Evenlode Global Income’s Ben Peters on picking dividend shares

Global earnings have traditionally been often overlooked by investors, but in recent months they have become increasingly attractive.

With global dividends reaching an all-time high last year, global income funds can provide investors with even more high-yielding companies to choose from.

The IA Global sector has returned 5.6 percent in the past six months and 35.3 percent over five years.

Equal worldwide income is one such fund, but it is unusual that almost a fifth of its portfolio consists of British companies.

Even more unusually, unlike many income-oriented funds, Evenlode Global Income chooses not to invest in energy stocks that are popular with income seekers.

Instead, consumer staples make up the bulk of Evenlode’s portfolio with an allocation of 27.9 percent, followed by healthcare at 20 percent and industrials at 18.3 percent.

Since the fund’s five-year launch, it has outperformed the IA sector, but struggled last year due to lack of exposure to energy stocks.

It meant fund manager Ben Peters had to rethink some of the fund’s holdings in light of the invasion of Ukraine, rising inflation and volatility in the technology sector.

Where does Evenlode Global Income invest?

The decision not to invest in energy stocks may not appeal to those looking for income, as oil companies have traditionally been reliable in paying dividends.

But rather than looking at sector by sector, Evenlode chooses low-asset companies for its three strategies: UK Income, Global Income, and Global Equity.

“We look for companies that can grow, but with relatively limited capital needs, reinvest in the business to drive growth,” fund manager Ben Peters tells This Is Money.

“We’re just as interested in a company’s ability to grow its dividend and invest over time as we are in whatever the total return is.”

The historic return on the Global Income Fund is around 2.3 percent, although Peters says ‘some growth is coming through’.

Instead, Peters says he focuses primarily on companies “that produce goods and services that people buy based on the value they get first, and then think about what the price they pay is a second consideration.”

Pricing power has proven to be a critical driver for the performance of defensive stocks over the past year, as they can pass higher costs on to customers without risking a drop in demand.

The fund has benefited from its strong holdings in the consumer goods and healthcare sectors, including Unilever, Nestlé and Medtronic.

It also owns a handful of companies in the communications services sector, with a focus on business-to-business media, including Dutch company Wolters Kluwer and RELX, which feature in the fund’s top 20 rankings.

Over the past five years, Wolters is up 132 percent, while RELX’s shares have grown a modest 24 percent.

The focus on asset-light companies, as Peters puts it, means the fund avoids commodities because “the company has no control over the price it charges… the client is looking for market price and, if possible, a little better .’

“When we look at oil and gas producers, they are often asset intensive and have to accept whatever price the market gives them. Last year was very good… but if you go back to the beginning of the pandemic, the price of oil was negative for a short time.

‘It’s not about whether or not you can make money by investing in these sectors, because of course you can… but they are not relevant to our process.’

Why has there been so much portfolio switching?

Given the continued volatility and choppy performance in the sectors it invests in, there has been a higher level of portfolio turnover since the pandemic.

Sometimes this is because the fund realizes that a company no longer fits within the portfolio, says Peters.

He points to money transfer service Western Union, where the competitive landscape had changed with the launch of services like Wise.

‘We do reassess companies and sometimes decide that they no longer fit. That doesn’t happen often, but it does happen.’

But more often than not, because a company’s relative valuation changes.

Where the average portfolio turnover was in the mid-teens, during the pandemic there was sometimes a turnover of 30 percent.

“We value companies over a long period of time… the turnover we see in the portfolio is largely a function of where we see relative valuation changing,” says Peters.

“I think it’s important that we, stock selectors and fund managers, are humble and understand that we can’t possibly do everything right.

We can’t possibly know everything and we should be free to change our mind about a company if we have new information or if we have reassessed the company’s business prospects.

‘We call it nudging the portfolio. We don’t tend to make radical changes week after week, but over time we are happy to make incremental changes that can result in something completely different.”

Evenlode Global reduced its exposure to technology as valuations came under pressure during the pandemic, albeit by company rather than by macro sector.

In the past year, however, it began to reverse the process by adding to its existing holdings such as Microsoft and Accenture.

Microsoft is now the fund’s second-largest holding after falling sharply over the past year.

While the share price has fallen 25 percent over the past year, Peters highlights Microsoft’s growing cloud business as an indicator of longer-term growth.

‘Will people want more or less cloud services in the future? My guess would be yes. And will they use Microsoft as one of the three big players in our market, alongside Amazon Web Services and Google? I can imagine that many will choose Microsoft and indeed AR.

“Obviously we don’t have a crystal ball that’s better than anyone. But I think the prospects for Microsoft over that time frame are very good.”