Catch up and a cuppa with… Stuart Rhodes

M&G Global Dividend was launched in July 2008. It was a different world back then: iPhones were only just starting to make their mark, Amazon was an online book store and social media was in its infancy.

In the financial markets, Northern Rock had just been nationalised by the Labour government and US Treasury Secretary Hank Paulson said that the worst of the financial crisis was behind us. Little did they know that more bailouts in the UK would follow and that Lehman’s wasn’t too big to fail as the global economy plunged into recession.

It may have been a difficult – and interesting – time to launch a fund, but M&G Global Dividend has been successful: growing to £6 billion in size and turning £10,000 invested into £31,134*, as well as achieving an average annual income distribution of £639*.

To mark the 10th anniversary of the fund, we caught up with manager, Stuart Rhodes, to talk about the highs and lows of investing in the past decade.

Are there any companies that you have owned for the whole decade?

There are a few actually. If we find a business that can grow sustainably, we don’t see any reason to sell it – as long as the valuation is reasonable, of course.

Microsoft is an example. It was first purchased in 2008 and, since then, the dividend has trebled and the share price has increased fivefold. The company has made a successful transition from a business perceived as mature to one that is dynamic – driven by the strong growth in ‘cloud’ services.

Novartis is another example. This Swiss pharmaceutical stock has been a core holding since the fund’s launch, during which time the dividend has increased 75% and the shares have added value. We still like it because it is a market leader in a growing industry, which is aiming to address the medical needs of an ageing population.

These investments – and indeed a handful of others – have been in the portfolio for the full 10 years and could stay for a lot longer.

Interestingly, over the decade, we’ve never really held any Japanese companies. But, more recently, the dividend culture is changing and we are starting to see better company behaviour, so this may change in the future.

How successful have you been in consistently increasing the fund’s dividend?

We focus on companies with growing dividends, so we can grow the income from the fund. And I’ve been really pleased with our success in doing this. We’ve been able to raise the fund’s distribution payments every single year.

These increases have been regardless of markets or currencies – most geographic regions and sectors have their time in the sun, but the fund has delivered consistent compounding.

What have been your biggest challenges in the past 10 years?

When we launched in 2008, we went straight into the financial crisis. The first few months of 2009 were really tough – the worst dividend environment for decades. It was a difficult and nerve-wracking time to invest.

More recently, we had a period of underperformance for 18 months or so during 2014 and 2015. This happens to all active managers, but it was a challenging time nevertheless. We were confident in the underlying businesses in our portfolio and some of those positions – notably those in energy and materials – paid off in the end. In the past two years, we have been rewarded for holding the line.

How is the fund positioned today?

We run a global fund and that gives us a big universe, but markets have risen a lot in recent years and many stocks have become too expensive. We can still find some compelling investment ideas, but the opportunity set is certainly narrower than it was. With companies trading at higher valuations, it is even more important to know what you are looking for and do the work on individual companies.

The fund has three distinct categories:

1. Quality: these are businesses with reliable growth and steady, but lower, dividend growth. This type of company usually makes up about 50%-60% of the fund, but is at its lowest level today (44%). Valuations of these companies have simply been too high to be attractive.
2. Asset-backed: these tend to be more cyclical companies and typically represents about 20%-30% of the portfolio. Today the weighting is 34%, as we think the more attractive valuations sit within cyclical areas.
3. Rapid growth: companies in this category are experiencing structural growth driven by either a product or a geography. This is the smallest part of the fund at about 10%-20% and today represents around 17% of the portfolio.

How much of risk does a trade war pose?

If we got a broader trade war, it could become problematic because trade wars tend to have nasty implications for supply chains generally. At the moment, we have just seen some early shots fired.

That said, there are always risks. It is the beauty of investing in equities and why they tend to do well over time. It is our role to try and understand whether the risk delivers an opportunity or not. In 2017, we saw low volatility and this didn’t throw up many opportunities. 2018 may be trickier, but it is where real investors should be rolling up their sleeves.

*Source: M&G, MorningStar, launch of fund to 30 June 2018