Finding dividends across the globe
13 July, 2021
Martin Connaghan is manager of Murray International Trust, alongside Bruce Stout and Samantha Fitzpatrick.
Sponsored by Aberdeen Standard Investments
2020 was one of the toughest years for dividends ever seen with widespread cuts and cancellations.
Geographic diversification proved an advantage during the crisis, minimising the drop in dividends for our investors.
From here, we believe that looking across the world for income allows us to bring in exciting growth ideas, with the potential to maintain and grow the dividend.
Over the past 20 years, the world has opened up for dividend investors. At the turn of the century, the UK was one of the few markets with an established dividend culture, but since then, Asia, emerging markets, the US and other countries have all come on stream. This has greatly contributed to the opportunities available to us with Murray International, but it proved particularly important in 2020.
2020 was one of the toughest years for dividends we’ve ever seen. There were suspensions and cancellations across a huge range of sectors as companies took steps to shore up cash flow as the pandemic took hold. The result was a deep dividend recession – how long this lasts remains to be seen.
The ability to draw dividends from across the world was vital for three reasons: incorporating companies from Asia, emerging markets, the US and elsewhere had already helped us build a war chest of dividend reserves to help us through this difficult period. Also, many of these companies proved resilient during the crisis itself. The UK market was one of the hardest hit. Perhaps most importantly, this global reach gives us more flexibility in repairing the Trust’s dividend in future, allowing us to target fast-growing companies with reliable dividend payouts, regardless of their location.
During the crisis, markets were polarised into, broadly, technology or non-technology. Traditional technology stocks, media and entertainment and consumer discretionary businesses with a solid e-commerce model all led the market returns. Given that many of these companies don’t pay dividends, this was unhelpful. However, diversification proved very positive from an income point of view, protecting the Trust against the worst declines in income.
Equally, this polarisation has opened up opportunities. We have increasingly found strong, cash generative companies where share prices have been hit hard, but the recovery prospects are strong. We believe we have been able to enhance the yield and dividend growth characteristics of the portfolio, putting us in a far stronger position for the future.
From a sector point of view, we have lots of businesses in different industries doing different things. In the UK, dividends tend to be confined to a small number of low growth sectors. This isn’t true elsewhere in the world – in the US, for example, the trust holds AbbVie (biopharmaceuticals), Broadcom (semiconductors) and CME Group (financial exchanges). We believe this blend of sectors will be vitally important as the economy recovers.
In the short-term, the return to normality and the strength of economic recovery are dependent on vaccinations and reopening. But there are wider considerations: how will the pandemic support packages be paid for? Will high government debt be a drag on growth? Budget deficits in many Western developed countries have expanded by a magnitude not seen since the Second World War.
We believe this will make a difference to the strength of economic growth in different parts of the world: Asia has emerged from the pandemic more quickly, with less debt and should grow faster in the long term. To our mind, this is fertile ground for investors.
Markets have been extremely narrow: when growth is scarce, investors are prepared to pay a high price for it. That said, as economic growth spreads out and recovery takes hold, we believe investors will start to look more broadly, away from the narrow range of stocks that have dominated through the crisis.
This means there is a real opportunity for us to access stronger growth, stronger earnings and dividends in companies that may have struggled, but where the outlook now looks considerably brighter.
Looking globally has helped us gain exposure to important fast-growing areas that might otherwise be too expensive or not have the required dividend characteristics. Within renewable energy for example, Enel in Italy has among some of the largest and fastest growing renewable energy exposures in the areas of hydro, solar and wind. Taiwanese components maker Hon Hai Precision is looking to use its expertise in assembly management to create opportunities within the electric vehicle manufacturing process. In Chile, Sociedad Quimica Y Minera, the world largest lithium producer, a key raw material in electric battery technology, is also a way to gain exposure to this area.
2020 was undoubtedly a tough year, but it has also opened up opportunities. We see better times ahead for global dividends as the economy recovers and believe that drawing ideas from across the globe should put the trust in a good position to benefit.
Risk factors you should consider prior to investing:
The value of investments and the income from them can fall and investors may get back less than the amount invested.
Past performance is not a guide to future results.
Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
The Company may charge expenses to capital which may erode the capital value of the investment.
Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘sub investment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.