It’s this that initially attracted me to the M&G Global Dividend fund. Manager Stuart Rhodes (pictured) only invests in companies that he thinks are capable of significantly growing their dividend. Companies that achieve this, he argues, are guaranteed to see their share prices rise.
The manager is so dedicated to this approach that he has refused to abide by the 110 per cent yield target outlined by the IA Global Equity Income sector. Many investors claim to prioritise dividend growth, but as FE Trustnet’s income campaign suggests, few are as dedicated to the cause as Rhodes.
Investors in M&G Global Dividend reaped the rewards of Rhodes’ approach. FE data shows the fund has outperformed its IA Global sector average and MSCI AC World benchmark in every calendar year between 2009 and 2013, leading to top decile cumulative returns. Encouragingly, the fund added value in both rising and falling markets.
Performance of fund, sector and index since launch (July 2008)
Source: FE Analytics
The strong performance of the fund and its refreshingly strict focus led to a vast spike in inflows – undoubtedly helped by M&G’s very large marketing budget. FE data shows the fund reached £2bn in asset within three and a half years of launching and by the end of 2013 hit an £9bn, making it one of the largest funds domiciled in the UK.
Rhodes has assured investors that his process has not been impacted by the size of the fund on a number of occasions, pointing out that his natural bias towards large-cap companies means he can handle many billions of pounds.
It could well be a coincidence, of course, but since these reassurances were first made, the fund’s performance has deteriorated. Bottom quartile returns of 2.34 per cent in 2014 mean it is now bottom quartile in its IA Global sector over one and three years, as well as over one, three and six months.
Performance of fund, sectors and index over 3yrs
Source: FE Analytics
Let me please stress that I’m not one to sell-out of a fund just because it underperforms. I had absolutely no problem with Trojan Income falling slightly short of its benchmark in the fast rising year of 2013, for example.
The reason why I’ve decided to sell is because the underperformance has coincided with the spike in assets, which in the past has acted as a warning sign. More assets mean less flexibility, and the faster the pace of inflows the harder it is for managers to handle – particularly for those with a sizeable portfolio turnover.
Rhodes insists the underperformance is indeed a coincidence, highlighting stock specific issues and an underweight to the US as principle reasons. The jury is still out, however.
The issue reminds me of what one of our readers said at the bottom of an article last year: “It is one of the great paradoxes of the fund management industry that outstanding performance ultimately leads to decline and failure.”
Perhaps this is slightly over-egging the point; my decision to sell M&G Global Dividend could well be proven wrong and Rhodes could come roaring back. However, there’s little doubt that running such a volume of money is a hindrance rather than a help, and I for one would rather invest in a fund that has a high degree of flexibility. I want to back a manager that has the very best chance of outperforming – pure and simple.
So what do I buy in M&G Global Dividend’s place? I sold out of my holding earlier this week and am currently sitting on cash. There are numerous short-term headwinds at the moment – a freefalling oil price, Greek elections and rumours of rising interest rates in the US to name but a few – but I’m no market timer and am keen to put my money to work sooner rather than later.
Looking at the options in Global Equity Income, I’m hardly spoilt for choice. Unlike the more established IT UK Equity Income sector, there aren’t many funds that have experienced a full market cycle, and even fewer with a genuine emphasis on dividend growth.
Two have caught my fancy however: Artemis Global Income and Invesco Perpetual Global Equity Income. Neither are like-for-like replacements for M&G Global Dividend, but one in particular comes close.
Jacob de Tusch-Lec’s Artemis fund is flavour of the month at the moment, and with good reason. The manager’s high conviction style, which has included a successful overweight in US mid-caps and peripheral Europe, has contributed to significant outperformance. FE data shows the fund is number one in the IA Global Equity Income sector over one and three-year periods and since its launch in July 2010.
Performance of funds, sector and index since July 2010
Source: FE Analytics
The manager prefers cyclicals, seeing defensive companies with bond-like characteristics as a problem area once Western economies raise interest rates. He explained this in an interview with FE Trustnet last year.
I’ve decided not to put my money with Artemis, however, for a few reasons.
First and foremost, de Tusch-Lec only has a track record going back to 2010 and the majority of managers with a cyclical bias have performed very strongly over the period. Artemis Global Income has performed much better than most and it’s very encouraging that it weathered a difficult 2014 better than its peers. 2011 was a decent year relative to its MSCI AC World benchmark as well, though losses of 5.43 put it firmly in the third quartile of its sector.
The fact remains, however, that the fund has consistently been more volatile than its peers and hasn’t experienced a significant downturn. I’m particularly attracted by defensive managers with a proven record of protecting against the downside at the moment, given the headwinds I mentioned earlier, and so this is of particular importance at the moment.
The only record we have of de Tusch-Lec in a crashing market is his performance in 2008 when running the Artemis Capital portfolio. The fund lost more than 40 per cent over the period, underperforming the FTSE All Share by more than 10 percentage points.
Drawing any firm conclusion from this is harsh, given that he was a co-manager and the objective of the fund is completely different to Artemis Global Income. As I said however, it’s all investors have to draw on.
As an aside, the stellar performance of the fund and growing reputation of the manager has led to significant inflows of late, pushing assets under management from £100m to £1.6bn in the space of two years. The trajectory is very similar to what M&G Global Dividend experienced in 2011 and 2012, and there’s a danger capacity issues could follow.
It’s for these reasons I’ve gone for the Invesco Perpetual Global Equity Income fund instead. Headed up by chief investment officer Nick Mustoe (pictured), the fund draws on the best ideas of Invesco Perpetual’s highly rated equity income team.
FE Alpha Manager Mark Barnett draws on his favourite stocks from his multi-billion pound UK funds, joined by Invesco European Equity Income’s Stephanie Butcher, Invesco US Equity’s Simon Clinch, Invesco Asian Equity Income’s Tim Dickson, and Invesco Japan’s Tony Roberts.
The team meets once a month to discuss current and potential positions, with Mustoe taking the final decision.
One of the biggest attractions of the fund is that it has a keen focus on dividend growth, following in the footsteps of Invesco Perpetual High Income and Income. Mustoe says he would be prepared to leave the IA Global Equity Income sector if he felt his style was comprised, as dividend growth and total return is more important to him than maintaining a yield. In this way, he and Rhodes have similar principles.
Performance has been very strong, albeit not as strong as Artemis Global Income. The fund is a top quartile performer over three and five-year periods and since its launch back in 2009. Importantly, it has operated with less volatility than its sector and benchmark, delivering top decile returns of 4.88 per cent in 2011, for example. All of the managers on the team, and most notably Barnett, have a keen emphasis on downside protection, which sits very well with my current outlook.
Performance of funds, sector and index over 4yrs
Source: FE Analytics
It should be noted that Mustoe took over the fund from Paul Boyne and Doug McGraw in 2012, though Mustoe and the team of managers are highly experienced with track records going back decades rather than years in most cases.
The positioning of the fund is also attractive. I currently only have direct exposure to Europe in my ISA via a small position in Jupiter European Opportunities, and have been looking at ways of increasing my exposure in light of the recent introduction of monetary easing. Mustoe is very bullish on continental Europe at the moment, which makes up 35 per cent of the portfolio.
The £775m has seen more moderate inflows in recent years, and the fact that it is team managed means that it’s arguably more off the radar than some counterparts run by star managers. Moreover, Invesco has a record of successfully running very large portfolio, which is reassuring.
One final bonus is the fund gives me exposure to Barnett. I currently hold CF Woodford Equity Income and Trojan Income, and don’t believe having a separate holding in Invesco Perpetual High Income is necessary; however, this indirect weighting is most welcome.
What do you think of my choice? What funds are you thinking of buying and selling at the moment? Tell us in the comments section below, or email us at editorial@financialexpress.net.
