Global Equity Income Fund Celebrates 20 years
We started the Global Equity Income strategy in October 2002 (then called the High Yield Fund). The world was still suffering from the fallout of the Technology Crash of 2000 and the global political tensions following 9/11. Nevertheless, the fund had good success in attracting investments at its launch and the initial months. However, equity markets continued their downward journey into early 2003, and by March 2003, despite a very cautious investment strategy, our new fund was down over 10%, a very inauspicious start (albeit well ahead of the global equity index).
Two events then turned things around for the Fund. Firstly, the invasion of Iraq by allied forces in March 2003 and the surprisingly rapid military success provided a market bottom and sharp rebound. Secondly, also in March 2003, for the first time since 1958, the yield on (UK) equities exceeded that of (UK) government bonds, a strong signal (in my view) that equities were suffering from excess pessimism.
As I wrote in the Irish Times in May 2003, I thought it was compelling investment logic that one could put together a basket of high quality, financially-strong, cashflow generating stocks with a good dividend yield, and with a high probability these dividends would grow at 5% – 7% each year. The same logic prevails today in our view.
As you can see below, an investor who put €100 in our strategy at inception, would now have almost €440, a compound annual return of some 7.5% per annum. This is despite the poor initial start, the Global Financial Crash of 2007 to 2009, the Euro crisis of 2011 – 2012, the Covid Crash of 2020, and this year’s inflation-driven correction. Over this 20-year period, we believe our holdings have increased their dividends by some 7% per annum.
Roll forward some 20 years, and we are still using that same logic. We have refined our processes of course, and improved our screening and analytical tools, but the basic investment proposition remains as compelling as it was in 2002/2003.
The other key characteristic of this strategy is that the types of companies we invest in are conservative and ‘boring’ and thus less volatile than the overall equity markets; companies such as Nestlé, Johnson & Johnson and Diageo. I fondly call them my ‘collection of tortoises’. Slow and steady is a strategy many of our clients like, they much prefer a less volatile journey for their funds.
Over the past five years, that the volatility of the Global Equity Income Fund has been significantly lower than the global equity index resulting in a more ‘sleep easy at night’ journey for our clients.
Apart from the defensiveness of the holdings in the Global Equity Income Fund, the other key ‘safety margin’ in our process is our ability to hold significant cash reserves if we are concerned about the equity markets. Higher cash reserves protect clients against market downside, and also give us firepower to quickly purchase quality stocks at attractive prices in a downturn.
As an example of our conservatism, during the ‘Covid Crash’ of March 2020, on the worst single day, global equity markets fell some 10%. Our Fund was down also, but only about 50% of that, at c.5%.
2022 has been a difficult year for the world and for financial markets, and we have worked hard to protect investor capital in the Global Equity Income Fund. As we head into a difficult winter, with higher interest rates and energy bills looming, we are actually becoming less cautious because we believe a lot of doom and gloom has already been priced into the equity markets. Importantly, as when we started the fund in late 2002, even though the economic outlook is concerning, and investors are cautious, many of the companies we favour for the Global Equity Income Fund are attractively priced and, will, in our view, continue to increase their dividends on average by 6% to 8% per annum over the coming years.
Pramit Ghose is Global Strategist at Cantor Fitzgerald.