Predicting further dollar appreciation, Geffen – who is both CEO and fund manager at the group – said the expected rise would be largely due to the US economy decoupling from the rest of the world.
Referencing the recently published Capita Dividend Monitor, which reported a record year for UK dividend payments of £97.4bn and identified US dollar growth as the biggest driver of income returns in Q4 2014, Geffen said the trend was far more significant than the quarterly numbers suggested.
He said: “It is actually the most profound issue to get right as a UK equity income investor in 2015. We believe that the US dollar will continue to strengthen significantly from its current level.”
Three main routes are available to UK equity income investors: buying US companies directly; targeting UK companies set to benefit from a rising dollar; and taking dividend payments in dollars where possible.
Geffen said he felt it was necessary to combine all three approaches in order to produce an optimal dividend strategy in his £329m Income fund.
“We hold Microsoft in the Income Fund to capture its dollar earnings. Certainly the firm has headwinds to tackle as it adjusts to weaker markets for PCs. However, the firm is innovating fast and deploying immense effort to become a leader in cloud technology. We believe the market has underestimated this and, on a tactical basis, the company can add some diversity at the edge of a UK income portfolio.”
An example of a company with sterling dividends exposed to dollar strength is Pearson, at 3.1% of the fund.
The Financial Times’ parent offers a 3.96% dividend yield and is believed to be the most successful global publisher in transitioning from print to digital publishing, with 60% of revenue now coming from online sources.
“We believe the firm has the capacity to grow its dividend from here and, as a result of its significant US education business, it benefits from a strong currency tailwind as the dollar continues to strengthen.”
It generates approximately 60% of its earnings in the US and even a modest move in the exchange rate can meaningfully improve the company’s earnings.
According to Capita, paying out in dollars added £310m to the total value of distributions last year by UK plc.
Neptune has exploited that trend by taking its HSBC dividend in dollars.
“It is our conviction that this approach will prove one of the most significant drivers of dividend growth in 2015, a year which is likely to be challenging for the UK equity market – at least in the run up to our general election and, depending on results, after that as well.”
Geffen explained the US could tighten monetary policy without derailing its growth prospects or derailing its housing market, but added: “The same can unfortunately not be said about the UK.”
Facing “the most uncertain election in generations” will present a significant headwind to the market and possibly the economy as well.
“This uncertainty comes in the context of a significantly overpriced housing market – which constrains our central bank’s ability to raise rates.”
