Juliet Schooling Latter, research director, FundCalibre and Chelsea Financial Services, continues her series for Professional Paraplanner looking at funds that are coming up to or have just past three-year anniversary of launch.
Here she looks at the Guinness Emerging Markets Equity Income fund.
In the past 15 years or so, the global income landscape has broadened substantially and today income investors can choose from a diverse base of economies, countries, sectors and companies that have been paying dividends for a number of years.
Launched in December 2016, the Guinness Emerging Markets Equity Income fund was designed to take advantage of the growing income sources in developing markets. Covering Asia, Europe, the Middle East and Africa and Latin America, the fund invests in businesses that have been the most successful in converting the dynamism of emerging markets growth into cash-based profitability – and dividends – over time.
Run by Edmund Harriss and Mark Hammonds, this fund follows the same tried and tested process as the successful Guinness Asian Equity Income fund, which we rate very highly.
Edmund and Mark focus on profitable companies (in cash terms) that have generated persistently high return on capital over the past eight years. Only a small percentage of listed companies (around 9%) get through this screen and the managers then reduce their universe further by excluding highly indebted companies and those less than $500 million in size. The remaining 360 or so companies then undergo more thorough research, with in depth modelling of the businesses cash flow, capital budgeting and – least but by no means least – potential for dividend growth.
The managers believe the dividend is a natural outcome for those companies that are generating above cost of capital returns on investment. This dividend then becomes a visible sign of capital discipline and good corporate governance, where the management is focused sustaining and growing cash profits. Strong cash generation and distribution of dividends also provide a degree of downside protection against volatility in local markets.
The end portfolio consists of 36 equally weighted companies. This equal weighting, together with the managers’ one-in, one-out policy, means there isn’t a long tail of smaller holdings, so each stock can make a meaningful contribution to performance. The holdings are rebalanced periodically to retain the equal weightings and are continually assessed to see if there are better opportunities, although turnover is relatively low (holdings are generally kept in the portfolio for three to five years).
Given the one-in, one-out policy, the managers’ sell discipline is also very important. Deciding on a company to sell, in order to make room for one to buy, can be a very hard choice to make. The managers therefore ask themselves some core questions: has the company failed to meet the return on capital criteria? Is the valuation too rich or the balance sheet too stretched? Has the dividend outlook or policy become less favourable? Does the original investment thesis no longer hold true? Has the yield contribution become insufficient?
Their approach filters out much of the noise and hype that surrounds companies allowing them to focus on the true signals that drive company valuations, rather than trying to make decisions based on an expected outlook for the region’s economies. Ideally, they like to invest in good companies that have, in the short term, fallen out of favour, but that have previously shown an ability to weather most economic environments over time.
Since launch, this fund has outperformed the sector average and index (29.4% compared with 25.8% and 27.6% respectively*) – quite a feat given the higher number of pure growth funds in the peer group. Indeed it is 33rd out of 101 funds in the sector and, importantly, it has outperformed in both rising and falling markets while also producing an attractive yield above 3%**.
For investors looking to diversify their income stream and/or get good exposure to emerging market growth, this fund is definitely a contender.
*Source: FE Analytics, total returns in sterling, 23 December 2016 to 25 November 2019
**Source: FE Analytics, 25 November 2019
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
