With the low yielding environment in the fixed income space, apart from those brave enough to really hike up their risk appetite, equity income products are still the favoured way to achieve income. But with the dividend rout last year, where in the world is the best place to find consistent dividend payers in this market?

This is what Matthew Page (pictured), co-fund manager of Guinness Asset Management’s Global Equity Income fund is tasked with finding out. For an income-oriented fund, it doesn’t contain the usual suspects in the form of banks and commodity companies, a blessing given last year’s events.

With the jury still out on whether rising inflation is going to be a transitory or permanent fixture of the markets going forward, Mr Page suggests that the portfolio is constructed so it’s not going to be devasted either way.

While rising inflation would benefit commodity companies and the resulting rise in interest rates would certainly help banks improve their net interest margins, the lack of the US tech giants who would be negatively impacted by these conditions evens things out. Or as Mr Page says, “we're sort of not exposed to it [rising inflation and interest rates] from a negative or positive point of view”.

Utilities companies tend to be solid dividend payers but they don’t enjoy pricing power which is the reason for their absence from the fund.

So how is the portfolio constructed? Mr Page says that around half the names are defensive, which explains the presence of two large pharma players in the top five holdings (AbbVie and Novo Nordisk). The other half is made up of cyclical and growth names with the former being illustrated by two industrial names in the top five in the form of Eaton Corp and Otis Worldwide.

While some fund managers blanche at the mention of ‘value’ and ‘growth’ Mr Page is happy to use these terms when discussing what his fund is trying to do.

“Our strategy isn’t looking for 20 percent percent earnings growth per year, we're very happy if we're looking at companies growing in the low single digit to double digit rate. At the same time, we are trying to overlay a value discipline,” he says. The portfolio as a whole trades on a discount to the MSCI World but as mentioned doesn’t contain those commodity and financials that are trading on what are optically very low multiples.

 

Turnaround, every now and then

The turnover rate of the fund, this is referring to the replacement of entire stocks and not just every addition/subtraction to positions, is remarkably low. Mr Page describes the process as ‘one in, one out’. This averages out at five, so five complete changes a year, with a stock coming in to replace one outgoing.

During Covid, turnover rates were rising across most funds although while the lowest rate at Mr Page’s fund has been two and the highest seven, last year saw the portfolio only make three substitutions. Given the portfolio is fairly highly concentrated with 35 holdings this makes sense but given the fund has outperformed its index, MSCI World |High Dividend, on a one, three and five basis suggests that the portfolio construction is robust to say the least.

With the pandemic causing chaos for funds containing the usual high dividend payers, this fund only saw one of its holdings cut its dividend, while 28 actually increased its payouts. A neat trick if you can manage it.

However, Mr Page is not suggesting this fund will outperform in all market conditions and actually identifies times when it struggles. “There have been periods where this sort of strategy has underperformed, typically at the very earliest stage of a new cycle, where you're seeing a dash to trash.” But as seen with the disciplined sell philosophy, Mr Page and his colleague tend to stick with their picks, seemingly safe in the knowledge that the companies fundamentals will come good in the end.

Referring back to labels given to certain funds, Mr Page describes this as being in the “quality dividend growth category. That might be a bit niche”. He added that it also has a value discipline and given the topsy turvy nature of recent market conditions, these ingredients seem to have made a highly successful strategy.

When it comes to those companies that may be considered for the fund, companies need to have at $500 million as their market cap. Mr Page explains that he and Dr Ian Mortimer wanted to run the fund in the same they did since inception when it had assets of just $0.5 million. While Mr Page says that there are some great dividend paying small cap companies, it seems that liquidity was a key requisite for the fund at launch and now even with assets over $2 billion remains a concern.

For equity income funds, managers can use a variety of ways to heighten their payouts to investors. Some use derivatives, the so-called ‘income booster’ funds. These funds will sell puts on their holdings and use the proceeds to up the distributions when times are lean. However, using this instrument also means the fund loses out on potential capital appreciation of the stock which has been selected by the counterparty. Given this capital appreciation may at some point be used to increase a company’s dividend, it’s not considered by Mr Page who concedes it works for ‘certain people and investors’.

This fund is more concerned with good old fashioned stock picking and given the high conviction and lack of portfolio changes even in a time of heightened market stress coupled with the performance of the product, it certainly doesn't need any smoke and mirrors to succeed.