finding value with global equities the importance of being active in a low yield world november 2014...
TRANSCRIPT
Finding Value with Global Equities
The importance of being active in a low yield world
November 2014
Charles Payne
Investment DirectorEquity Income Products
2
Agenda
2 Global Equity Stock Picking and Yield
1 Finding value in Global Equities
3
If you are going to be active – give yourself the widest opportunity set
Grinold & Khan – Active Portfolio Management (1994)
The ‘generalized’ version of Grinolds Law of Active Management:
Where
– IR = Active Return Potential
– B = Breadth of Opportunity Set
– HR = Hit Rate
– R = Reward for each correct decision
IR = B x HR x R
4
Volatility is the oxygen of stock pickingGreater dispersion = greater alpha potential
Source: Datastream & FIL Limited 31/10/2014. Dispersion of stock returns: The maximum and minimum returns of constituents of the MSCI AC World as at 31/10/2011, grouped by MSCI Sector and excluding the 10 largest returns and 10 smallest (most negative) returns in each sector. Sector dispersion shows the maximum and minimum returns for the 10 MSCI AC World sector indices. All returns are capital only in US dollars for the 3-year period 31/10/2011 - 31/10/2014.
3 Year Returns Dispersion (USD) - to 31/10/2014
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
Lowest
% c
ha
ng
e o
ve
r 3
ye
ars
5
What drives individual stock returns?Through time, stock specific factors dominate
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
HP
Filt
ere
d A
dju
ste
d R
-Sq
ua
red
Coun-try Only
Coun-try & In-
dustry
Stock
Specific
Country Only
Country and Industry
Stock-specific/Other
Source: Citigroup MSCI AC World March 2014
6
Evidence that correlation is fallingBetter times for active managers?
Source: Nomura ;Russell 1000 index 28.02.14
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
0.1
0.2
0.3
0.4
0.5
0.6
0.7
75 day US Stock Correlation Averages
7
Agenda
2 Global Equity Stock Picking and Yield
1 Finding value in Global Equities
8
Reaching for yieldYields across asset classes
Central banks are forcing you up the risk spectrum
Source: Datastream, BofA Merrill Lynch Bond Indices - Redemption Yields, MSCI Equity Indices – Dividend Yields (to 31 August 2014).
Government Bonds
Investment Grade Credit
High Yield EquitiesEM
DebtCash
Shaded areas = current yields
$ C
ash
1 m
th
€ C
ash
1 m
th
£ C
ash
1 m
th
¥ C
ash
1 m
th
US
10Y
Gov
ernm
ent
Eur
o 10
Y G
over
nmen
t
UK
10Y
Gov
ernm
ent
Japa
n 10
Y G
over
nmen
t
US
Cor
pora
te B
onds
Eur
o C
orpo
rate
Bon
ds
UK
Cor
pora
te B
onds
Japa
n C
orpo
rate
Bon
ds
US
HY
Eur
opea
n H
Y
Asi
an H
Y
Em
ergi
ng M
arke
t B
onds
US
Equ
ities
Eur
opea
n E
quiti
es
UK
Equ
ities
Japa
n E
quiti
es
0%
2%
4%
6%
8%
10%
Pre-Crisis: 30/06/2007
1986 1989 1992 1995 1998 2001 2004 2007 2010 20130
2
4
6
8
10
12
Global bonds Global Equities Corporate BAA bonds
Yie
ld (
%)
In fact, not a new phenomenonBond yields have been compressing for 25 years
9
High yield bonds compression = greater relative value in equity income
Source: DataStream, 31 August 2014
10
Yield gap: low quality bonds vs. high quality equities BOFA ML High Yield Bond Index vs SG Quality Income Index
Source: SG Cross Asset Research, 31 August 2014
‘Margin of safety’ near an all time low
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 20130%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Very different asset backingCredit rating of Fidelity Global Dividend holdings & IBOXX High Yield constituents
11
Source: SG Cross Asset Research, Moodys, Standard & Poors, Fitch, Japan Credit Ratings Agency, Korea Ratings (Bloomberg). June 2014.
By design, high yield indices contain the lower quality credits
AA
A/A
aa
AA
+/A
a1
AA
/Aa
2
AA
-/A
a3
A+
/A1
A/A
2
A-/
A3
BB
B+
/Ba
a1
BB
B/B
aa
2
BB
B-/
Ba
a3
BB
+/B
a1
BB
/Ba
2
BB
-/B
a3
B+
/B1
B/B
2
B-/
B3
CC
C+
/Ca
a1
CC
C/C
aa
2
CC
C-/
Ca
a3
CC
/Ca
C/C
0%
5%
10%
15%
20%
25%
IShares IBOXX HY Fidelity Global Dividend
12
What really drives Equities – 110 years of US Equity returnsDividends are the principal component of total return
19001901190219031904190519061907190819091910191119121913191419151916191719181919192019211922192319241925192619271928192919301931193219331934193519361937193819391940194119421943194419451946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020110
1
15
150
1,500Real total return
including dividends:End value = US$851
+ 6.3% p.a.
Real capital return excluding dividends:End value = US$8.50
+ 1.9% p.a.
US
$
The ‘eighth wonder of the world’ – the power of compoundingSource: Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists: 101 years of Global Investment Returns, Princeton University Press 2002, Credit Suisse Global Investment Returns Sourcebook 2011
Dividends dominate wherever you choose to investDecomposition of regional returns
13
Source: SG Cross Asset Research, MSCI real returns as at Q2 2014, in US$. The decomposition of real equity returns since 1970.The chart demonstrates that the price you buy at is important and the compounding effects over time are a dominant force and fundamentals such as dividend growth and dividend yield become more important over time.
UK US France Ger-many
Italy Spain Australia Canada Japan-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
5.3
6.25.4
5.0
1.1
3.5
4.15.6
3.5
Dividend Yield Dividend growth Multiple expansion Total annualised returns
123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960616263646566676869707172737475767778798081828384858687888990919293949596979899100
0
10
20
30
40
50
60
70
80
90
100
FTSE 100
Fidelity Global Dividend Fund
Avoid the yield concentration of country indicesGlobal diversification is critical for sustainability
14
A healthy yield underpinned by diverse income stream
Cum
ula
tive
Yie
ld (
%)
Number of Stocks
50% of yield comes from top 8 stocks in FTSE 100 top 18 stocks in Fidelity Global Dividend Fund
Source: Factset, June 2014
Be Active – don’t rely on the index delivering yieldAt both a regional...
15
A healthy, sustainable yield means being active at both a regional....
Source: Fidelity, 30 September 2014.
MSCI AC World – yield weighted vs. market cap weighted
NORTH AMERICA
JAPAN
EM (EMERGING MARKETS)
PACIFIC ex JAPAN
UNITED KINGDOM
EUROPE ex UK
-12% -10% -8% -6% -4% -2% 0% 2% 4% 6%
Be Active – don’t rely on the index delivering yield...and a sector level
16
...and a sector basisSource: Fidelity Worldwide Investment, 30 September 2014.
INFORMATION TECH
CONSUMER DISCR
HEALTH CARE
INDUSTRIALS
MATERIALS
CONSUMER STAPLES
UTILITIES
TELECOM SVC
ENERGY
FINANCIALS
-6% -4% -2% 0% 2% 4% 6%
MSCI AC World – yield weighted vs. market cap weighted
17
High yields can be a sign of stressThe importance of Stock Picking
Assessing the sustainability of yields is essential
Source; Global developed dividends 1995 – 2013, Societe Generale Cross Asset Research, February 2014.
<4% 4%-5% 5%-6% 6%-7% 7%-8% 8%-9% 9%-10% 10%-15% 15%-20%0
2
4
6
8
10
12
14
16
18
Estimated yield (%) Realised yield (%)
Div
ide
nd
yie
ld (
%)
Sustainable dividend growth is rewardedPerformance and volatility of the ‘Dividend Aristocrats’ Dividend Aristocrats MSCI AC World
A powerful tailwind for the income investorSource: Citigroup as at June 2014 in USD. The universe is divided into Dividend Aristocrats which are companies that have been able to grow their dividends each year over 10-years and the total and price cumulative returns and volatility of returns of that basket of companies. This is compared to the broader MSCI AC World universe where the same figures are calculated.
18
Total Return Price Return Volatility0%
50%
100%
150%
200%
250%229%
147%
11%
Total Return Price Return Volatility0%
50%
100%
150%
200%
153%
92%
16%
19
Cash in Cash out
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Operating Cash Flow Increase in net debtCAPEX DividendsBuybacks M&A
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
0
2
4
6
8
10
12
14
Cash Flow Return on Investment (CFROI)
Re
ven
ue
s
Ea
rnin
g...
Div
ide
n...
To
tal R
e...
Ne
t De
bt
0%
2%
4%
6%
8%
10%
12%
4.0%
5.1%
9.2%
10.0%
2.3%
Stock picking in action – a quality compounder Kimberly Clark US, Consumer Staples
Source: FactSet, March 2014. For the purposes of illustration only and should not be construed as a recommendation to buy or sell the mentioned security.Third party trademark, copyright and other intellectual property rights are, and remain, the property of their respective owners
‘Boring’ company, exciting returns
Resilient return profile Good capital allocation Double digit annualised total return=+
20
Stock picking in action – avoid overpaying for growthWal-Mart – US/Global Retailer
Source: Bloomberg, March 2014. For the purposes of illustration only and should not be construed as a recommendation to buy or sell the mentioned security.Third party trademark, copyright and other intellectual property rights are, and remain, the property of their respective owners
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
10
15
20
25
30
35
40
Wal-Mart Stores, Inc. - EPS - NTM (Left)Wal-Mart Stores, Inc. - PE - NTM (Right)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
42
44
46
48
50
52
54
56
58
60
62
64 Wal-Mart Stores, Inc. - Price
Wal-Mart Stores, Inc. - Price
Strong growth does not guarantee strong share price performance
EPS progression Share price performancePE rating =x
21
Source: DataStream, Bloomberg 31 August 2014
Result - Quality Income outperformsAnd with less drawdown in times of market turbulence
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 201360
600
6000
Total Return in Euros
Quality IncomeMSCI AC World
Bear market
A strategy for investors seeking yield but worried about bond prices
22
Source: Morningstar Direct. Basis: Fidelity Global Dividend A-MG-USD nav-nav, gross income reinvested in US dollars to 31/08/2014. Performance / Risk vs. Offshore Global Equity Income Sector
Result: Higher return, lower volatility, better yieldFF - Global Dividend Fund risk - return matrixRisk / return vs. Global Equity Income Sector since launch
Lower volatility than both the index and the peer group
6 8 10 12 14 16 18-10
0
10
20
30
40
50
60
Average
MSCI ACWI NR
Fidelity Global Dividend Fund
Annualised Volatility (%)
Cu
mu
lativ
e R
etu
rn (
%)
Thank you very much
Charles Payne
Investment DirectorEquity Income Products
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