Stuart Rhodes, manager of the M&G Global Dividend Fund answers questions on the minds of many advisers.
How do you look at currency from a total fund level?
I try to construct the fund so that that it is well balanced and diversified geographically. I'm not trying to add value from a geographic perspective and I don't want or expect this to be a main driver of fund performance.
There is a large element of natural hedging at the total fund level due to there being many global companies, with international sales and profits. This is particularly true of the high quality, reliable growth companies or ‘dividend bankers' category of stocks that form the bedrock of the fund. Companies here include global groups such as Johnson & Johnson, Coca Cola, Nestle, HSBC and Roche. The one real exception is Brazil where most of the companies are domestically focused. For Brazil I wouldn't go above 10% of the fund due to the currency risk that this would create. Currency risk has so far been a very low contributor to the fund's (active) risk.
How do you decide on country weightings?
I look at the fund's geographic breakdown in relation to the two major global indices - FTSE World Index and MSCI World Index. Even though it's a bottom-up, stockpicking fund I still look to these global indices as rough parameters of how I'd like the fund to be positioned. So even though I'm not dogmatic about it, I'm keen to keep the fund with a broad global spread. In this way I wouldn't expect country allocation to be a major contributor to performance over the long term. That said, I am happy to have reasonable country weightings as this is built up from individual stock views. For example, currently the fund has no investments in Japan, and yet has 7.4% in Brazil. (as at 28 Febriuary 2011)
Is there a minimum yield level below which you won't go?
It has to be something pretty special to have a yield below 2%. For that level of yield the dividend growth rate would have to be 20% or more to justify a purchase.
Generally, I'm interested in companies with yields of between 3% and 5% that are growing their dividends by around 7% or 8% per annum. I try to balance the fund by having a spread of higher-yielding, lower-dividend growth and lower-yielding but higher-dividend growth companies. Also, a global remit helps in having a well balanced fund. Regional or single country funds often tend to have more of a sector bias, whereas having a global mandate means that I always have somewhere to go.
If one of your holdings has a dividend cut then what action do you take?
I take the view that if the fund is only getting a few dividend cuts then the rest of the fund can make up for this. Therefore, if a fund holding announces a dividend cut I am able to assess the situation and see whether I want to keep the stock and, indeed, if I want to buy more. If the share price has collapsed then I could well increase the position. If I can't see the path back to dividend growth then I will sell.
I probably only sell around one in five of the fund's dividend cutters. If a company the fund holds cuts its dividend then I may well hold on to the position at least in the short term. I may look to dispose of the holding when the valuation improves, however, as they have failed my test of having a consistently rising dividend.
What characteristics do you look for in dividend stocks?
Performance comes from companies that are disciplined enough to pay a rising dividend over time. So I'm trying to identify those that offer good dividend growth as well as a reasonable yield.
Why did you buy Microsoft?
I bought the position when Microsoft's dividend yield reached 3.5% during the credit crunch (November 2008). Last year I became concerned about comments from the company that the board didn't want Microsoft to become viewed as a yield investment as the yield was getting too high. This was worrying as it showed that the company did not view the dividend in the same way as we do. I therefore sold the holding.
One of our main questions when considering investments is what role does the dividend play in the business in terms of capital allocation; and how this ensures the highest-return projects are selected for investment. In Microsoft's case, this was not how the dividend was being viewed. The shares had performed well and I no longer had conviction in the valuation given the company's prospects for dividend growth.
For Financial Advisers only. Not for onward distribution. No other persons should rely on the information contained in this article. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The company's registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776.
