Ten years is a long time in asset management. During the past decade there has been a global financial crunch, a eurozone crisis, unprecedented quantitative easing and the most unloved bull run in market history, to name just a few.
Keeping a global fund afloat in these circumstances is no easy task but one that Stuart Rhodes has handled with gusto and great focus since he launched the M&G Global Dividend Fund in 2008 as a 27-year-old.
Reflecting on the past decade, he says the early stages of the financial crisis was an “interesting time” to launch a dividend fund, but the ensuing years can’t have been too hard on Rhodes, who still looks as fresh-faced as back then.
Trial by fire
Prior to launching Global Dividend, Rhodes worked alongside Aled Smith on the M&G American Fund, which he says taught him early on what it takes to manage a large fund and gave him the confidence to launch his own vehicle.
“We launched the fund into what was the worst dividend market we’d seen since the Second World War,” he says. “In hindsight, it was a really good thing for me because we survived it and did very well.”
Rhodes believes pulling through the crisis perhaps got his fund more attention from investors in its early stages than his peers.
Indeed, barring a period of sharp underperformance in 2009, a good run of flows and performance meant the fund largely rode out the volatility created by the eurozone crisis. However, halfway through 2014 it hit a stumbling block, as several stocks in the portfolio suddenly correlated strongly to the oil price.
The fund returned 3.11% in 2014 versus the IA Global sector’s 7.09%, according to data from FE Analytics.
“That led us into what has been our one difficult time running the fund, which was the second half of ’14 and through ’15, when we underperformed by a reasonable amount. It was the first time, so a lot of our clients weren’t mentally prepared.
“In no way have we ever been hugging the benchmark in any shape, way or form, so if you can outperform by 7%, which we did a few times, you can underperform by 7%.”
Clients pulled money from the fund as it went from £9.5bn under management in early 2015 to its current £6bn. But Rhodes is not afraid to admit when he has made a mistake. In 2015, he wrote an open letter to the fund’s investors, apologising for complacency around underperforming stocks in 2014.
“Clearly, we get businesses wrong,” he says in an honest appraisal. “You know how many fund managers never admit to getting stuff wrong? Well, I’m not one of those.”
The portfolio turnover is about 25-30% of the fund, which includes names Rhodes feels he has got wrong or those heading in the wrong direction but which still offer a reasonable exit point. The usual reason for selling is because a company has done well and Rhodes is struggling to justify its valuation.
Fortune favours the brave
Despite the tough times, Rhodes says keeping true to his process and philosophy is what has led to the fund’s bouncing back. This is something about which Rhodes has become more uncompromising as his experience has grown.
“Listen to yourself and believe in your own process, your philosophy and understand that the best opportunities come when no one else is interested or they have a negative view on what you are doing.”
Indeed, following the 2014/15 setback, Rhodes loaded up on some of the stocks that had correlated so strongly with the oil price because they were trading at what became “ludicrous valuations”.
“You can see the performance in the past couple of years has been very strong on the rebound. We are very proud because we did not want to react after the horse had bolted.”
The fund bounced back in 2016, returning 40.75% versus the IA Global sector’s 23.35% and the MSCI AC World index’s 28.66%, according to FE Analytics figures. In 2017, it returned 13.17% against the IA Global’s 14.02% and the MSCI AC World’s 13.24%.
The dividend on the fund has grown every year since inception, increasing from 3.56p in 2008 to more than 6p now, and Rhodes is optimistic this growth will continue.
“I see absolutely no reason why the next few years won’t deliver what the previous years have delivered.”
Although it must be tough sticking to your guns in the ongoing bull market. “It’s extremely difficult. In 2015, we were a huge fund. We got to over £9bn at one stage and that has a very big impact on the whole company. Suddenly, you find many more people are interested in what you’re doing and why.
“We’ve been really tested and I think we can point to hard evidence that we’ve done the opposite of what the market consensus was at various times, and that is yielding highly significant results.”
Rhodes believes a lot of fund managers have been successful over the past five years from simply owning stocks that have gone up in the course of the bull market.
He cites the recent “love-in” with consumer staples, such as Procter & Gamble, General Mills, Kellogg’s and Heinz, as bond proxies when people thought interest rates would be low for a long time.
But he warns that these trends never last: “Lots of fund managers have had great numbers just on the belief that shares always go up. They have never had to deal with a challenging period. There will come a time when the darlings of the market do not perform and then we’ll see how good they are.
“I believe 10 years is the earliest time frame you can reach any conclusions over whether that individual is really any good.”
Under the radar
But what about the growth explosion among tech firms? Most of the famed ‘Fang’ firms, bar Apple, don’t pay a dividend. Has that been a hindrance to performance?
“We just accept that and move on,” he says. “If those companies were to start paying a dividend we’d consider them a little bit more seriously.”
According to Rhodes, even if they did pay out to shareholders, he would struggle with some of the valuations attached to these companies. However, he has identified opportunities in technology that do pay competitive dividends.
“It just hasn’t been the really big ones that you hear about all the time,” he says.
This same understated nature is evident in companies in other areas of the portfolio.
“Some of them you will never read about in the papers because they’re not sexy enough. In fact, I feel quite good when a lot of my companies are never in what I would describe as the popular press. It’s usually a good sign and they just chug along.”
He cites US semiconductor firm Broadcom as an example of a company that has rapidly increased its dividend, to almost 25% of the original share price for which Rhodes bought the firm. Broadcom is the fund’s fifth-largest holding at 3.9% of the portfolio.
In fact, the US is the main hunting ground for Rhodes by far as the fund has 52% in US equities, according to FE. The fund holds about 50 names, meaning 25 of them are US companies, and he often gets asked the question as to whether that is too much.
“My answer is always ‘no’ because the US is such a big, broad, liquid market that we always have investment opportunities there.”
Rhodes says for this approach to change, the US market would have to be so extraordinarily expensive that he could not find ideas across the spectrum.
“We always had a big chunk there and I would imagine that will continue for the foreseeable. I certainly don’t see any reason on the horizon why things should change.”
In terms of other geographies, Japan has been heralded for changing attitudes to shareholder payouts, yet Rhodes has no exposure. The fund has only held Japanese companies once, when it launched in 2008.
However, he says: “There does seem to be a decent change in attitudes towards dividend payments and share buybacks as well, which means our choice is gradually getting bigger. I would not be surprised if over the next couple of years we don’t start getting some Japanese holdings into the fund.”
But Rhodes says he is not a manager who will just stick in a couple of holdings for the sake of risk appetite or making it look pretty against the index. “For a company to be on the fund, we’ve really got to believe in it.”
Home truths
Closer to home, The Share Centre recently reported that FTSE 350 dividend cover more than doubled over the past year, from 0.8x to 1.8x, hitting a three-year high. This was driven largely by mining, consumer goods and housebuilding companies. How does Rhodes view the UK market?
“Those kinds of statistics can be really misleading given the construct of the index,” he says. “You always have to dig down. Which companies are we talking about? Domestic UK versus big internationals, oil & gas, pharmaceuticals, banks?
“I’m getting this question a lot: ‘Isn’t the UK cheap?’ Some of it might be but I can say the same about the US. There are lots of parts of the US where we are finding very attractive valuations, emerging markets, too.”
The UK is the fund’s second-largest geographical weighting at 12.8% and holdings tend to be UK-listed but international earners. The second-largest stock holding is Imperial Brands (5.5%) and Rhodes also counts UK-listed Compass, a multinational food services company, among its holdings.
For Rhodes it is more about the underlying companies and not making big calls on sectors or countries but, while he does travel, he is not always on the road.
“Quite often I’ll spend the day with one of the companies we invest in or one that we’re looking at seriously. I find that can bring perspective to the valuation of what you think the company is worth.”
He adds: “It’s a bit of travel but it’s not all-encompassing, which is good because the job’s hard enough as it is without spending your life living out of a suitcase as well.”
After 10 years working “pretty long hours”, what keeps Rhodes ticking? Running a global fund means he needs to be in the office early to cover Asia and stay late to keep up with the US. When he has any downtime he tends to go running in the middle of the day as a good way of de-stressing.
The main motivation, however, is seeing the dividend on the fund grow for clients.
“Ten years ago, clients used to get 3p, now they get 6p and I know they’ll get 10p at some point. That’s real wealth creation, going to someone where it makes a difference. That’s more inspiring than looking at a performance table versus X across the road. That doesn’t really motivate me.”
Biography
Stuart Rhodes joined M&G in 2004 as a global equity analyst. He has been the manager of the M&G Global Dividend Fund since its launch in July 2008 and was appointed deputy manager of the M&G North American Dividend Fund in April 2015.
Fund selector comment: Gavin Haynes, managing director, Whitechurch Securities
“Stuart Rhodes is a stalwart within the equity team at M&G and has established a 10-year track record running M&G Global Dividend. In the past decade he has managed the fund with a clearly defined, consistent approach. While many investors chase
income, Rhodes pays little attention to the headline yield and remains focused on total return.
“The fund invests in companies able to produce sustainable growth and Rhodes will avoid higher-yielding equities, believing this will avoid ‘bond proxies’. The focus remains on businesses with strong potential to provide long-term disciplined expansion that will feed through to consistent dividend growth.
“His focus is to screen the global universe down to an investible universe based on stock specifics. These include dividend track record, payout ratio, potential for growth and a liquidity screen. The overall performance has been strong in absolute and relative terms and, with £6bn invested, it has become one of the group’s flagship funds.”
