17 January 2024 6 minute read
Author

Richard Saldanha celebrated his tenth anniversary as lead portfolio manager of the Global Equity Income Strategy in November 2023. Here is the journey of the strategy over that decade.

Important information

Read this article to understand:

  • The potential advantages when investing in global equity income strategies
  • The journey of the Global Equity Income Strategy to deliver a decade of consistent outperformance versus the benchmark
  • What the next decade will look like for equity income investing
We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten…

Bill Gates

"The Road Ahead”, 1995.

A lot can change in ten years.

A decade ago, when Richard Saldanha took over as lead portfolio manager on the Aviva Investors Global Equity Income Strategy, no one could have foreseen the significant events that would shake the world, economies and markets alike over that time.

The chaotic decade encompassed major obstacles for all investors, from political ructions to a global pandemic. Huge intraday swings and relentless volatility in all risk assets became the norm, growing more frequent and intense – culminating in a great number of drawdowns for equity investors. Yet, global equities dramatically grew by 8.2 per cent per annum in that same period.1

A resilient and consistent approach

Over the ten years, Richard and his team successfully guided the Global Equity Income Strategy to deliver a net annual return of 11.2 per cent alongside a compound annual dividend growth rate of nearly ten per cent (Figure 1).2,3 This shows that as a core equity holding, our strategy can play an important role in providing stability and growth to portfolios over the long term.

Figure 1: Delivering income growth

Ten-year annual dividend growth

Past performance is not a reliable indicator of future results

Note: Representative account. Dividend figures based on quarterly pay-outs in pence.

Source: Aviva Investors, Bloomberg. Data as of December 31, 2023.

Figure 2: Delivering consistent performance

Composite performance

Composite performance

Past performance is not a reliable indicator of future results

Note: Performance shown for the Aviva Investors Global Equity Income Composite. Inception date of the Strategy is March 31, 2013. See end note for composite disclosure.

Source: Aviva Investors, B-One. Data as of December 31, 2023.

A decade of consistent outperformance of the benchmark

Since Richard became lead portfolio manager in 2013, the strategy (representative account) has consistently outperformed the MSCI All Country World Index over all major time frames, with top decile performance versus peers over three-, five- and ten-year periods as at December 31, 2023.4 Further, it was either the top, or the top-three ranked, performer versus notable peers as at December 31, 2023.5

Richard has been ranked the number one manager in the Global Equity Income category based on total returns over the last two years, and number three over the last five years – a testament to his exceptional track record in this asset class (rankings as of June 2023).6 Here’s how he explains the reasons behind the strong performance of the strategy, the lessons he has learnt over the period, and his expectations for income investing over the next ten years.

Richard Saldanha on equity income investing

A good starting point

There are potentially a few key advantages when it comes to investing in global equity income strategies, one of which is capital protection. Income strategies can offer greater levels of capital protection in periods of market stress. Inflation protection is another. Higher-yielding companies are typically well-established franchises with the ability to support a sustainable and growing dividend. These dividends, re-invested over time in a well-balanced, high-conviction portfolio, can deliver a powerful compounding total return for investors and a hedge against inflation.

Today, investors can find companies that pay and grow dividends across a wider spectrum

Last but not least, diversification. In past years, opportunities for income funds were largely limited to companies in traditional income-paying sectors such as financials, healthcare, consumer staples, energy, utilities and telecoms. Today however, income investors can find companies that pay and grow dividends across a wider spectrum, including non-traditional sectors such as technology and industrials.

Translating advantages into performance

We believe our strategy’s strength lies in the way we select holdings for the portfolios. Our philosophy has been consistent over the decade, looking through short-term market noise, and instead, focusing on free cash flow generation from companies with sustained growth in their dividends, which we believe should offer better protection against volatile markets. We have always focused on companies with attractive growth prospects and sustained returns on capital, but only where we see resilience in the underlying business and a margin of safety in terms of valuations.

For a stock to be included in our portfolios, we focus on three key characteristics: predictability, protection and upside. Predictability in terms of free cash flow compounding and income growth. Protection against the downside through good business models, balance sheets and valuations.

We look for the upside that equity markets deliver over the long term by looking beyond traditional income sectors

Finally, we look for the upside that equity markets deliver over the long term by looking beyond traditional income sectors, aiming to maximise both income and capital growth potential. We seek income from a variety of diversified sources and ensure the strategy invests in companies across the “dividend yielding” and “dividend growth” scale. We believe this maintains a balance in our strategy without the skew towards either growth or value styles witnessed among many of our peers.

A distinguishing feature of our strategy is the move into non-traditional income sectors, giving a higher weighting to resilient industrials (such as elevator manufacturers, information service companies and payroll processors), as well as technology (such as those empowering growth in artificial intelligence, cloud computing and digital payments). This pivot has proven beneficial to performance, with the two sectors’ returns outweighing those of traditional ones, as the global equity market continues to rebound from a difficult 2022. It also helped the strategy’s returns to keep pace during many periods of growth-driven bull markets before central banks started implementing aggressive interest-rate hikes to tame inflation.

Delivering for our clients

We have been able to shield our returns from wider market and economic challenges through the philosophy and investment process outlined above. During the period of rapidly rising interest rates and high inflation since 2022, for example, the businesses in our portfolios were resilient against market volatility and inflationary pressures.

Protection against drawdowns is crucial for any income strategy to be successful

We have also been able to offer clients consistency through market style rotations between value and growth, as well as resilience in income growth. While drawdowns are more frequent than investors may believe or remember – protection against them is crucial for any income strategy to be successful, and ours is no different – our investment in resilient businesses has offered a better defence than the benchmark MSCI ACWI.

Additionally, the ability to keep up with rising markets has been another crucial component of our success to date; we have outperformed both the MSCI ACWI and notable peers over all major time frames in the past ten years. Our strategy has continually grown its income since inception despite certain periods when a vast array of companies cut dividends. The COVID-19 period is a prime example of this resilience; during the pandemic, 95 per cent of the names we held either maintained or grew their dividends, with one exception (which in the event reinstated them very quickly).

The future is all about megatrends

While, through our tried and tested processes, we aim to continue to deliver positive outcomes going forward, we are thinking about the next decade and what it will bring for equity income investing. It is certain that in addition to company fundamentals and macroeconomic factors, investors hoping to successfully navigate the challenges of the coming years will need to pay close attention to global megatrends.

Among the most important of these shifts is demographic change. While it is not easy to predict what lies ahead, it seems clear that the rapid ageing of populations in advanced economies will lead to a significant increase in demand for income. This weight of capital, searching for investments that generate the highest levels of returns, is likely to spur changes in many industries.

Electrification will likely be one of the biggest growth opportunities across industries

Another key megatrend: electrification. This will likely be one of the biggest growth opportunities across industries given the numerous requirements for development, expansion and modernisation, along with the necessity to transition away from fossil-fuel power sources. Similarly, the rise of artificial intelligence technology, which now forms part of our daily lives, promises substantial changes in many sectors, including autonomous vehicles, healthcare and agriculture. Climate mitigation efforts are also set to transform the fortunes of several sectors.

We believe that through our robust research process, we should be able to find more companies combining strong dividends and protection (the traditional cornerstone of income investing) with capital growth in this new environment. The Global Equity Income team is backed by a fully integrated analyst and environmental, social and governance (ESG) team who contribute and challenge investment recommendations from the beginning, allowing us to identify candidates for investment outside of traditional income sectors and differentiate from our peers.7

These capabilities should come into their own at a time of volatile markets, high interest rates and macroeconomic uncertainty. We believe an allocation to our Global Equity Income Strategy can offer investors the potential for long-term capital growth through a more resilient approach that aims to defend against the challenges of this uncertain environment while also capturing the potential upside when it presents itself.

Global Equity Income Strategy

A concentrated and high-conviction strategy that aims to deliver an income yield of 125 per cent of the MSCI All Country World Index, while growing both capital and income.

Find out more

References

  1. MSCI All Country World Index (MSCI ACWI), annualised gross returns, US dollars. Data as of November 30, 2023.
  2. For the Aviva Investors Global Equity Income Composite. Inception date of the Strategy is March 31, 2013. Net of fees, GBP. Source: Aviva Investors, B-One. Data as of December 31, 2023.
  3. Compound annual growth rate (CAGR), dividend figures based on quarterly pay-outs in pence. Source: Aviva Investors, Bloomberg. Data as of December 31, 2023.
  4. Lipper. Representative account for the strategy. Performance is shown net of fees. Data as of December 31, 2023.
  5. Morningstar. Representative account for the strategy. Performance is shown net of fees. Data as of December 31, 2023.
  6. Citywire Funds Insider, Global Equity Income. Rankings as of June 30, 2023.
  7. The investment manager always applies the Firm’s Baseline Exclusions Policy and any specific constraints within a prospectus or IMA, but any other ESG factors or risk considerations are adopted at the manager’s discretion.

 

Key risks

Investment risk and currency risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates. Investors may not get back the original amount invested.

Emerging markets risk

Compared to developed markets, emerging markets can have greater political instability and limited investor rights and freedoms, and their securities can carry higher equity, market, liquidity, credit and currency risk.

Equities risk

Equities can lose value rapidly, can remain at low prices indefinately, and generally involve higher risks - especially market risk - than bond or money market instruments. Bankruptcy or other financial restructuring can cause the issuer's equities to lose most or all of their value.

Hedging risk

Any measures taken to offset specific risks will generate costs (which reduce performance), could work imperfectly or not at all, and if they do work will reduce opportunities for gain. 

Illiquid securities risk

Certain assets held in the Strategy could, by nature, be hard to value or to sell at a desired time or at a price considered to be fair (especially in large quantities), and as a result their prices could be very volatile.

Income risk

The investment objective of a Strategy is to generate income, at times this may limit opportunities for capital growth.

Related views

Composite disclosure

This composite is benchmarked against the MSCI All Country World Index (ACWI) (Net) which is designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 26 emerging markets. The MSCI ACWI Index is a free float-adjusted market capitalization in each market. Aviva Investors Global Services claims compliance with the Global investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Aviva Investors Global Services has been independently verified for the periods January 1998 through December 31, 2020. The verification reports are available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm's policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.

The firm is defined as Aviva Investors Global Services, which includes all managed assets, excluding direct real estate investments. The firm was redefined as of December 31, 2013, when open ended direct real estate assets were removed from the firm. Closed end direct real estate assets had been excluded from the firm as at December 31, 2010. Therefore, direct real estate assets managed by Aviva are not included within the assets under management value. Following the acquisition of Friends Life group by the Aviva Group, the assets managed by Friends Life group, and its investment operations, were integrated into Aviva Investors in 2015. Aviva Investors Global Services AUM increased from £131bn at the end of 2014 to £172bn at the end of 2015. Further to an agreement dated 26 May 2018 between Aviva Investors Global Services Limited and LaSalle Investment Management, Aviva Investor's global indirect real estate investment division was transferred to LaSalle Investment Management with effect from 6 November 2018. Additional details are available upon request. This composite includes funds that are actively managed with an income focused investment approach. The portfolios will invest in a blend of dividend paying companies listed anywhere in the world and will aim for capital growth and income over the longer term.

This composite was created on March 31, 2013. With an inception date of March 31, 2013. he returns are calculated net of non-reclaimable withholding taxes on dividends, interest and capital gains. Reclaimable withholding taxes are recognised on a cash-basis. Net returns are calculated net of actual fees. Gross returns are presented gross of management fees and other expenses but net of all trading costs. For unitised funds, gross returns are calculated by adding back the Total Expense Ratio (TER) only, or part thereof, to the net return. Actual fees charged are dependent on the mandate and value of client assets. The fee scale for pooled clients ranges from 0.1 per cent p.a. to 1.8 per cent p.a. and for segregated mandates the fee scale starts at 0.5 per cent p.a. All income is taken gross of tax, but net of irrecoverable taxes. Further information is available upon request. The Firm uses derivative instruments for investment purposes as per the prospectus. These derivatives include futures, forward, options and swaps.

A more complete description of the derivatives used can be found in the investment guidelines of each fund within the composite, along with the maximum exposure level allowed for each fund. For composite benchmarks the weights are rebalanced monthly. Dispersion measure, based on an equal weighted calculation (equal weighted ex-post standard deviation), is done when there are more than 5 accounts in the Composite. The vast majority of the composites will not show a dispersion measure. The 3-year annualised volatility measures displayed, if applicable, are calculated using the 3-year annualised ex-post standard deviations. This information is not presented when there are less than 36 monthly observations available. Net-of-fees returns are applied in the calculation of this GIPS Report's Risk Measures. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request.

A list of composite and limited distribution pooled fund descriptions and a list of broad distribution pooled funds are available upon request. Fees are specific for each portfolio. All asset weighted management fees currently being charged in a composite are calculated for each composite. Fees for non-retail portfolios are negotiable. There may be inconsistencies between the source and timings of the exchange rates used to calculate the returns among the portfolios within this composite and between the composite and the benchmark. The sources of exchanges rates for the funds are as per our Valuation / Pricing principles. The source of the exchange rates of system reporting the composites and benchmarks returns are quoted WM / Reuters Closing Spot Rates (1600hr London). Further information is available on request. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

Where relevant, information on our approach to the sustainability aspects of the strategy and the Sustainable Finance disclosure regulation (SFDR) including policies and procedures can be found on the following link: https://www.avivainvestors.com/en-gb/capabilities/sustainable-finance-disclosure-regulation/

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK this is issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Hong Kong the contents of this document have not been reviewed by any regulatory authority in Hong Kong. It is not intended to constitute, and under no circumstances should it be construed as, an offer or invitation to anyone to invest in any products, an offer of or solicitation for services, or an advice on any products, services or investment, associated with Aviva Investors Asia Pte Ltd. If Investors are in any doubt about any of the contents of this document, they should obtain independent professional advice. This document is not being distributed in Hong Kong other than (1) to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong (the "SFO") and any rules made under the SFO; or (2) in other circumstances which do not result in the document being a "prospectus" as defined in the Companies Ordinance (Cap. 32) of Hong Kong (the "CO") or which do not constitute an offer to the public within the meaning of the CO. No action has been taken, in Hong Kong or elsewhere, to permit the distribution of this document to the public of Hong Kong or in a manner in which this document may be accessed or read by the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong). This document is distributed on a confidential basis. 

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material.  AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act 2001 and is an Exempt Financial Adviser for the purposes of the Financial Advisers Act 2001. Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.