Threadneedle Global Equity Income has taken in more than £500m in new money over the last year, more than any other fund in its hugely popular sector, yet has underperformed the average portfolio over that time.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Thornber (pictured) says that the reason was that the market rapidly shifted focus away from quality dividend-paying names once the US Federal Reserve announced its intention to taper its quantitative easing programme.
“Last year was difficult for dividend strategies, in particular because of QE,” he said.“We have seen a move away from defensives and from quality, and investors are looking for more growth.”
“This is being driven in particular by fears of what tapering would do to dividend-paying stocks.”
“Also because there was a feeling that QE and its tapering would only start if the underlying economy [the US] was healthy enough to take it.”
“So we underperformed slightly in the second quarter and more substantially in the third and fourth quarters.”
Data from FE Analytics shows that his fund has made just 3.52 per cent over the past year while the average portfolio in the sector made 7.44 per cent and the MSCI AC World index 7.8 per cent.
This has pulled the fund back into the second quartile of the sector over three years, according to our data, although it is still top-quartile over five.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Thornber says that the £876m fund will not be changing course and is retaining its requirement that all its stocks yield more than 4 per cent.
The yield on the fund is currently 4.6 per cent, according to FE Analytics, the highest out of the 29 funds in the sector.
Earlier today FE Trustnet looked at funds that underperform against their sector while following their mandate faithfully, and this portfolio would seem to fit the bill.
“You can find high dividend companies with growth, that are sustainable and have strong balance sheets that support their dividends,” the manager said.
“If you can find quality companies like that, you can provide outperformance through the cycle and market leadership will change back to quality,” he said.
“We have built a quality portfolio that can deliver and has delivered over the last six years.”
Threadneedle Global Equity Income is third since launch out of the nine funds in the sector with a track record long enough, having returned 50.46 per cent against a sector average of 39.21 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
The two funds that have beaten it over that period have also struggled over the past year: Veritas Global Equity Income and Newton Global Higher Income.
With very different funds doing well in this point in the cycle, there is a danger that investors forget how well funds such as the Threadneedle portfolio have done over the longer term and bail out.
Thornber says that former Fed chairman Ben Bernanke’s decision to taper quantitative easing took many investors by surprise, including him.
He notes that global REITs rapidly started to underperform global equities, as did global high dividend-paying stocks.
REITs suffered more, which Thornber says vindicates his view that they are value traps.
He prefers high quality defensive stocks such as Imperial Tobacco, Kraft Foods and AstraZeneca.
He sold out of AT&T after the Verizon and Vodafone de-merger, which he thinks will result in an invigorated Verizon which will challenge AT&T.
The manager also holds stocks such as Las Vegas Sands Corp, which runs casinos in Asia, and Blackstone private equity, both of which meet his dividend criteria but add growth potential.
The latter was the largest portfolio position of last year and the largest contributor to performance.
The portfolio was hit by allegations of fraud at RSA, but Thornber says that he has met management and was reassured by its statement on the health of the business and what it is doing to turn around its problems.
The fund has ongoing charges of 1.63 per cent and is available with a minimum initial investment of £2,000.
