M&G Global Dividend (GB00B39R2N93) fund manager Stuart Rhodes kicked off the fund's seventh year by issuing a controversial open letter, apologising for the fund's poor performance in 2014. Instead of backing away from his worst-affected stocks he is now going out on a limb to back a trio of controversial picks in a move which he says will define the fund's next five years.
Mr Rhodes is this month celebrating seven years of his global equity income fund, which the highly regarded young manager took on at launch in 2008. But he hasn't been feeling much cause for celebration in recent months. He spent the run up to the new year asking himself "some very blunt and direct questions" in a public mea culpa for the fund’s 8 per cent underperformance of the MSCI All Country World Trade GBP index last year.
Writing the letter was "cathartic", says Mr Rhodes, who spent the start of the year analysing what went wrong and what he was going to do to turn it around. He puts the fund's 2014 performance down to three key issues - the oil price crash, an impatient trigger finger leading to selling expensive, quality stocks too early and an underweight position to the US.
The first thing the manager did in 2015 was sell some of the worst-affected stocks "at big losses," he says, believing firmly that "in some cases selling at big losses is the right thing to do". That meant getting out of offshore drilling company Seadrill (0HYK), Nokian Tyres (0FFY) - a company heavily exposed to the Russian oil market - and Dutch energy surveying company Fugro (0LNT). "In all three cases the shares' ability to grow had been severely affected," he says. He is also keen to sell offshore platform company Prosafe but valuations have not reached the right level yet.
Stuart Rhodes CV Stuar Rhodes has been manager of the M&G Global Dividend fund since launch in 2008 following three years as deputy fund manager of the M&G American Fund. He joined M&G in January 2004 as an analyst on its global equities team. |
Mr Rhodes makes a point of analysing sold stocks after they exit the portfolio. He says: "In some cases stocks have a 20-30 per cent underperformance to the market after selling." M&G has been so convinced by his process of monitoring sold stocks that the company has rolled it out across all fund managers.
But his key decision-making this year has not been about selling energy-related stocks but buying them. Instead of turning away from the unloved sector altogether, Mr Rhodes has decided to head straight into the storm. He is putting his chips into Canadian energy haulage company Gibson Energy (CAN: GEI), methanol supplier Methanex (CAN: MX) and refiner HollyFrontier (US: HFC), three controversial stocks which he believes were unfairly hit by the oil price slump.
The stocks accounted together for 2 per cent of the fund's 2014 underperformance last year but he says "we were amazed at how the market has reacted to some names as a result of the fall in oil prices." Not everyone agrees.
"Some clients are quite scared by some of these businesses and think they look risky," he admits, agreeing that he has been surprised by the negativity of some of his recent conversations.
But he thinks the market has overreacted. "Normally to get these opportunities you have to be invested in distressed businesses which don't pay dividends" he says. His favoured trio certainly do. Methanol producer Methanex is now the fund's largest holding at 6.4 per cent of the portfolio. Demand for Methanol is connected to, but not wholly derived from, the energy market and Mr Rhodes says the company has strong growth potential and a solid dividend record. He says: "It is extremely cheap and doesn't have the issues that an oil producer has. It also doesn't have the capex requirements and doesn't have to find a load of new resources.
"The company's dividends have gone up about 10 per cent year on year and they have increased the dividend 11 times and never cut it. The stock got to unbelievable valuations in early 2009 when we bought an awful lot. I don't think we can go up 10 times from here but it can go up by several multiples," he says.
Gibson Energy now makes up 3.9 per cent of the portfolio. The Canadian market has been "phenomenal in the bad way," he concedes, but Gibson Energy has "a yield of 7 per cent and a well covered dividend, so it’s hard to see why the business is being priced like that," he says.
He is certainly taking a different view to the market. But Mr Rhodes earned his name in global equity income for ploughing a different path to his peers. Instead of looking at companies paying large dividends and sticking to the well-known consumer defensive stocks, he focuses on dividend growth and looks for undervalued opportunities. He is sceptical of paying high prices for big-name stocks which he does not believe will be able to continue bumping up their dividends each year.
"I think being paid to wait is a ridiculous phrase, wouldn't people prefer to be paid to grow?" he asks. That conviction has worked over the long term - the fund has delivered a return of 55.6 per cent over five years with a yield of 3.6 per cent, and has increased distributions by 45 per cent since launch.
It also means his fund looks different to its benchmark, and to his peers. He steers clear of stocks such as Unilever, Coca Cola, Procter and Gamble and Colgate because doesn't believe dividend growth can continue over the long term and says their price/earnings ratio looks too high for years ahead.
"They all look the same apart from Reckitt Benckiser, which has a growth rate that other are finding hard to match. Others are really struggling and have lofty multiples and they are not growing into them," he says.
But when it comes to the US, a region many managers cite as overvalued, he disagrees. "The US is a big place full of large liquid names and I think the valuations would have to get very extreme before we couldn’t find 15-20 ideas," he says. "It's priced highly but some of my cheapest names in the fund are in the US."
So far this year Mr Rhodes is still struggling, having lost 6.6 per cent in three months. He says: "We started off poorly and got it all back and now we're 3 per cent behind the index." But he stresses the fund's high active share - the difference between its holdings and the benchmark index - and says its aim is to offer a 4 per cent yield and 10 per cent growth per annum is "doable".
"Over seven years the yield has been around 3.6 per cent and our growth rate has been between 7-8 per cent so it's an aspirational goal to get somewhere near that," he says.
Having just made his big decisions under very public scrutiny, how does he feel? "The decisions we make this year will define our performance in the next five years. It was the same when we started. The difference now is that when we did it in '08 barely anyone knew who I was internally or externally," he says. Here's hoping his bets will turn out well for investors.
