BL-Equities Dividend aims to generate a higher risk-adjusted return than that of the global equity markets over the long term, by investing in high-quality companies offering attractive dividends. Fund Manager Jérémie Fastnacht answers the most frequently asked questions.
What are the main features of BL-Equities Dividend?
The key point is that we are highly selective.
We do not screen the major equity indices to find stocks posting the highest dividend yields and then try to identify what qualities these companies could have.
Instead, we look for investment opportunities solely from among what we consider to be top quality companies around the world, then we only select those that offer attractive, sustainable and growing dividends.
The portfolio is therefore concentrated on a relatively small number of stocks and is clearly differentiated from the indices and its peers.
Also, we manage the fund with a genuine long-term view. This results in low turnover – around 14% on average over the last three years. The companies currently in the fund have been held for an average of around five years. Several have even been in the portfolio for more than a decade, like Unilever and Nestlé for example.
Moreover, appreciating the compounding effect of superior cash flows over the long term is not intuitive, and we think that most investors and analysts underestimate the value of high-quality companies because they focus only on the next few years.
But this does not mean that we do not pay close attention to valuation. It is in fact a critical element of BLI’s investment process.
Lots of fund managers talk about focusing on quality stocks yet they end up constructing very different portfolios. What exactly do you mean by quality?
Many analysts, investors and companies associate quality with things like strong sales or earnings per share growth, regular share buybacks, big mergers & acquisitions, etc.
But in reality, the only true measure of economic value creation is the Return On Capital Employed (ROCE). In very simple terms, this means the return generated on the money the company needs to run its business.
Sustainable competitive advantages and barriers to entry are key to enabling quality companies to grow and maintain a superior ROCE over long periods, despite competitive pressures . Such advantages may be distribution networks, captive installed bases, licences, patents or brands.
On average, the companies currently held by BL-Equities Dividend maintain an ROCE of 18% compared to around 8% to 10% for companies in the main regional equity market indices.
This emphasis on quality is a feature shared by all our equity funds.
Why focus on equities offering dividends?
Over the long term, dividends account for a significant proportion of the total return from equity markets.
Equities are the only asset class in which the cash flows generated are automatically reinvested to go on to produce more cash flows, and sometimes offer a dividend along the way, which may also grow.
Also, in today's context, I find it hard to understand why a long-term investor would buy some types of bonds knowing in advance that they will lose money if they hold them to maturity, even before factoring in inflation.
However, you have to be selective because not all dividends are equal, nor without risk. A very high dividend yield often reflects a valuation that has taken into account problems affecting the underlying company, and that dividend may soon be cut or even cancelled.
We focus solely on dividends from quality companies which are attractive in absolute and relative terms, sustainable because they are covered by cash flows, and have growth potential.
BL-Equities Dividend currently offers a gross weighted average yield of 3.1%. The companies in our portfolio have increased their gross dividend per share by 7% p. a. on average over the last 5 years.
Aren't companies that pay dividends, by definition, short on growth potential?
That can sometimes be the case. However, the companies that we look for have a sound business model and limited investment requirements. They are able to invest in their activities to generate profitable growth and pay attractive dividends at the same time.
Moreover, the trends driving the growth of our companies are many and various: Coloplast is benefiting from an ageing population; Microsoft is dominant in the cloud; urbanisation in Asia is boosting business for KONE, the leader in elevators and escalators; LVMH and aircraft engine manufacturer Safran are profiting from the increase in disposable income in emerging markets; Rockwell is at the centre of industrial digitalisation and automation; while more rigorous standards, the proliferation of products and brands, shorter innovation cycles and the increasing demand for traceability are helping Intertek and SGS, the champions of the ‘test, inspection, certification’ sector, and Givaudan, world leader in flavours and fragrances.
These are just a few examples and they also serve to show that BLI equity funds are not hemmed in by a particular theme.
In addition, because the companies in BL-Equities Dividend offer added-value products and services, they can rely on their capacity to raise their prices. This is crucial as the objective is not growth at any price but profitable and relatively regular growth.
How has BL-Equities Dividend performed since inception?
Given the asymmetry between losses and gains and most people's risk aversion, we think that it is more important to resist better in difficult markets than to capture the entirety of the upside in periods of euphoria.
And that has been the fund’s profile since its launch in 2007. To be honest, our fund is not the best option for speculating on a rally in cyclical stocks for example, but over the long term, it has offered an attractive risk/return profile. The fund tends to be differentiated by its relatively low volatility, and more importantly, its relative resistance during market corrections.
But I must emphasise that this is its track record and we cannot make any promises for the future.
Our past performance could be explained by our selectivity in favour of sound, high-quality companies, with a relatively recurrent business, and by the attention we place on valuation.
We do not take the risk of investing in the potential future winners of the latest trendy sector. We seek out companies that have already won. Obviously, this approach does not appeal to everyone when the markets are in a state of euphoria.
The average founding date of the companies in our portfolio is 1938, which means that most of them have withstood a number of recessions, crises, and even wars, and are still very profitable today. For example, PepsiCo has not reduced its dividend since 1972, Colgate-Palmolive since 1962, and Nestlé for almost 8 decades. Despite the selection bias, this gives a certain idea of the resistance of the business models we look for.
Is now a good time to invest in this fund?
It’s always a good time to invest in BL-Equities Dividend!
Actually, that answer is more serious than it seems. Most people often try to find correlations that have worked in the past, predict the outcome of political events, anticipate macroeconomic data, forecast interest rate movements, or worse still, guess how the markets and hence millions of investors will interpret it all...
It seems unrealistic to hope to achieve this reliably and repeatedly…
In contrast, the shares of the quality companies that we look for – companies offering added-value products and services, protected by strong competitive advantages, maintaining high return on capital employed and cash flows, with the potential for profitable growth, having a sound balance sheet and paying attractive, sustainable and growing dividends – should naturally generate a relatively attractive risk-adjusted return over the long term.
So you have to own them in all weathers.
BL is a “SICAV” (Investment Company with variable share capital) governed by Luxembourgish law, whose management company is BLI - Banque de Luxembourg Investments S.A. ("BLI"). The economic and financial information included in this publication is provided for information purposes only based on the information known at the date of publication. Nothing in this document should be construed as an offer and is therefore not a recommendation to purchase or sell shares, neither a legal or fiscal advice. Each information should be used with the greatest of care. No guarantee is given as to the accuracy, reliability, currency or completeness of this information. BLI cannot guarantee that the securities and financial instruments will achieve the intended investment objectives. Interested persons must ensure that they understand the risks inherent in their investment decisions and must refrain from investing until they have carefully assessed, in consultation with their own advisors, the suitability of the investment to their specific financial situation, in particular concerning the legal, tax and accounting aspects. Subscriptions are only permitted on the basis of the current prospectus, the latest annual or semi-annual report and the Key Investor Information Document (KIID). These documents are available free of charge from BLI at any time. KIIDs are also available on the BLI website (www.bli.lu). Past performance is no guarantee of future results. The funds in the BL Funds range are subject to supervision by the CSSF.