Veritas global income fund sees inflows intensifying as investors seek yield overseas
Veritas Asset Management’s Global Equity Income fund celebrated its fifth anniversary in February with assets fast approaching the £500m milestone.
The first global equity income fund launched in the UK, the Veritas vehicle has taken in a slew of assets over the last year as investor demand for dividend income from outside the UK has intensified.
The fund’s assets totalled £135m at the end of June 2009, and by 31 July this year they had jumped to £625m.
Co-managed by Veritas CEO Charles Richardson and director Andy Headley, Global Equity Income (sterling) has returned 60.8% since inception, against a 31.3% rise for the MSCI World index.
The fund, which was self-seeded by the managers, seeks to grow capital over UK CPI and generate an income in excess of 115% of the FTSE All Share yield.
Richardson says the group has been a strong advocate of the global equity income story for some time.
“Over five years ago we concluded there was a strong rationale for global equity income investing and we believed we had a sound approach to this investment philosophy,” he says.
“We have consistently argued that there is a place for soundly based and differentiated yield investing and we have always believed the global approach creates more wide-ranging opportunities for investors than with UK equities.”
Richardson believes the considerable growth of assets over the last year is partly because it takes time for a strategy to be accepted.
He says: “Even if you have got a long standing core competency and experience in running global assets I think there is a desire to see both a three- to five-year track record, and the ability to navigate difficult markets during that period.
“It has taken a while for prospective shareholders to buy into and adopt the strategy, and they want to see a track record on which they can do due diligence. Once this is in place they are prepared to back it.”
The manager says there is also now a much greater acceptance of the diversification benefits offered by a global strategy than there was when the fund was launched five years ago.
Richardson says it is notable how many global equity income funds have been launched in the last six to 12 months, and he believes this has focused attention on the strategy.
He highlights a number of regional markets which have a long culture of paying dividends, and says this is reflected in the higher yields, identifying Canada, Australia, Singapore and Hong Kong in particular.
The UK remains one of the higher yielding markets with an overall yield of around 3.5%, but Australia has 4%, Hong Kong 2.9% and Canada 2.5%,
For Richardson, the most marked dividend difference between UK and global companies is in sectors.
He identifies healthcare as including two high yielding sub-sectors – pharmaceuticals and biotechnology. The healthcare sector overall generates a 3.5% yield, and some positions such as Merck and Roche yield above that, Richardson adds.
He says the oil and gas sector, particularly in Canada, includes some stocks yielding between 6% and 7%, and the real estate industry includes Reits with yields between 5% and 7% in Singapore and Canada.
“It is possible to access the better global opportunities in certain sectors. These are stocks that provide a combination of high yield, good quality and growth.” Richardson adds.
The IMA is considering proposals to create a new global equity income sector, but Richardson tends not to concentrate on indices or peer groups.
However he does believe it shows global equity income has become a well established investment strategy.
“When the IMA establishes a global sector, what it appears to be recognising is that sector has got longevity and critical mass,” he says.
“Once you have 15 to 20 funds – as is now the case with all the recent global equity income fund launches – the IMA recognises they warrants their own sector. “
Richardson says a number of “sophisticated buyers of funds”, including large wealth managers, fund of funds and family offices are already doing their own work, comparing the various global equity income funds’ performance.
“When you get this activity in the marketplace – and we see people doing quite onerous due diligence on us on behalf of their own clients – an IMA-type organisation picks up on this for the retail market, and sees that it needs to be doing that too.”
The managers are currently positioning the portfolio away from any singular view on the economic or market outlook.
Richardson says: “On the economic context, the headwinds of private and public sector de-leveraging continue to be very significant.
“As a consequence, investors face very sharp policy-driven swings in the outlook. Policymakers will continue to do what it takes to stimulate the economy once they see deflationary headwinds.
“This is going to result in major swings, notably on exchange rates and inflation.”
As a result of this view, the managers have narrowed down their universe to concentrate on themes that are likely to be structural drivers of growth, and more resilient companies that are going to deliver on their dividends and earnings, whatever the economic outlook.
Richardson says: “We are not relying on any particular economic or market outcome. We currently have 36 positions from around the world, and the portfolio is yielding 5%.
“There are normally between 30 and 40 positions in the portfolio, and we look for companies that will deliver sustainable and growing income with some growth prospects.”
The managers are supported by a proprietary research team, which has recently been developing a theme called ‘dependable compounders.’
“We are looking for companies that will be dependable in delivering earnings and cashflows,” Richardson explains.
The theme is generating a number of new ideas as well as reinforcing existing ones.
“It is notable that Merck and Roche, for example, which we think of as diversified health companies, are going to deliver strong cash flows and good compound annual growth rate of earnings,” he says.
“They will be able to sustain the type of yield they are on now, which in Merck’s case is 4.5%. This is a good example of a dependable compounder for us in healthcare.”
Richardson adds: “We have a diversified portfolio that includes a range of healthcare companies, Chinese expressways, property investments Reits with assets in Canada, Hong Kong, Japan and Singapore, industrial companies with operations worldwide, and specific banks such as the Bank of China (Hong Kong), which has a particular opportunity set in Hong Kong and some of China.”
