Mark Dampier: Get rich slowly with global equity funds
Saturday 30 July 2011
The popularity of global equity income funds is a fairly new phenomenon. One or two fund management groups attempted the concept more than 20 years ago, but it failed miserably because most overseas markets provided little dividend income compared with the UK. However, times have changed. Many more areas of the world have now embraced a culture akin to the UK, where there is widespread commitment by companies to provide investors with increasing dividends.
One company that has recently celebrated three years in this sector is M&G, courtesy of their Global Dividend fund managed by Stuart Rhodes. Statistically three years is quite a short period. To get an idea of a fund, or more importantly a fund manager, you really want to see a record of seven years or more. That said, Mr Rhodes has certainly got off to a fine start and when I met him a couple of weeks ago I was impressed with his philosophy regarding equity income investing.
The argument behind investing in companies with growing dividends is well-rehearsed but worth a reminder as too many investors have a time horizon of only a few months. In contrast, the equity income philosophy is very much to get rich slowly. The compounding of dividends over the years to buy more shares has an extraordinarily powerful effect – providing of course you regularly reinvest your income. Growing dividends is a considerable financial discipline for a company too. It requires good management to increase payouts while allowing enough money for investment. Indeed dividend policies can act as a balance, preventing companies wasting money on unproductive projects and instilling a focus on the most profitable ones.
In finding suitable companies for the fund, Mr Rhodes looks for resilient businesses able to survive difficult economic times while growing dividends more or less in line with inflation. He is also vigilant to avoid any company that has become a slave to its own dividend policies, clinging to a record of dividend growth that is ultimately unsustainable. Out of a universe of around a thousand companies, he produces a list of 200 that broadly meet his criteria, and from this he selects a tight portfolio of only 50 names.
For the core of the fund (representing 50 per cent to 70 per cent) he buys good-quality companies, dominant in their respective areas. Although these companies are dependable and likely to see him through good times and bad, they often lag behind when markets rise. To counteract this he likes to invest 20 per cent to 30 per cent of the fund in asset-backed, cyclical companies whose fortunes are much more closely related to global GDP growth. These are more responsive to market moves and include mining companies such as BHP Billiton. Finally, he dedicates approximately 10 per cent of the portfolio to companies growing quickly and increasing dividends very rapidly – albeit from a low base. These are often emerging markets stocks and are frequently expensive, so he attempts to pick them up when markets wobble.
It is from these more economically sensitive areas that the fund has derived its performance edge over the sector since launch, though there will clearly be times when the strategy works less well. It also means something of a compromise in terms of income. At 3.2 per cent, the fund's yield is behind a number of rivals, who produce up to 4.5 per cent. However, I believe Mr Rhodes is an impressively deep thinker regarding income, and is aiming to build a truly long-term record of dividend growth alongside growth in capital. In the long run this strategy could produce better total returns than funds targeting higher yields.
While the fund has increased rapidly in size, Mr Rhodes does not feel constrained by this and believes there is plenty of capacity to grow it further. Clearly it has already proved popular, and it does seem to me to be the type of fund many investors should be looking for, particularly those in retirement, where funds providing income that broadly rises with inflation are highly desirable as part of a retirement portfolio. It also offers important diversity away from the more traditional UK equity income funds that tend to dominate investors' portfolios.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Shock poll shows voters believe Ukip is to the left of the Tories
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
iJobs Money & Business
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens