Mustoe (pictured) runs the Invesco Perpetual Global Equity Income fund with the input of the fund house’s star equity income managers including Barnett and Butcher, and says he is sticking with the more cyclical, dividend growth stock picks that served them well last year. The recent market pull-back is merely a pause in a longer-term trend of economic and stock market growth, he says.
“The world in the developed markets is gradually improving and we are confident about the US, Europe and UK continuing to improve – the most recent data all shows that,” he said.
“We think in terms of equity markets this is a pause and it has been a good opportunity in the fund to add to some of our holdings that have underperformed in this period.”
“We are not rotating into defensive areas. A lot of these bond proxy stocks look pretty expensive compared to their histories and offer little growth going forward.”
“There is enough yield but little growth and this fund is focused on a balance between dividend yield and total return.”
Last year the funds that did the best were those that chased dividend growth in more aggressive, cyclical sectors.
Data from FE Analytics shows there has been a rotation back into the defensive areas that have typically been the hunting grounds of equity income investors this year.
Performance of defensive sectors against market in 2014
Source: FE Analytics
Invesco Perpetual Global Equity Income was a big beneficiary of 2013’s trend, making 26.4 per cent against the 19.4 per cent of its peer group.
This year it has slightly underperformed as it has stuck to its guns while rivals revert to the bond proxy areas of the market.
Performance of fund vs sector and index since Jan 2013
Source: FE Analytics
“The sectors that benefited [last year]were cyclicals in particular,” Mustoe said. “2014 has been really a reversal of that: a rotation away from cyclical sectors and a move towards more defensive sectors.”
The manager explains that it is the bond market that has spooked investors by not reacting as they expected. For this reason the early optimism has waned.
“I think it’s all being driven by the bond market taking a very strong view that was different from the consensus at the beginning of the year,” he said.
“Post-December when the Fed announced tapering, expectations were for yields to rise and that has not happened which has spooked the equity markets who think there will be slow growth given the yields on bonds.”
“We have actually seen bond yields come down with despite the prospects of rate rises, and the convergence of peripheral bond yields, which is a very different picture to what we were two years ago to when yields were near 7 per cent for Spain and Italy,” he added.
“This has happened across the whole bond world – high yield and credit spreads are coming down. Bond investors are not just searching for yield but anticipating a slow period of growth.”
FE data shows investors have made more money in gilts than in stocks this year, in sharp contrast to what was expected at Christmas, when all the talk was of a bear market in bonds.
Performance of stocks vs bonds in 2014
Source: FE Analytics
Mustoe says that the market is pausing after a huge re-rating last year, but the trajectory is up.
Markets look fair value right now, with stock-picking essential, he says, but in the slightly longer term it is improving economic fundamentals which will reassert themselves and push up equities.
“If you look at what happened to developed markets last year, everything was re-rating in anticipation of long term growth and we think going forward that will reassert itself,” he said.
The £627m Invesco Perpetual Global Equity Income fund holds between 50 and 60 stocks at any one time, and focuses on a mixture of yield and dividend growth.
The yield has slipped down to 2.45 per cent, according to our data, but Mustoe notes the growth rates on its dividends is higher than that of the MSCI World.
While this yield may not seem much to shout about, Mustoe says in the longer term a fund that focuses on dividend growth will be rewarded, and that many of the higher-yielding sectors of the market are over-valued making it dangerous to chase a higher payout.
“Markets will reward companies and a portfolio that delivers excess dividend growth over time,” he said.
“We typically have lower weightings to some of the classic yield sectors that have tended to exhibit low growth rates for dividends.”
“We are always looking for companies with the ability to grow a quality income stream that’s dependable but will rise over time.”
Ongoing charges on the fund are 0.92 per cent.
