Fidelity’s Roberts: High dividend yields are unsustainable
The manager questions how corporate profits can be so high at a time when sovereigns and consumers are loaded up with debt.
Investors are being deliberately pressured out of safe haven investments and into riskier stocks, according to Dan Roberts
, manager of the newly-launched Fidelity Global Dividend
Dividends are rising throughout the global economy, as companies in markets with little history of offering income look to lure investors in, but Roberts warns this may not be sustainable in the long-term.
"We are in a time of financial repression – Ben Bernanke has driven yields on cash to next to nothing, government bonds to next to nothing, and he wants you to take more risk to get better returns," he claimed.
"His rationale is that he wants to create a wealth effect and he hopes by doing that you push up asset prices and kick-start the economy, creating a wealth effect trickling down."
"As a result people are seeking income and I think company managers on a global basis recognise that fact and are paying out to shareholders to make their shares more attractive to investors."
In an exclusive interview with FE Trustnet
at the Fidelity Investment Summit, he was asked whether the higher dividend pay-outs in the US, Europe and Japan would last.
"The trend in corporate profitability is worrying," he replied. "At a time when sovereigns and consumers loaded up on debt, corporate profits are way above trend and that doesn’t sit easily with me."
"If there was a reversal in profitability then companies could become less attractive."
"When people say price/earnings (P/E) ratios are attractive, well that isn’t true if the ‘e’ in the equation isn’t sustainable," he added.
However, the manager is optimistic about finding individual stocks in regions with a consistent record of producing rising dividends over all market conditions.
Data from FE Analytics
shows the Royal Bank of Scotland Equity Income fund, which Roberts previously managed, was in the top quartile of its IMA UK Equity Income sector – also the fund’s benchmark – over three and five years.
Fidelity Global Dividend was launched on 31 January to apply a similar approach with a global remit, and has beaten its IMA Global Equity Income sector average over its short lifetime.
Performance of fund since launch vs sector
Source: FE Analytics
Recent FE Trustnet
research has underlined the popularity of investing for income
, and Roberts says a global equity fund has serious advantages in portfolio construction.
"I’ve got 17 or 18 per cent in healthcare. If I was running a UK portfolio there’s no way I’d want to have 8 or 9 per cent of a fund in the individual stocks to get up to that sector weighting."
"The reason is that even though I think Glaxo, for example, is attractive, there are real stock-specific risks."
"Seventeen per cent of Glaxo’s profits come from one drug and profitability on that will eventually fall, so in a UK-only fund if you want to get 20 per cent exposed to that space you need to take on more stock-specific risk," he explained.
He describes himself as a very cautious manager, saying that his first objective is to not lose money.
"I don’t diversify into sectors of the market where I don’t feel the risk/reward is in my favour. So I don’t own any mining stocks, I don’t own any market-short stocks, I own only two banks."
These two banks are HSBC – which Roberts says is less exposed to the UK – and US lender BB&T – which he says has good management and is set to benefit from the flight of non-US banks from the American market.
"Both HSBC and BB&T are highly geared to rising rates and although that’s not going to happen soon it will eventually happen," he finished.