Investing in "hairy situations"

Taking a different view to his peers has helped make Artemis Global Income the top-performing fund in the Investment Association (IA) Global Equity Income sector over five years, with a return of 121.9 per cent compared with the sector average of 77 per cent and MSCI All Country World Index's return of 94.9 per cent.

Mr de Tusch-Lec hunts for value stocks with reasonable price tags and reasonable yields. But in a low-rate world flooded with income-seekers those are increasingly hard to find.

"A lot of the things in the fund now are slightly hairier situations than they used to be because there aren't a lot of pockets of value left in the market," he says. "In 2010 you could buy Colgate (US:CL) and argue it was good value but that is not the case now. To get value you have to take some risk, but it's all about the kind of risk you take. For example, in Europe we have found ourselves in the special situations space - we try to find companies where the underlying business is very stable but the valuation is not stable because of other factors."

Italian TV network company EI Towers (EIT:MIL), which accounts for 2.7 per cent of the fund's assets, is one example. "The dividend is rock solid so it is similar to an inflation-linked corporate bond in some senses," explains Mr de Tusch-Lec. "But if the Italians left the euro there would be a currency issue. We are aware of that, but think the market has been too aggressive."

Italian telecoms company Infrastructure Wireless Italiane (Ita:INW:MIL) and TV 'tower' company Rai Way (Ita:RWAY) are also in the fund's top 10 holdings, and have stable long-term contracts with providers and broadcasters, enabling them to increase earnings throughout the business cycle. "These are essentially infrastructure businesses in Italy and defensive as hell, but are being priced as if Italy is going to exit the euro," he says. "The three Italian stocks in our top 10 holdings do give me sleepless nights, but it's about taking a view on something that is different to the rest of the market and getting that right."

Mr de Tusch-Lec says all the fund's top 10 holdings are "hairy situations", including the largest - Norwegian financial services company Storebrand (Nor:STB). "It has been an amazing performer and we've probably seen the best from that," he says.

But when he bought Storebrand a year ago it was not paying a dividend. "It was the classic story of a company that no one wanted to touch with a barge pole, but we knew it was changing its spots," he says. It now has a 5 per cent dividend yield.

Data storage company Western Digital (US:WDC) accounts for 3.6 per cent of the fund's assets and should benefit from the growing global demand for phone memory and trends such as driverless cars. However the company is highly geared and there are competitors in its market. "It is not a stock for everyone," Mr de Tusch-Lec concedes, "it's not like pitching Unilever (ULVR)."

Mr de Tusch-Lec takes a long-term total return approach to income rather than just focusing on short-term yields, so the fund yields 2.9 per cent. He says: "I could get a much higher yield if I wasn't looking for total return but my view is that you want a bit of both. When you go global and have a bit more of an unconstrained mandate it isn't hard to get the income, it's the balance between growth and income that's hard."

He divides his portfolio between companies with low but growing dividends, those with high yields, and cyclical stocks that will cut their dividend if the market turns. He also focuses on cash flow yield rather than dividend yield.

"Dividend yield is something you can massage," he says. "You see some companies with supposedly safe dividends, but they've spent the quantitative easing (QE) era gearing up their balance sheets dramatically. They're issuing debt and buying back shares, and driving up the dividend per share. But that can't last."

He includes expensive consumer staple stocks in that bracket.

"You have to ask where the hammer will fall," he says. "I'm worried that if a certain part of the market has done well in a period of quantitative easing and low interest rates then it will not do well when the opposite is happening. In the US I own bank but not consumer staple stocks, because the banks are blowing the numbers out of the water."

His holdings include Wells Fargo (US:WFC), Synchrony Financial (US:SYF) and Citigroup (US:C). "US banks right now have low dividends, but they could soon become dividend monsters," he says. "They're well capitalised and have gone through 10 years of building up their balance sheets and taking out costs."

He admits that holding US banks has "not been a great trade to date", but says "many [US financials stocks] are what we could call utility banking today - they are pretty well capitalised, and the dividends are safe and could grow dramatically in the right environment."

Financials is the fund's largest sector allocation, accounting for 39 per cent of assets. Other value areas he is buying include "basic materials, certain emerging markets and southern Europe", all of which tend to be cheaper than the average but can be higher risk.

"My portfolio has earnings and free cash flow multiples that are 25 per cent below the market average," he says. "But with that comes a lot of sleepless nights."

Ultimately, though, he has more faith in stocks with lower price tags than income stalwarts such as Unilever, as long as they can grow their dividends over time. That explains why the fund has 6.4 per cent of its assets in Japanese companies, many with yields of only 1 per cent, and why he is happy to buy stocks yielding nothing today.

That puts Mr de Tusch-Lec in a different camp to many of his global equity income peers, but he is happy to be there. "Income investing used to be value investing and now it's the opposite," he explains. "If you're buying a company on 25 times earnings with a 2 per cent yield, you have to ask if you are actually getting the characteristics that were the reason for being an income investor in the first place."

Source: Morningstar, as at 26.04.17

Performance (cumulative total returns %)

Source: Artemis, as at 31 March 2017

Top 10 holdings (%)

Source: Artemis, as at 31.03.17

Sector allocation (%)

Source: Artemis, as at 31.03.17