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Yield test


Global income mandates give access to a much wider universe than UK peers, opening up sectors such as technology and materials, says Thread-needle’s Steve Thornber

Manager of the group’s global equity income fund since launch in 2007, he also cites pervasive macro reasons for avoiding a pure UK focus, with the economy mature and typically among the world’s poorer performers. Instead, his portfolio has a strong Asian skew, with just under 24 per cent of total assets allocated to the East.

This flexibility has driven strong performance, with top-decile returns in the global growth peer group over one and three years to mid-May.

Thornber says: “If you look at UK equities, there are no technology companies yielding over 4 per cent, for example, so managers only investing in our home market simply cannot access this sector. At Threadneedle, we currently believe the industrial cycle is turning up and cap-ex is growing so we want expo-sure to that theme. There are 11 UK industrials yielding over 4 per cent against more than 80 worldwide so a global mandate has a much wider opportunity set.”

Thornber also highlights the well-versed argument on yield concentration in the UK market, holding just one of the ten biggest British stocks – Vodafone – whereas most UK-focused portfolios own the majority.

Looking at the geographical make-up of his fund, Thornber says it displays a widening of dividend culture across the world, with global income vehicles hardly possible a decade ago.

He says: “After the Asian crisis in the late 1990s, governments and companies have strengthened their finances and these economies were largely unscathed by the credit crunch. Many stocks in the region have cash on their balance sheets and are increa-singly returning this to share-holders in the form of growing dividend streams.”

Europe and the UK are also major markets for the fund but there is limited exposure to the US – which Thornber says rem-ains largely a growth culture – and very little in Japan. His starting point for stock selec-tion is a yield of 4 per cent. He stresses the portfolio is not a barbell strategy and the team will not compromise on yield unless a stock is under the target level but expected to see strong dividend growth in the subsequent year.

Thornber says: “These criteria mean we are typically seeking stocks that can sustain a progressive dividend policy, so we have strong earnings growth and decent yield cover.”

Favoured sectors on the fund include telecoms, with Thornber citing strong stock opportunities beyond the basic yield target. He says these companies have become tarnished as super-defensive in recent years but he sees ongoing consolidation in the sector and growing demand for data on smartphones.

As for financials – usually a major source of income – the Threadneedle team owns no UK banks and has favoured insurance plays instead such as Admiral Group. Other holdings in the sector include Banco Santander Brasil, benefitting from industry and regional tailwinds, and US private equity firm Blackstone. On the latter, Thornber says the partners largely recom-pense themselves through dividends so the firm’s payout levels have been attractive.

Looking at technology, the fund’s best-performing holding last year was Asian firm HTC, bought as a play on the growing handset and tablet computer markets.

Thornber says: “Some of our global portfolios hold Apple but the stock pays no dividend like so many tech names and we were forced to look elsewhere to access these themes. Our Asian colleagues highlighted HTC as a name building its own brand in this space and the company has committed to growing dividends in line with earnings. On top of strong capital performance, this meant we enjoyed 30 per cent dividend growth last year and are conservatively predicting a 60 per cent rise for 2011.”

As for miners, Thornber flags up Ausdrill as a favoured name, playing into the group’s focus on commodity service companies as stocks such as Xstata continue to increase cap-ex.

Thornber says equity markets generally remain volatile, rising during earnings season as good corporate results continue but falling off when the focus moves back to the uncertain macro picture. Like many groups, Threadneedle is expecting slow growth in the Western world and a much healthier picture in the emerging universe and Thornber notes equities valuations at 15 to 20-year lows against this background.


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