend growth, and does this by investing in three buckets: quality, assets and rapid growth. The first of these contains defensive, disciplined companies with a strong dividend track record; the second asset backed cyclical companies; and the third fast growing companies that boast dividend growth of up to 20 per cent year-on-year.
The graph below clearly shows that Rhodes has rebalanced portfolio away from quality and rapid growth and assets in recent months, with quality falling from more than 60 per cent to 50 per cent over the past year. This has made the M&G Global Dividend fund much more attractive from a valuation point of view, Rhodes says.
Asset allocation of M&G Global Dividend since launch
Source: M&G Investments
Emerging markets have been at the forefront of Rhodes’ activity. He says there are still only small pockets of opportunity, but it has enabled him to add names such as emerging market specialist Aberdeen Asset Management and Russian tyre company Nokean Tyres. He’s also added to his holdings in Standard Chartered and Prudential, which both have significant exposure to the Far East in particular.
Some of Rhodes’ moves have proven to be too early, which contributed to the fund’s very poor showing at the start of the year. M&G Global Dividend has recovered since then and is now only slightly behind its IMA Global sector average; however, Rhodes says the portfolio remains more attractive now than it has done for many years.
M&G Global Dividend is also slightly behind its sector over a one year period.
“In January we had four or five specific companies that had problems with, which was disappointing. On a brighter note, I see this as an opportunity to make money from here,” he said.
Performance of fund, sector and index in 2014
Source: FE Analytics
“The valuation of the fund looks much more attractive now than it has done for the last couple of years. We’ve made quite a few changes recently, but we’re back to having a low turnover again and I’m happy.”
“We have 46 names which is the lowest we’ve had. Traditionally the fund has been at a slight premium to the market, but because of the changes we’ve made the fund is now cheaper than the market.”
“I feel good – we’ve got some big opportunities for dividend growth and they’re at a discount to the market. That usually means we’re looking at some pretty exciting performance.”
Rhodes argues that dividend growth is the key to outperformance. Though the fund’s yield is at a premium to the market at 3.2 per cent, the manager insists that M&G Global Dividend very much has a total return focus.
“We’re not buying the best yields today – all I care about is finding companies that can grow their yield,” he explained. “It’s a mathematical certainty that growing your dividend will eventually be reflected in high returns, otherwise yields hit unrealistic levels.”
“Over the past three years we’ve had one company that has cut its dividend, and it’s no surprise that it’s the only one that hasn’t increased its value in share price terms.”
FE data shows that M&G Global Dividend has returned 92.93 per cent since its launch in July 2008, which compares to 47.88 per cent from the IMA Global sector average and 59.4 per cent from the fund’s MSCI AC World benchmark.
Performance of fund, sector and index since launch
Source: FE Analytics
The fund is also a top quartile performer over a three and five year period, and has managed to beat both its sector and benchmark every calendar year since inception.
Rhodes has managed to grow the dividend payout of his fund by 50 per cent over the past five years, and hopes to report a 100 per cent rise by the fund’s 10 year anniversary in 2018.
Though the manager is more wary about the US than he has been, stocks listed in this country still have a 50 per cent weighting in the fund. He says that the US tech market is the most attractive area, thanks to companies’ improving dividend discipline. He points out that the likes of Microsoft and Qualcomm have free cash flow yields of 10 per cent. Both are major holdings in the fund.
Mike Deverell, investment manager at Equilibrium Investment Management, thinks that buying a fund that you rate highly after a period of underperformance can be a very effective strategy.
“I’ve done the same on a number of different occasions myself,” he said. “The important thing is to focus on why a fund has underperformed.”
“A period of underperformance often leads people to sell, and in most cases the client will probably be happy with the decision. However, you need to understand fund behaviour – the reason for it underperforming could well be the reason why the fund will outperform in the future.”
Deverell himself likes Rhodes and the fund, and is in agreement with his current positioning.
“In terms of his move into emerging markets, I’d have to agree with him,” he said. “After a poor start to the year I saw recently that the MSCI Emerging Market index is ahead of the developed index. It seems that things are starting to turn around there, which bodes well for the fund.”
Performance of indices in 2014
Source: FE Analytics
“If you hold a global fund, you need a manager who makes big calls. They may sometimes be a bit early, but you need someone who is active,” he added.
M&G Global Dividend has clean share class ongoing charges of 0.91 per cent.