Juliet Schooling Latter, research director, FundCalibre, continues her series of articles for professional Paraplanner with look at the Magna Emerging Markets Dividend fund.
“The types of companies we like to own have fallen into the overlooked bucket in the past 18 months. They are quality, growth compounders – good little companies, which have a growth runway and are growing between 10-15 per cent a year, as opposed to the high growth plays which were in vogue in 2020.”
Having just witnessed a significant dispersion in 2020 from a style perspective – where growth outperformed dividends by almost 30 per cent – Magna Emerging Markets Dividend manager Ian Simmons believes a return to some semblance of normal should be a catalyst for this performance gap to close.
Having seen the world move online to counteract the pandemic, Ian – who became lead manager of this fund in 2018 – believes the vaccine roll out, the re-opening of economies and the reflationary trade all play into the hands of companies which pay dividends.
“Whether it’s commodity companies, offline businesses like physical retailers, banks or insurance companies – the opportunity is there. As the yield curve steepens, we’ve also seen some of the frothy valuations from high growth internet companies start to fall back to pre-Covid levels. We should start to see the performance gap closing.”
The process behind this fund is simple – something we like when we talk to our managers. It is focused on finding the best companies, rather than predicting market or economic trends. The team searches for companies that are able to pay high dividends in the short term but are also able to grow those dividends over the long term. These are often in niche areas, which may be overlooked by less well-resourced teams.
The final portfolio typically consists of 45-55 holdings with stocks selected on the basis of their risk-adjusted upside potential and position sizes driven by conviction, not by the market index. In the past three years the fund has returned 15.8 per cent*. The fund currently has a dividend yield of 3.4 per cent**, while ongoing charges stand at 2.15 per cent** – that’s little high for our licking, but hopefully this will decrease as assets grow.
Ian says the overlooked nature of the companies he holds means the portfolio is currently trading at less than 15x earnings, despite having a mid-teens earnings growth forecast for the coming three years. “The return on equity in the portfolio is above 20% and there is little leverage. These are quality and growth characteristics in developed markets, and in normal times in emerging markets they would have far greater appreciation than they currently do,” he adds.
A good example is recent addition, Xinyi Solar, the world’s largest manufacturer of solar glass panels and modules. Ian says the industry is only at the start of its high growth phase, with solar power costs having only dropped in the last year or so to bring them on a par with more traditional forms of energy production.
The fund has also proven to be resilient in the midst of some challenging economic conditions. Ian says, in sterling terms, the dividends paid in December 2020 were actually flat year-on-year. “Given that emerging market currencies depreciated 10 per cent in that period that implies, in local currency terms, the dividends we collected actually rose, which is an impressive feat for the companies we own,” he adds.
Ian credits the resilience to the focus on companies with strong balance sheets/capital positions – adding that he expects dividend growth to be double digits in 2021.
A hidden gem among other better known emerging markets funds, this offering benefits from a specialist team, an intuitive investment approach and the backing of a company focused on emerging markets. It’s one to consider for those looking to broaden their income exposure away from the UK and other developed economies.
*Source: FE fundinfo, total returns in sterling, 30 March 2018 to 31 March 2021
**Source: FE fundinfo
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.
