Stuart Rhodes’ five crown-rated fund is among the 10 best performers in its IMA Global sector over a three-year period and since its launch in July 2008, and has easily beaten its MSCI AC World benchmark in the process.
It has also been one of the most consistent, beating the index in every calendar year since inception, which includes both rising and falling markets.
Performance of fund vs sector and index since launch
Source: FE Analytics
Strong performance almost always results in inflows, particularly at a fund house such as M&G; however, the success of Rhodes’ portfolio is almost unprecedented.
The fund still does not have a five-year track record, but assets under management (AUM) have already grown to £6bn. It is the largest global equity fund in the UK by some distance, and is among the top-10 biggest equity funds overall.
FE inflows data shows it is the bestselling open-ended fund of the last year, and the only name in the top-five that sits in an equity sector.
So what is the secret – why is it that M&G has proved so successful and popular?
Rhodes (pictured), a newly appointed FE Alpha Manager, points to the fund’s attitude towards dividends, and more importantly dividend growth, as its defining feature.
"I’d say it approaches things a little differently," said Rhodes. "There’s a major misconception between income and growth, with many believing that you either have one or the other." "This fund looks to give investors a balance between the two."
M&G Global Dividend certainly has an income focus, as the name suggests, but the group chose to keep it in IMA Global rather than move it over to IMA Global Equity Income when the sector was introduced in early 2012.
This, M&G explains, is to prevent Rhodes from being constrained by the yield mandate given to funds in that sector, giving him more scope to maximise the fund’s capital growth and therefore total return.
Rather than simply targeting a yield in excess of 110 per cent of the MSCI World, Rhodes looks for companies that he believes can consistently grow their dividend, and at the same time grow in share price terms.
"Too much emphasis is put on yield at any given time," explained Rhodes, echoing the premise of a recent FE Trustnet study.
"A high yield might be false. There are many value traps that exist specifically today."
"If you look at the highest-yielding companies, 99 per cent of the time they yield a lot because the share price has gone down, which can lead you down the road of a catastrophic situation."
Rhodes says current yield is "the single last thing" he looks at when picking a company; he places much more emphasis on a stock’s track record in successfully growing dividend payouts, and the likelihood of it continuing to do so in the future.
"I’ve never run a report trying to filter out a company by yield – this is the very last thing we look at," he explained. "On average, the starting yield for a company is between 3 and 4 per cent, but that comes much later."
"Firstly, we look at the last five to 10 years and identify the companies that have managed to grow with their dividend intact."
"This gives us a very focused set of businesses. Then, we try and find which ones will continue to grow their dividend, by looking at whether they invest their capital wisely, and whether they can grow their business in a sustainable manner over time."
Rhodes says there is a "serious misconception" about the relationship between growth and income, which many investors fail to recognise.
"There seems to be this idea that if you pay dividends you can’t grow as a business," he said. "This is absolutely not the case. Mathematically, if your dividend goes up year-on-year then your share price would have had to have gone up as well."
The manager highlights the strong share price performance of what he refers to as "dividend achievers", defined as those that have grown their dividend in each of the last 25 years.
Between December 1999 and December 2012, the S&P 500 delivered an annualised capital return of -0.2 per cent and an annualised total return of 1.8 per cent.
By contrast, the average "dividend achiever" in the index delivered an annualised capital return of 8.2 per cent, which translates to a total return of 11.4 per cent.
"This dismisses the theory entirely," said Rhodes.
The fund is currently yielding 3.03 per cent, which is a touch below the IMA Global Equity Income sector average of 3.31 per cent, according to FE Analytics.
However, M&G Global Dividend has far superior total return numbers, and has also grown its dividend strongly over the last four and a half years or so.
According to M&G, dividend distribution in pence has grown by 38 per cent since launch.
Rhodes points to the fund’s capital growth tilt as another big driver of performance and a strategy that sets it apart from many of its rivals.
Dividend-paying strategies such as M&G Global Dividend’s tend to focus on quality, defensive companies, which outperform during falling markets, but lag during rallies.
To ensure that the fund is not just a one-trick pony, Rhodes splits it in to three buckets: "quality", which typically has a 50 to 60 per cent weighting; "assets", which has between a 20 and 30 per cent weighting; and "rapid growth", which has between a 10 and 20 per cent weighting.
The "quality" bucket is packed full of solid, stable large caps that typically outperform during market turmoil. These include Nestle and Johnson & Johnson.
The "assets" bucket is full of companies that are associated with basics industries, such as mining. BHP Billiton is a major holding, for example.
The "rapid growth" portion does exactly what it says on the tin. Growth in this case refers to the company’s ability to grow both its dividend and share price.
Rhodes says this portion of the portfolio tends to be heavily exposed to emerging markets, and lists semiconductor specialist Analog Devices as a good example.
"We don’t just want to be invested in the Nestles and Johnson & Johnsons, which are in the quality bucket – we want to give the portfolio a bit more beta, which we get from 'assets' and 'real growth'," he explained.
Year-on-year performance of fund versus sector and index
| Name | 2013 (%) | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) |
|---|---|---|---|---|---|
| M&G Global Dividend | 16.74 | 11.07 | -2.36 | 19.85 | 28.02 |
| IMA Global | 13 | 9.43 | -9.27 | 15.78 | 22.95 |
| MSCI AC WORLD INDEX | 12.53 | 11.03 | -6.66 | 16.21 | 19.86 |
| IMA Global Equity Income | 13.66 | 9.74 | -2.06 | 14.3 | 17.37 |
Source: FE Analytics
This has enabled the fund to outperform its benchmark in every calendar year since inception, which includes the falling market of 2011 and the rising markets of 2009, 2010 and 2012.
It has also beaten the index so far this year and protected more effectively against the downside in 2008.
It has beaten its IMA Global sector average every year as well, and only fell short of the IMA Global Equity Income sector average in 2011, by a mere 0.3 percentage points.
Unsurprisingly, Rhodes says that the "quality" portion of the portfolio was the biggest driver of outperformance in 2008 and 2011, while "assets" and "rapid growth" added the most value in 2009 and 2010.
No Global Equity Income fund has come close to matching the performance of M&G Global Dividend since its launch in 2008.
Veritas Global Equity Income is the nearest, with returns of 72.08 per cent.
Performance of funds vs sector since launch
Source: FE Analytics
Only two Global Equity Income funds have beaten it over three years.
As mentioned earlier, M&G Global Dividend has seen huge inflows in recent months, totalling more than £2bn in the last year alone. However, Rhodes says he is comfortable with the rate of inflows, and has no concerns over fund size at present.
"It tends to be invested in larger caps, and the vast amount – around 75 per cent – of the assets are invested in companies that have less than a 1.5 per cent weighting in the fund. This means there is significant scope to increase positions."
Rhodes was unwilling to disclose what he feels is the capacity of the £6bn fund, but says it is "not close to reaching that level right now".
M&G Global Dividend is highly rated by the FE Research team, and appears in all three of the AFI’s recommended portfolios.
It requires a minimum investment of £500 and has an ongoing charges fee (OCF) of 1.66 per cent.