4 – FUND SPOTLIGHT
Dan Roberts Portfolio Manager - Fidelity Global Dividend Fund
R E V I S I T I N G T H E C A S E F O R Q U A L I T Y
WITH THE OUTLOOK FOR EARNINGS GROWTH AND VALUATIONS PRECARIOUS, FIDELITY GLOBAL DIVIDEND FUND MANAGER DAN ROBERTS DISCUSSES WHY DIVIDENDS COULD BE A VALUABLE SOURCE OF RETURNS FOR INVESTORS IN THE YEAR AHEAD. HE OUTLINES HOW HE GOES ABOUT IDENTIFYING SUSTAINABLE DIVIDEND PAYERS THAT POSSESS THE COMPETITIVE AND FINANCIAL STRENGTH TO PROSPER ACROSS CYCLES. When thinking about future returns from global equity markets, it can be helpful to break the sources of investment return into three components: yield, growth and valuation change. The sum of these three components gives an investor their total return. In very good years, for example 2017, a positive return will come from all three components. Last year, however, we saw a significant multiple compression due to a combination of rising US rates and the emergence of a more negative narrative around the health of the global economy. This resulted in an overall negative return from global equities in GBP terms last year, despite a positive contribution from earnings and dividends.
In the case of the Fidelity Global Dividend Fund, this approach results in a portfolio that is cheaper than the market on a dividend yield and free cash-flow yield basis and similarly valued in terms of price/earnings ratio. However, the quality of the assets in the fund is higher than the market, with more resilient return profiles and a lower level of debt. Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments and any income from them can go down as well as up so the client may get back less than they invest. Past performance is not a reliable indicator of future returns. The Fidelity Global Dividend Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The annual management charge for the income share class is taken from capital, therefore distributable income may be higher but the fund’s capital value may be eroded, which will affect future performance. Changes in currency exchange rates may affect the value of an investment in overseas markets. This fund invests in emerging markets which can be more volatile than other more developed markets. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi- annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0119/23241/SSO/NA
Interestingly, as the US Federal Reserve continued to raise rates in the fourth quarter, high-dividend strategies generally outperformed the broader market, which challenges the consensus assumption that rising rates lead to the underperformance of dividend-based strategies. In terms of what may lie in store for investors over the coming months, given the uncertain outlook around valuations and growth, I think it makes sense to emphasise dividends as a component of total return, and to do so by investing in assets that trade at an attractive yield and will be well-supported throughout a range of economic scenarios. LOOKING PAST THE HEADLINE YIELD FOR A MARGIN OF SAFETY It is important, however, to look beyond a high headline yield and hone in on those companies that possess the quality and resilience to deliver sustainable dividend growth over time. As a result, I do not simply invest in the highest yielding or cheapest companies, as a high headline yield can often be a sign of stress in the underlying business. So, while I place significant emphasis on the price I am being asked to pay for a stock, I also demand certain characteristics from companies – such as a strong balance sheet, predictable cash flows and management that recognises the importance of good capital allocation – to help provide clarity over a stock’s true value and sustainability of its earnings and dividend.
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