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FE Alpha Manager Troup: Three ways to maximise income in today’s tricky market

10 February 2016

Kevin Troup, who runs the SLI Global Equity Income fund, explains how his style-agnostic approach towards choosing stocks has helped him successfully grow his dividend while navigating choppy market conditions.

By Lauren Mason,

Reporter, FE Trustnet

Maintaining a style-agnostic approach and diversifying sources of income as well as sectors and regions are key to generating yield growth, according to Kevin Troup.

The FE Alpha Manager recently celebrated his four-year anniversary at the helm of the Standard Life Investments Global Equity Income fund and over this time he has generated a yield of around 3 per cent and provided a top-decile return with the lowest maximum drawdown in the sector.

Performance of fund vs sector under Troup

 

Source: FE Analytics

The hunt for income has become increasingly difficult for investors over recent months, due to the low yields on offer from bonds and the weakened balance sheets of many dividend-paying large-caps that are exposed to oil or commodities.

However, Troup says those seeking an attractive income stream shouldn’t give up hope just yet and says that maintaining an approach that is non-style biased is fundamental in today’s volatile market conditions.

For instance, his four crown-rated fund currently has equal weightings in growth, value and defensive dividend-paying stocks.

“We focus very much on change – you may say that a lot of managers do that, but what makes us different is the style-agnostic nature in the way we go about it. We try to capture change in all its various shapes and forms and we don’t have a tilt towards value or growth or momentum stocks,” he said.

“It’s a well-diversified strategy and quite different to some of the more defensive income funds you’ll find in the sector or indeed some of the higher beta portfolios.”

The FE Alpha manager and his team believe that picking individual stocks through extensive research while factoring in a risk budget is the best way to limit the portfolio’s exposure to factor risks such as GDP changes, oil prices fluctuations and currency rises or falls.


This, he says, is then likely to generate a diversified and uncorrelated portfolio, although Troup warns that dividend income must be thought of in exactly the same way to both protect and grow income streams.

 He does this through categorising his income-paying stocks into three dividend buckets – high dividend, dividend growth and dividend upgrade. Stocks are also selected based on their cash flow and their ability to increase it, as well as their generation of earnings.

“In Ryanair’s case, when we invested in it in 2013 it wasn’t paying a regular dividend. However, our analysis of its earnings and the cash flow when we looked at its balance sheet suggested that cash could build up on the balance sheet to such an extent that we felt the company would then pay a special dividend of significant magnitude, at around a 3 per cent yield,” the manager said.

“That’s a typical example of a dividend upgrade stock. A special dividend or where the pay-out ratio changes.”

While Troup says that the other two buckets have also generated good upside, he is most positive on the dividend growth bucket at the moment, which he has currently allocated half of the fund’s portfolio to.

According to data from FE Analytics, the MSCI AC World Growth index has comfortably outperformed the MSCI AC World and MSCI AC World Value indices over the last two years and the manager says that this area of the market should be utilised by investors who are genuinely long term.

Performance of indices over 2yrs

 

Source: FE Analytics

“[The growth bucket] has typically been stocks that may only generate a 2 or a 2.5 per cent yield at the outset of the idea, and typically this might be screened out by other funds that don’t want to invest in anything that yields less than 3 per cent,” he explained.


“They might miss out on this opportunity, but we’ve put the jigsaw together of where we think the earnings can deliver material significant upside, and whether the balance sheet can be influenced in such a way that the dividend pay-out could increase so that this yield could grow from 2 towards 4 per cent. In this case, their dividends could grow by double digits annually or more.”

While Troup believes that potential dividend growth hasn’t yet been priced into share markets, he also has an allocation to higher-yielding and more popular stocks in the telecoms, utilities and, in some cases, the banking space.

He is selective with these, however, and aims to only choose stocks offering premium dividends that are sustainable and could potentially grow in the future without the market pricing this in.

“This particular bucket didn’t have a huge amount in it two years ago when we were negative on European telecom dividends and European utility dividends but that’s changed and evolved over the last 12 to 18 months,” the manager continued.

“We’ve been allocating capital back to the high dividend bucket as we’ve see more ideas coming through, particularly in the European telecoms space through the likes of Deutsche Telekom and Vodafone.”

The manager says that his weightings in these dividend buckets can alter significantly as ideas are generated through meeting companies’ management teams face-to-face, discussing ideas with SLI’s regional sector analysts and completing in-depth individual research.

SLI Global Equity Income has a clean ongoing charges figure of 0.93 per cent.

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