Thomas Buckingham, JP Morgan Asset Management
“People automatically think that a dividend strategy should have a strong focus on buying defensive or bond-proxy type of stocks,” said Buckingham, co-manager of the JP Morgan Europe Strategic Dividend Fund.
Compared with the benchmark MSCI Europe Index, the portfolio’s biggest overweight is in the cyclical sectors, including financials, energy and materials.
In these sectors, he believes a supportive business environment in Europe is resulting in increased profitability. “For instance, many insurance companies have a stronger balance sheet with higher solvency ratio, and their investment book has also done better than in the recent past,” he said.
“It happens equally in the bank space,” he continued. “We start seeing a slight increase in quality of the loan book as some of provisioning that we have seen against loans is starting to come down. If we continue on a rate rising trajectory going forward, the bank sector should benefit.”
In the energy and materials sector, the recovery of commodity prices is expected to support the companies to improve in profitability and bring back cash dividends.
“In 2016, many large-scale miners and oil companies either cut the dividend payout or gave out scrip dividend instead,” he said. But today, these companies have streamlined their businesses by closing down less profitable oil wells or mines, and enhancing their efficiency in capital expenditure. Their dividend policy is reverted to on a cash basis, according to him.
Conversely, he holds underweight positions in Europe’s food and beverages, tobacco, pharmaceutical companies.
The fund invests in around 300 companies from the universe of 18000 European equities, he said.
The largest exposure is to UK companies, accounting for 27.8% of total assets. But compared with the benchmark, the allocation represents a slight underweight.
Buckingham said around 30% exposure of the fund to the UK market is reasonable because it is the largest single country market across Europe.
He added that the UK holdings do not only reflect the domestic economy. “Some of the UK stocks we hold in the portfolio, such as Royal Dutch Shell and BP, are mega-cap companies. They are operating internationally so we do not consider them as UK businesses that reflect the UK economy.”
His team has a reasonable amount of concern about Brexit negotiations. However, he said it is difficult to measure the impact of Brexit in a forward-looking perspective.
“What we can measure is the macroeconomics data. The message we get from the indicators is reasonably positive,” he added. He cited positive purchasing managers’ index in the UK and a low unemployment rate and suggested the economy remains in expansionary territory with an expected rise in wages.
Underperformance
The most recent annualised yield for the euro share class is 5%. However, the fund underperformed versus its benchmark MSCI Europe Index on a three-year basis. He said the conservative dividend policy of European companies across the board may have hurt pure dividend strategies like the fund he manages.
Despite the improving macro environment in Europe, income investors were not able to benefit because of a lagging dividend reward to shareholders. “Income investing did not work very well in the European equity market in the past couple of years partially due to a decline in dividends in many sectors, such as mining. The stock prices, however, recovered very strongly before their dividend reinstated. Therefore, some of this outperformance was missed,” he said.
He noted that the fund also took a hit because of the UK’s Brexit decision in 2016. “Income investors that had material exposure to domestically-focused UK stocks, which had an attractive dividend yield at that time, tended to suffer.”
