The £7.2bn M&G Global Dividend fund’s recent bottom decile losses have largely been due to its exposure to the energy sector, according to its manager Stuart Rhodes, who is confident he can steer the former favourite back to the top of the sector tables. 
Rhodes (pictured), with his strict focus on dividend growth, built a name for himself following five consecutive years of outperformance relative to both the IA Global sector and MSCI AC World index and attracted billions of inflows as a result.
However, investors in the fund will have no doubt realised M&G Global Dividend has been through a particularly tough time recently.
The fund was bottom decile last year with gains of just 2.34 per cent (compared to a 10 per cent rise in the index) and its falls of 10.67 per cent so far this year mean it is once again in the bottom decile.
What is worrying, however, is that the fund has failed to protect investors during the recent China-induced global equity rout posting falls of 17 per cent since April, despite its bias towards businesses with sustainable franchises and attractive returns on company assets.
Performance of fund versus sector and index during the correction
Source: FE Analytics
That means that a lot of the fund’s early outperformance has been all but washed away, with M&G Global Dividend now lagging the sector and index over one, three and five-year periods.
Source: FE Analytics
However, Rhodes says there have been a number of reasons for that underperformance – most of which relate to his investment style.
In previous FE Trustnet articles, FE Research analyst Amandine Thierree noted that the fund’s underperformance in 2014 was due to the manager’s decision to up exposure to emerging markets following their falls the previous year. The fact that the fund tends to be quite concentrated can also lead to greater underperformance in falling markets, she added.
This time around, Rhodes says it was another value call which hasn’t paid off yet.
As the manager focuses on companies which have a proven track record of dividend growth but doesn’t want to over-pay for those characteristics, he upped his exposure to the energy and basic materials sectors due to the attractive valuations on offer after last year’s commodity price falls.
While he says he has long-term conviction in these areas (he is significantly overweight both industries relative to his benchmark) he admits he was caught out by the increasingly negative sentiment towards commodities over recent months.
Developments such as the recent agreement with Iran and China’s economic slowdown have caused the oil price and the Bloomberg Commodity index to post double-digit losses over recent months. This, in turn, has caused huge falls in the MSCI World Energy and Basic Materials indices.
Nevertheless, given those falls and the types of companies Rhodes now holds, he is feeling more positive about the future.
“In line with our long-term investment approach we remain confident that our focus on rising dividends is an excellent way to build wealth for our clients over the long run,” Rhodes said.
“Dividend growth from the fund’s underlying holdings remains encouraging with the majority continuing to deliver dividend increases in the region of 5 per cent to 15 per cent. While these growth rates are in line with previous years, there has been a significant shift in valuations across the market with the best investment opportunities now being among cyclicals rather than defensives in our view.”
A number of other managers have talked about opportunities in the commodities space which have arisen from the huge falls in natural resources companies over recent years.
Performance of indices over 5yrs
Source: FE Analytics
“You want to be buying things when people are fearful and they’re pretty fearful of commodities at the moment,” Marcus Brookes, co-manager of the Schroder MM range, told FE Trustnet last week.
“If you look at a 13-year chart, commodities are only about halfway back to where they were in 2002. If you want to get yourself scared, you could say these things still have a long way to go but if nothing else, people should reflect on the fact that if they were prepared to buy them three or four years ago then they’re looking a lot cheaper today.”
It is also true that Rhodes has met his objective of growing his investors’ income over the medium term.
The fund sits in the IA Global sector, rather than IA Global Equity Income, due to the manager’s focus on dividend growth rather than headline yield. Therefore, it isn’t too surprising that between January 2009 and December 2014 it paid out slightly less than the IA Global Equity Income sector average (£3,127.93 on an initial £10,000 investment compared to £3,262.50 from the peer group average).
But as the graph below shows, the fund has increased its pay-out in each calendar year over that time as investors who bought £10,000 in January 2009 would have earned £303.42 in income in the first 12 months with that figure steadily rising to £662.29 in 2014.
M&G Global Dividend’s dividend history
Source: FE Analytics
Any criticism of the fund’s recent underperformance most also be coupled with its outperformance in Rhodes’ early years.
It beat both the sector and index in 2009, 2010, 2011, 2012 and 2013, for instance. However, the scale of the fund’s underperformance over the past 18 months or so now means the fund is just 7 percentage points ahead of its benchmark since launch.
At the start of 2014, M&G Global Dividend was more than 85 percentage points ahead of the index since launch.
Performance of fund versus sector and index since launch
Source: FE Analytics
Many investors seem to be voting with their feet in regards to M&G Global Dividend’s recent underperformance, with FE Analytics showing it is the most sold fund in the IA Global sector over three, six and 12 months with some £1.6bn coming out of the portfolio in the first half of 2015.
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, says the recent underperformance is starting to become a worry. While he rates Rhodes, he is now watching the fund very closely.
“It’s a difficult one because a lot of people in that fund would have bought it on the back of it very, very strong performance,” Morgan said.
“He has been very successful at raising assets but what you have to remember is that though it has been brutal, the fund’s underperformance hasn’t been going on that long. It just seems he has invested in the wrong places and many of those have turned out to be value traps.”
“Clearly, his process and the resources available to him are first class but I think it is fair to say we are now monitoring the fund very closely. It is a true test for a manager when their style falls out of favour and how they react to that – so while we still have faith in Rhodes, we are questioning that decision a little more at the moment.”
Investors, like certain experts FE Trustnet have spoken to in the past, may well think that M&G Global Dividend’s underperformance is due to its large AUM.
FE data shows the fund peaked at £9.5bn last year and its underperformance has coincided with a period where M&G Global Dividend’s assets have surged. However, Morgan says it is more down to portfolio positioning rather than any capacity constraints.
“I’m not sure that underperformance is because of size,” Morgan said. “It has always invested in big liquid stocks so size is not really a concern for me.”
For those who have sold out of M&G Global Dividend and are a looking for similar funds to fill the gap, FE Trustnet will look at a number of possible alternatives in an article next week.
