The overall macroeconomic picture is murky, but there are opportunities aplenty for investors willing to take a three-year view on markets. That is the view of Sam Witherow, co-manager of the JP Morgan Global Equity Income fund.
The fund has outperformed both its IA Global Equity Income sector and the MASCI ACWI index over the year to date (as shown in the chart below) and has been the best fund among its peer group over six months, as well as three and five years. Over 10 years it ranked second overall within the sector.
At a time when investors have been moving away from growth stocks and into value, income-paying companies due to concerns around inflation, recession and the global economy, below Witherow says there are reasons to be optimistic.
Here he looks forward to record-high dividend pay-outs, as Trustnet recently reported, and discusses opportunities in the US and Europe.
Performance of fund vs sector and index year to date
Source: FE Analytics
Can you sum up your process?
We focus on three types of dividend opportunities and align them with the best ideas from our global fundamental research.
Businesses with very consistent resilience, long-term dividend growth and reasonable yields, or compounders, are the first category and typically make up the bulk of our portfolio.
Then we make more tactical allocations to the other two categories, which are high dividend growth (lower-yielding businesses with a very impressive and long runway for rapid dividend growth) and the more traditional high-yield sectors, where we look for dividend consistency, resilience and growth.
How healthy are dividends this year and into the next?
They are much more resilient than in the recent past. Covid was a cut-off point in terms of pay-outs. When the crisis arrived in 2020, it was pretty logical that dividends were cut globally, with global pay-out ratios at long-term lows. Today, we find ourselves in another crisis, maybe not as acute as the pandemic, but still facing several macroeconomic issues.
Looking forward, however, we feel much more confident about the underlying resilience of the global dividend picture. We're only two years after the last crisis and dividends have only just started recovering. Meanwhile, earnings have soared to all-time highs.
What sectors are you interested in the most at the moment?
The prime question for us is how to position the portfolio with regard to cyclicality. We have been defensive for the past 12 months because of the growth euphoria that happened post-Covid and the revaluations in the cyclical parts of the market that followed. This position served us well as valuations have got back to normal levels after the rally.
As we look at the world today, there has been a drawdown in equity markets, cyclicals have enjoyed a good initial start to the year and have now sold off very materially; while defensive areas such as consumer staples and utilities have performed very well on a relative basis.
In these conditions, we are starting to position our portfolio towards more cyclical stocks, taking down our weightings in consumer staples stocks and utilities and starting to be more opportunistic in areas such as semiconductors, US retail and even banks.
We're going slowly because we recognise that the macroeconomic picture is still pretty murky, but we're starting to see really good opportunities on a three-year basis and we're prepared to take some short-term volatility to get those returns.
What geographies look particularly attractive today?
The patterns are similar worldwide, but our process is steering us towards a more pro-cyclical stance, especially in Europe. The European market is facing high economic uncertainty in the medium term, which is a tough trade-off for us, but we are adding risk relatively cautiously and slowly.
Additionally, we have also added some US stocks back into the portfolio. The market had become very inflated and had been caught up in a growth euphoria for the last few years. As that bubble burst, we see some good opportunities in today’s valuations.
We have bought Nike for example and Intuit, the software company that owns the accounting programme QuickBooks.
What have been your best and worst performers of the past year?
The best stock over the past year has been Coca Cola, which has returned 29% over 12 months. It's a very defensive business with unchallenged dominance in its space, but its success was also due to its royalty-based business model, which allowed it to benefits tremendously from inflation.
Coca Cola sells concentrates to bottlers at a very high gross margin, around 80% to 90%, and in return does marketing for them. This means that the increases in the price of electricity, glass and carbon dioxide have been borne by the bottlers, not Coca Cola.
At some points in the year it has been our biggest position, but now, as it has increasingly been rewarded by the market, we've been reducing our exposure.
Performance of stock over 1yr
Source: Google Finance
On the other hand, Deutsche Post, with DHL Global Express network being the driver of the business, has suffered from the inversion in consumer consumption trends and from people returning to physical shops. It returned -33% in twelve months.
Planes, trucks and sorting centres are large expenses and any change in sales can have a dramatic impact on earnings. Also, this is a cyclical stock in Europe, where a war is on your doorstep, which must have an impact on sentiment.
We've continued to hold the position, as we are very happy with the business on the medium term.
Performance of stock over 1yr
Source: Google Finance
What do you do outside of fund management?
Since I've had twin toddlers enter my life, everything else has fallen by the wayside. My hobby is now primarily keeping my two sons alive.