This fund aims to deliver both income and long-term capital growth. It concentrates on mega-cap companies in developed markets, with 90% of holdings having a market value of over £10bn. The target yield is at least 125% of that on the MSCI All Country World Index.
The portfolio invests across a variety of sectors and geographies, providing diversification. The fund adopts a conservative strategy. All holdings must demonstrate clear business models, healthy cash flows and have minimal debt.
Daniel Roberts has managed the fund since January 2012, having joined Fidelity from Gartmore. While he is ultimately responsible for stock selection, he has support from Fidelity’s global team of around 130 research analysts.
The specialist analysts, based in key regions, regularly meet companies, with many having the advantage of speaking the local language. Roberts also works closely with six other equity income managers.
Investment philosophy & process
Roberts believes that high quality businesses are best placed to preserve and grow investor’s capital over the economic cycle. Company management must demonstrate the ability to maximise return on capital.
As well as the bias to quality, there is also a strict valuation discipline. Roberts considers valuation to be the single most important factor affecting future returns. He is adamant he will not overpay and is always prepared to bank profits and move on to another opportunity.
When evaluating a company, Roberts considers three factors: dividend yield, earnings growth and valuation change. If markets fall, robust earnings and dividends are crucial to preserve capital.
A stock-picking process is used to identify companies that meet his criteria. Roberts emphasizes the sustainability of the dividend and having a margin of safety in the event of a setback. The universe is screened for companies with recurring revenues, and which offer at least mid-single digit dividend growth.
The approach currently favours defensive companies with high return on equity such as healthcare. Roberts tends to make limited allocations to traditional high-yield sectors, including telecoms and property, but is highly selective. He always scrutinises the balance sheet and avoids the most indebted companies.
Performance & costs
The fund has delivered strong performance under Roberts’s management. Since he took charge on 30th January 2012, it has produced a total return of 169.9% compared with 144.1% for the MSCI AC World Index (FE Analytics 31st August 2019) in sterling terms with dividends reinvested.
In 2018, the defensive positioning helped to protect investors in testing conditions. The fund made a positive total return of 2.2% against a fall of 3.8% for the MSCI ACWI (FE Analytics, 31/12/2017 to 31/12/2018). This was despite lack of exposure to some of the best performing parts of the market- US equities and technology.
The ongoing charges figure (OCF) is slightly above the peer group average at 0.92% but transactions costs are modest at 0.15% due to low turnover.
This high conviction portfolio currently has 40-50 holdings, each accounting for 1-4% of the fund. No holding exceeds 4%, to limit the risk of unexpected events which can affect even the best companies.
The unconstrained, stock selection process means country exposure can differ considerably from the benchmark. For example, around 28% of investments are in the US compared with 56% for the benchmark. This is due to what the manager considers to be unappealing valuations and the fact that many technology stocks do not pay dividends. The fund is currently very overweight in Europe and the UK, although companies here tend to be global businesses with low correlation to their local economies.
Main sector exposures are currently in financials, health care and consumer staples while the fund is underweight in technology, consumer discretionary and materials. The fund has over 20% in Financials, the biggest sector exposure. Roberts prefers simpler and more stable businesses within this sector, such as general insurance, and currently only owns one bank, US Bancorp.
The largest investment is currently Deutsche Bourse, which the manager believes should benefit from a pick-up in market volatility or interest rates. It’s clearing, settlement and custody operations are growth businesses with little correlation to stock markets. US Bancorp, the second biggest holding, is a domestic retail bank operating in the Midwest and Western US. It has a conservative lending culture with, what the manager believes are good growth prospects.
The other top three holding is Roche, which has an attractive pipeline of new drugs, an undemanding valuation, and a solid balance sheet. The company is a market leader in oncology with promising treatments for haemophilia and multiple sclerosis. It has recently benefitted from FDA approval for its personalised cancer treatment.
Although currently underweight in energy, Royal Dutch Shell is a top 10 holding. The company has transformed its business, reducing costs and concentrating on higher return activities. Its purchase of BG group in 2015 has significantly improved cash flow.
Roberts has been relatively cautious in adding cyclical exposure as he still feels there is some valuation risk. However, Informa was purchased in the sell-off at the end of 2018. The company is a global leader in exhibitions, a very profitable business with high barriers to entry and an attractive free cash flow yield.
We appear to be entering a period of slower earnings growth. This means Roberts continues to favour defensive companies with better visibility. Furthermore, the portfolio remains cheaper than the market, which should provide a margin of safety if more expensive shares come under pressure.
Roberts is finding opportunities in Japan and the US where dividends are low in relation to company earnings. This means companies are less likely to cut their dividends, and may actually grow them, albeit from a low base. In the UK and Europe yields are currently higher but dividends are not as well covered by earnings, making them riskier.
Resilient dividends from high quality businesses should serve investors well in a potentially more volatile and uncertain environment. Such companies held tend to be less sensitive to an economic slowdown. The highly selective approach gives Roberts confidence the fund can deliver dividend growth of around 5% in 2019 although clearly such growth cannot be guaranteed. The yield on the fund is currently around 2.7%.
Roberts’ highly selective quality approach does not produce the highest yield in the sector but his strategy provides the potential to both protect capital and deliver a sustainable and growing income.
The fund has outperformed with Dan Roberts at the helm despite low exposure to the US and technology shares. This shows that stock selection, rather than regional asset allocation, has driven returns.
The defensive strategy means the fund may hold up better in falling markets while potentially lagging in strongly rising markets. If sentiment swings towards value stocks, it could lag more economically sensitive funds.
Nevertheless, the strict valuation criteria mean that while the quality approach looks for a ‘margin of safety’, it avoids the most expensive stocks. Morningstar award it a bronze rating.
Important information: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.
Tell us what you think
We would love to hear what you think of our Insight area or if you have any questions or suggestions.
Tell us what you think
Need to speak with our PR Team?