In search of further downside protection in its core global equities book, AMP Future Directions has invested US$800 million in a yield strategy run by an investment partner with the multi-affiliate Grant Samuel Funds Management.
The ‘global shareholder yield’ strategy run by US manager Epoch Investment Partners has been selected as a key defensive tactic in the $5 billion Core International Share Fund run by senior portfolio manager with AMP Capital Investors’ Future Directions Funds, Van Athukorala, who gave it a 15 per cent weighting.
“What clients worry about most is down-markets. When markets are up, they’ve made gains through beta and at best, some alpha, but in down-markets we want to fall less than the benchmark,” Athukorala said.
The Epoch strategy invested in stocks demonstrating sustainable dividends, which were typically generated by companies which convert cashflows into shareholder dividends, and also undertake share buy-backs and routinely pay down their debts, he said.
Because high-dividend paying companies typically generated stable cash flows, they were also bought during market declines as investors sought certainty of earnings.
“So in down-markets we expect the strategy to perform well, and in up-markets, we expect it to outperform and at least keep pace with the benchmark,” Athukorala said.
In the five years to March 31, which encompassed the financial crisis and its aftermath to date, Epoch’s shareholder yield strategy delivered a net return of 5.4 per cent against the 2.4 per cent posted by the benchmark MSCI World Equity Index, according to the manager’s website.
To fund the mandate, an allocation to a Wellington global equity strategy which invested according to technical signals was redeemed. While AMP Capital’s confidence is Wellington as a funds manager remains undiminished, it decided that this strategy did not meet the needs of the Core International Share Fund in current market conditions, Athukorala said.
Epoch’s fund joins five other active strategies in the AMP portfolio, such as growth plays run by T. Rowe Price and Baillie Gifford, and a Schroders product themed on quality stocks.
Damian McIntyre, a distribution executive at Grant Samuel Funds Management, said most of the returns from the Epoch strategy were generated by cash dividends, although all three income streams combined to create “shareholder yield”.
“If you find a company with rising free cash flow, which is already in the habit of allocating cash flow to benefit shareholders, then you should expect a reasonable or rising shareholder dividend. That’s Epoch’s sweet spot,” he said.
The strategy is run by portfolio manager Eric Sappenfield and co-portfolio manager Mike Welhoelter, and screens 14,000 stocks worldwide in its selection process.
McIntyre noted that in the first quarter of 2011, up to 44 companies across the globe increased their dividends, and that there were currently 104 stocks in the Epoch portfolio.
Grant Samuel acquired a stake in Epoch in October 2007, and began distributing its products in May 2008 before first winning a mandate seven months later, said managing director Andrew McKinnon. The Future Directions mandate brought the amount of capital raised by Epoch’s Grant Samuel-distributed funds to $2.1 billion, he said.
Grant Samuel’s other affiliates are Tribeca Investment Partners, which runs about $1.2 billion in domestic small-cap and long/short equities, and Grant Samuel Infrastructure Partners.
“We always try to identify a specialist in each asset class,” McKinnon said, adding that a partnering global fixed income manager would soon join its line up.