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Global warrior

Baillie Gifford converted its UK-focused income fund into a global mandate earlier this year, allowing manager Dominic Neary to access dividend growth across the world.

James Smith
James Smith

Neary, who joined the firm from Insight last year, says the group decided a local focus was not the best way to service yield-seeking clients, who typically need to see real capital and income growth from their investments.

“The UK market still has a high yield relative to the rest of the world but economic circumstances mean dividend growth is likely to be subdued compared with regions like emerging markets,” he says.

“We are long-term believers in the emerging market story and feel companies in the region displaying improving revenue and earnings growth will increasingly transfer that to shareholders via dividends.”

He says notes stocks such as Samsung and Taiwan Semiconductor as trendsetters in this enterprise and expects many more firms in these countries to follow suit as they court foreign investors.

Another issue with UK-only income funds is the recent shrinking of dividend opportunities, with many banks forced to cut or suspend distributions as they repair battered balance sheets.

With banks stripped out, more than two-thirds of the UK market yield comes from just 15 stocks and adopting a global stance clearly increases the opportunity set massively for income managers.

Baillie Gifford is primarily known as a growth house and Neary follows this approach with an income slant, rather than simply chasing stocks with the highest yields.

When picking companies, the group is basically looking for quality firms offering long-term growth via a sustainable competitive advantage in their particular part of the market.

Neary draws on the ideas of Baillie Gifford’s various geographic teams to find the best opportunities, believing long-term sustainable growth will result in increasing dividend payouts.

He says: “We are not just buying high-income stocks – a third of our portfolio yields under 3 per cent and certain holdings yield nothing as yet.

“But we expect growth in the long run from these holdings and that will translate into a rising income stream.”

Neary cautions against buying stocks based solely on a high yield and believes many are actually yield traps where future distributions could fall.

A high yield can also reflect mature companies with nowhere to reinvest capital, which will likely provide dull returns on the growth front.

“This is borne out by the S&P 500, where in the period from 1927 to the end of 2009, the top quintile of yielding stocks beat the index by around 1.5 per cent but the second quintile outperformed by 2.2 per cent,” says Neary.

“This top-quintile includes the value trap and mature company stories that are best avoided, whereas the slightly lower-yielding stocks also offer capital growth potential.”

The manager says higher-yielding stocks also often come to resemble bonds, which are actually a poor holding for income investors in the long run as the static distribution falls in real value.

Looking at Global Equity Income, Neary currently has 25 per cent in the UK, 11 per cent in Europe, 27 per cent in the US, 4 per cent each in Japan and developed Asia, 16 per cent in emerging markets and 12 per cent in bonds.

This weighting in the UK is a structural position, designed to provide the fund a stable stream of sterling-based income for investors.

Neary says: “We considered hedging the currency exposure but only wanted this on the income rather than capital performance of companies, which would be time-consuming and difficult.

“Having the 25 per cent position in the UK mitigates this income currency risk and the local market also still provides several great stocks from the most developed dividend culture in the world.”

On the sector front, the portfolio is overweight technology, with the team highlighting the new product cycle as well as the growing pervasion of the internet into our everyday lives.

Again, Neary calls attention to the huge growth potential of many stocks in this sector, holding companies such as Chinese internet provider Baidu, for example.

His growth slant has kept the fund out of traditional yield havens such as pharm-aceuticals, a sector he feels has been unproductive for years and has grown through mergers, not organically.

On financials, the manager is underweight banks because of the increased regulatory regime across the world but likes some emerging market names and simple thrift players in the US, as well as being overweight insurers.

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