In this video update Jane Shoemake, Client Portfolio Manager, provides an update on the Janus Henderson Global Equity Income Fund (Fund).
Why does the US have a preference for buy backs over paying dividends?
Once a company starts to pay a dividend, they are normally rewarded by shareholders for maintaining that dividend and indeed growing it. What we've seen in the US though, is that companies have preferred to buy back their shares. It gives them more flexibility as buybacks can be turned on and off.
When we look at the US, we've had about 2% in dividend yield in 2018, but almost 3% returned to shareholders via buybacks. When we compare this to other markets, such as the UK and Australia, the dividend yields in those markets are much higher, in excess of 4%, and buybacks much lower. Part of that is due to the composition of those markets – the UK and Australia have much more mature industries within their indices, whereas in the US it has very much been dominated by technology companies – high growth companies, generating huge amounts of cash flow and very capital expenditure-light. They don't have to spend a lot on factories and equipment, and so any excess of cash that is generated has to-date largely been given back to shareholders via buybacks.
We’ve seen some underperformance from the Fund, what has been the main driver?
The Fund has underperformed the MSCI world ex-Australia Index (Benchmark), because the US has been strongly outperforming all the other major regions of the world over the last two to three years. And, given our focus on income, and the relatively low yields available in the US, the Fund has had exposure to Europe and the UK, and that has been a drag on performance given that these markets have fallen well behind in return terms against the US.
When I look more broadly at performance at a sector level, we've had strong exposure to technology stocks within the Fund, which has been very beneficial, but our exposure to financials and industrials has been unhelpful.
What we're trying to do, is target a yield of 4% and yield and dividend income that is going to grow. And we want the portfolio to be diversified. So we don't want to have too much concentration in any one geography or sector.
What is the catalyst for a reversion to value stocks?
It's very hard to identify a single catalyst. But what we can say is that some of these stocks that are very highly rated at the moment may be more cyclical than some investors perceive them to be. And therefore, any earnings disappointment is going to be severely punished by the market. Some of the other things we need to look out for is perhaps merger and acquisition (M&A) activity in these value stocks that are very much unloved by investors, because if we see some M&A activity, that may then just alert people to the fact that there's valuation support in a lot of these companies. And also, we have to be mindful that we may see some regulation in some of these really high growth areas, such as the tech sector, which may really impact future profitability. So these companies may not make the earnings that people expect them to going into the future.
Are we seeing value opportunities in specific sectors?
I think there's been quite a divergence in stock valuations between those stocks in favour with the market and considered to be very attractive, high growth areas and these value stocks that are very much unloved. Within sectors, we can find stocks that we think are attractively valued that are being very much overlooked for the amount of profits they can generate, and their ability to restructure and to improve their outlook in the future. In terms of at a sector level, within healthcare, we've found some attractive opportunities recently. And indeed, at the total portfolio level, the price to earnings ratio (P/E) of the Fund is significantly below that of the Benchmark. So we think a lot of value is stored within the stocks we hold.
What is the impact of Brexit on the Fund?
Brexit has been going on a lot longer than any of us anticipated, particularly from here in London. And indeed, the negotiations have been absolutely torturous. When we look at the portfolio however, we do have 15% of our portfolio listed in UK stocks.
However, the vast majority of these are international, market-leading companies. So, if we look at it by revenue, the Fund only has 5% exposure to the domestic UK economy. And therefore we think really whatever the outcome for Brexit, and indeed for the next choice of Prime Minister, the impact on this particular Fund will be very muted.
Can you discuss a stock you’ve recently purchased and what you look for when selecting a stock?
The key things we look for when we're picking stocks, is we start with free cash flow yield, we then look at the dividends and the payments that are being made and whether it's covered. And then, in addition, the ability for that company to sustain and grow that dividend.
We also consider factors such as balance sheet strength and level of leverage. A recent example of a stock we've purchased is Sanofi in the healthcare sector. This is a leading pharmaceutical company that was trading at a significant discount to its peer group around the world. It's free cash flow yield is in excess of 7%. It gives a dividend yield of over 4% and is trading on a P/E of less than 13 times.
Filmed 18 June 2019.
Earnings per share (EPS): The portion of a company’s profit attributable to each share in the company. It is one of the most popular ways for investors to assess a company’s profitability.
Price to earnings (P/E) ratio: A popular ratio used to value a company’s shares. It is calculated by dividing the current share price by its earnings per share. In general, a high P/E ratio indicates that investors expect strong earnings growth in the future, although a (temporary) collapse in earnings can also lead to a high P/E ratio.