Quarterly Review M&G Global Dividend Fund Fourth quarter 2017 Fund manager Stuart Rhodes FOR INVESTMENT PROFESSIONALS ONLY Overview The fund delivered positive returns and outperformed the MSCI AC World Index, driven by positive stock selection across a variety of sectors. Methanex and Imperial Holdings made the biggest positive contributions, while Orica led the detractors. There were no new purchases during the quarter, but we sold AbbVie after a strong run and Orica on a rebound. Dividend remained robust across the portfolio, with Broadcom and Visa reporting the biggest increases. Risks associated with this fund: For any past performance shown, please note that past performance is not a guide to future performance. The value of investments and the income from them will rise and fall. This will cause the fund price, as well as any income paid by the fund, to fall as well as rise. There is no guarantee the fund will achieve its objective, and you may not get back the amount you originally invested. Changes in currency exchange rates will affect the value of your investment. The fund holds a relatively small number of investments and, as a result, may experience larger price rises and falls than a fund which holds a larger number of investments. Further risk factors that apply to the fund can be found in the fund s Key Investor Information Document (KIID). Things you should know: The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash. Performance, attribution & positioning Past performance is not a guide to future performance.
Fund commentary The fund delivered positive returns during the fourth quarter and outperformed the MSCI AC World Index. Stock selection added value across a broad range of sectors and was the key driver of the fund s outperformance. Methanex (materials) and Imperial Holdings (consumer discretionary) made the biggest positive contributions. Methanex returned 21% during the quarter in US dollars, as methanol benefited from a favourable combination of higher coal prices, higher gas prices, solid demand, an environmental clampdown in China and higher energy prices. Imperial Holdings, the South African logistics group, rallied with the help of a stronger rand and a supportive environment for emerging markets. We continue to believe that both stocks are undervalued. Stock selection in consumer discretionary was also positive, thanks to a recovery in Pandora. The Danish jewellery company ended the quarter more than 20% higher from its November low, as it emerged that short positions in the stock had been reduced and the chief executive commented that the market is ignoring the company s operational progress. UnitedHealth and Novo Nordisk bucked the trend in an underperforming healthcare sector after both companies raised their guidance. Stock selection was positive in healthcare as UCB, AbbVie and Johnson & Johnson also added value. We continue to favour healthcare among the defensive sectors given the prospects for long-term and the reasonable valuations. Orica, which provides services for the mining industry, was the biggest detractor during the quarter after the Australian company provided a cautious outlook. We sold the stock after it rebounded more than 40% from its low in 2016. Prosafe and Keyera underperformed in the energy sector. Prosafe, a leading owner and operator of accommodation vessels for the offshore drilling industry, continued to face a tough operating environment, as a result of which the service provider reported an impairment charge with its third-quarter results. Keyera, one of our energy infrastructure holdings, drifted lower after its quarterly results fell short of expectations and the company issued new equity to finance projects. We continue to believe that Prosafe s valuation is distressed and we bought more Keyera shares on weakness. Novartis (healthcare) and Imperial Brands (consumer staples) struggled in a generally adverse environment for defensives, although we continue to believe that both stocks are attractively valued. 2017 performance The fund delivered positive returns in 2017, but was marginally behind the MSCI AC World Index. Methanex added the most value after the US-listed shares returned more than 40% during the year. Although the valuation discount has narrowed, we see scope for further upside. Holdings with exposure to emerging markets and Asia also featured prominently among the top performers. Imperial Holdings, based in South Africa, is exploring the separate listing of its logistics and vehicle divisions, with both businesses expected to grow revenue and profit in the current financial year, while AIA, the Hong Kong-listed life insurer, continued to deliver strong in its business. Las Vegas Sands rose as the gaming company continued to benefit from an improving operating environment in Macau.
Stock selection added notable value in healthcare as Novo Nordisk, UnitedHealth and AbbVie bucked the trend in an underperforming sector. Broadcom and Microsoft contributed positively in a strong technology sector which led the markets higher in 2017, but their gains were offset by the disappointing performance of Sabre. Not owning Apple and Facebook in the US or Tencent and Alibaba in Asia also provided a headwind. Most of these companies are non-dividend payers and therefore not considered appropriate for our investment approach which focuses on dividends as a way of ensuring capital discipline. Pandora was the biggest detractor in 2017 as a result of concerns about a slowdown in the US, despite impressive in other parts of the world, most notably Asia. We believe that the stock is significantly undervalued. Imperial Brands came under pressure with the rest of the tobacco industry after an announcement from the US regulator in July. We continue to believe that tobacco is the last bastion of value in an otherwise expensive consumer staples sector. Overall sector allocation added value, helped by the fund s zero exposure to telecommunications and utilities which failed to keep up with a rising market. Portfolio activity There were no new purchases during the quarter, but we sold two stocks in their entirety. We completed the sale of our holding in AbbVie, a US pharmaceutical company, in October. The shares returned more than 80% in US dollars since their initial purchase in August 2014, during which time the stock re-rated from a deep value situation to an industry-level multiple. The dividend increased more than 50% during that time. We also sold Orica, which cut its dividend in 2016. The stock was reclassified as sale at right price and we have been looking for an appropriate exit point. We have been selling into strength all year. Elsewhere, we continued to build our positions in Roche and Siemens, which we started in the third quarter, and added to Imperial Brands on weakness. We also took profits in Las Vegas Sands, which returned 36% during the year in US dollars, and reduced our holding in Pembina Pipeline to manage the fund s energy-related exposure at about 20%. As a result of these transactions, the number of holdings dropped to 43. We would like to restore the number of holdings back up to our historic level of 50 over time. The fund s exposure to quality slipped marginally to 43.9% and remained below our historic range of 50-60% as a result of our continued struggle with the high valuations attached to many defensives, particularly in consumer staples. The exposure to assets, the fund s cyclical component, rose to 31.2%, helped by the strong performance of Methanex. The cyclical exposure has been towards the top of our historic range of 20-30%, reflecting the attractive opportunities we see in the energy-related sphere. remained above 20% and close to its historic high. From a regional perspective, the fund s exposure to the US remained at 53.5%, which is broadly in line with the weighting in the MSCI AC World Index. The exposure to Europe ex UK increased as we continued to build our positions in Roche and Siemens, while the UK weighting rose back up towards 14% as we added to Imperial Brands. We continue to have no exposure to Japan. The weighting in emerging markets, comprised of direct and indirect holdings, slipped towards 7% as we reduced our holding in Las Vegas Sands. Dividend announcements The fund s holdings continued to deliver solid dividend, with the majority in the 5-15% range. Imperial Brands, one of the fund s top 10 holdings, raised its dividend by 10% in sterling after the tobacco company reported full-year results which were in line with expectations. The company is based in the UK but the business is global, and the stock offers a dividend yield of more than 5%. Pembina Pipeline, another large holding, reported a dividend increase for the second time this year. The energy infrastructure company raised its monthly payment by 6% in October, having raised it by 6% in April. The shares remain attractively valued on a dividend yield of 4.7%. Broadcom reported the biggest step up in dividends with a 72% increase. The semiconductor company has raised the dividend more than sevenfold since we first bought the shares in October 2013 and the shares have returned more than six times the original investment during that time. The stock remains a core holding.
Visa raised its dividend by 18% in US dollars, growing it at the same rate as the previous year. The world leader in digital payments showed continued momentum in its business with better-than-expected results for the latest quarter. The shares have returned 45% since we first invested in the company in December 2016 and we have been taking profits. MasterCard, reported a more modest 14% dividend increase, although this was accompanied by a new US$4 billion share buyback programme, equivalent to 2.5% of outstanding stock. The shares returned 48% in 2017, almost double the return of the MSCI AC World Index, and 90% since their initial purchase in February 2016. We have been reducing the holding into strength. Las Vegas Sands and Siemens increased their dividends by less than 5%. Las Vegas Sands offers a dividend yield of 4.2% which can accommodate a slower rate of than the minimum 5% we would normally expect, while results from Siemens showed that the German industrial conglomerate delivered on its targets for the financial year and the company expects to grow earnings again in 2018. We remain confident about the prospects for dividend across the portfolio and look forward to the dividend reporting season in the first quarter of 2018. Company Sector Country Bucket Dividend Broadcom Technology US Visa Technology US MasterCard Technology US Nike Imperial Brands Union Pacific Pembina Pipeline Consumer discretionary Consumer staples US +72% +18% +14% +11% UK Quality +10% Industrials US Assets +10% Energy Canada Assets +6% Consumer Compass UK Quality +6% discretionary Las Vegas Consumer US +3% Sands discretionary Siemens Industrials Germany Assets +3% Source: M&G, January 2018. Please note, past performance is not a guide to future performance. Outlook Global equities continue to defy the critics with several markets ending 2017 near record highs, but the nature of the rally, in particular the dominance of technology s performance, has resulted in wide valuation disparities across the market. These extremes present threats and opportunities. The importance of being selective cannot be emphasised enough. At one extreme, many technology stocks are looking very expensive as momentum became the driving force, most notably in the US and Asia where technology accounts for more than 20% of their markets. Investors have become increasingly willing to pay up for, often without any heed for value, which we would argue leaves many fashionable stocks vulnerable to a setback. We strongly believe that a valuation discipline is essential to generate excellent returns over the long term, and we would highlight that the danger of ignoring value is already apparent in some areas of the market today. Defensive stocks, which investors flocked to for many years in an environment of low and low interest rates, have started to underperform meaningfully as share prices unwind their past excesses. They may have benefited in the past from their status as bond proxies, but their fall from grace is not simply a matter of rising bond yields, in our view. Investors have started to question the stable which they took for granted, at a time when competitive pressures are eroding the rates they saw in the past. Fundamentals do matter after all. Food companies such as General Mills, Kraft Heinz, Kellogg Company and Campbell Soup have all underperformed in 2017 as disappointing results prompted investors to reconsider. The high multiples attached to these perceived safe havens are hard to justify if the companies are barely growing, and leave them exposed to a significant de-rating. The process of adjustment could have a lot further to go. Being labelled as defensive does not guarantee defensive returns. While we remain wary of these rich price tags, we take comfort from the observation that investors are starting to pay attention to fundamentals again and value is no longer being dismissed. The performance of Methanex during the quarter is a case in point. We continue to see excellent opportunities at the stock level. Healthcare has been a fruitful hunting ground for
new ideas in our defensive quality category, as the combination of and valuation is much more attractive compared to consumer staples in particular. We remain excited by our recent additions to the rapid segment where despite our aversion to overpaying we can find long-term structural at reasonable prices. The exposure to the rapid category remains close to its all-time high, and we would be happy to buy more should opportunities arise. Our best ideas, however, continue to be in the cyclical assets category where value characteristics are most pronounced. We continue to back our conviction in our energy-related holdings which we believe offer meaningful upside. We are encouraged by the dividend from our holdings which continue to be robust across the portfolio in an environment where dividends have not always been reliable. As the recent dividend cuts from General Electric (US industrials), PG&E (US utilities) and Telstra (Australian telecoms) demonstrate, there are pitfalls to be avoided. Dividends are the ultimate sign of management confidence and the dividend increases we are seeing from the fund s holdings reflects well on the long-term potential and the financial health of the companies we are invested in. We believe that the combination of strong dividend and attractive valuation stands us in good stead to generate competitive returns over the long term. Long-term performance
252205_268605