Approfondimenti
MS Global Brands Equity Income - Targeting 4%
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Insight Article
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luglio 19, 2020
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luglio 19, 2020
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MS Global Brands Equity Income - Targeting 4% |
Finding reasonable income in a low rate world is a challenge. Ten-year U.S. Treasuries offer better developed market yields than most other Sovereigns, but at below 1% the problem is the absolute level. Allowing for inflation, the real return is actually negative.
Outside the United States, the French, German, Spanish and Japanese 10-year bonds all yield near to zero, again before inflation.
Higher fixed income yields can be found in more exotic debt instruments and markets, but these yields are typically tempered by greater volatility and risk.
So how about equities? As Display 1 shows, in absolute terms equity yields are reasonable by historical standards, at 3% as of 31 March 2020. Relative to U.S. 10-year Treasuries however, given the very low treasury yield, equity yields are now particularly attractive.
Source: FactSet, March 2020
Unlike bonds, equities have the ability to grow. This means they can potentially offer both income and capital appreciation. Illustrating this, the indexed price of the MSCI World Index over twenty years has risen from 100 to 131. The total return (with dividends reinvested) has risen from 100 to 212.1
What you see isn’t necessarily what you get
A number of companies offer dividend yields higher than the market — sometimes a fair bit higher. The problem here is that whilst these higher yields are attractive at face value, they typically disappoint. Our research tells us that forecast dividend yields much above 4% are rarely sustainable. Put another way, if a dividend yield is very high, the market probably doesn’t believe in it. Potentially, there’s a risk of a future dividend cut.
The real challenge for investors is finding equity income, but not at the expense of long-term capital growth. The global equity income universe has struggled relative to the market in recent years, with the Morningstar Global Equity Income peer group underperforming the MSCI World Equity Index over 1, 3, 5 and 10-year periods.
In contrast, since inception on 29 March 2016, the Global Brands Equity Income Fund has performed ahead of the MSCI World Index, outperforming the Morningstar Global Equity Income peer group (Display 2), as well as providing superior distributed income (Display 3).
Source: MSIM, Factset.
Performance data is based on median annualized returns and net of fees. Time frame reflects the inception date of the Global Brands Equity Income Fund (29 April 2016) through 31 March 2020. The Global Brands Equity Income Fund is not part of its Morningstar peer group. Performance for the peer group is based on the median of peer group returns.
Source: MSIM, Factset.
Data is based on average annualized dividend yields. Time frame reflects the inception date of the Global Brands Equity Income Fund (29 April 2016) through 31 March 2020.
Past performance is not indicative of future results. The value of the investments and the income from them can go down as well as up and an investor may not get back the amount invested. Returns may increase or decrease as a result of currency fluctuations. Performance of other share classes, when offered, may differ. Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing.
In difficult economic conditions, both income and capital can be at risk as the current economic slowdown is beginning to reveal. Companies with volatile sales, weak cash conversion, stretched balance sheets and stretched pay-out ratios, as well as those that operate in areas that are economically or politically sensitive, are struggling to maintain their dividend payments, or even pay a dividend at all. Many of these companies can be found in the more cyclical financials, energy, materials, industrials and consumer discretionary sectors, parts of the market where traditional income funds often have holdings.
Focus on the Compounding
Unlike many income funds, we do not select companies because of their dividend yield. We have always believed the best way to achieve attractive long-term returns is from owning high quality, well-managed, reasonably priced companies able to maintain or improve their high returns on operating capital. We typically find these companies in the more defensive consumer staples, healthcare and technology sectors.
These strong fundamentals underpin the compounding of returns — the core principle of long-term investing in our view. Since inception, Global Brands Fund, which has exactly the same holdings as those in the Global Brands Equity Income Fund (with the notable exception of derivatives used in Equity Income), has achieved an annualised compound rate twice that of the MSCI World Index, leading to more than 3x the total return. $100 invested in the year 2000 has compounded to $770 today. The same $100 invested in the Index would now be worth $219 (Display 4).
Source: Factset.
Growth of investment illustration is quoted in U.S. dollars, based on an initial investment of $100 made since fund inception (30 October 2000) through 31 March 2020, assumes reinvestment of dividends and capital gains, but does not include sales charges and fees. Performance would have been lower if sales charges and fees had been included. Results are hypothetical.
Past performance is not indicative of future results. The value of the investments and the income from them can go down as well as up and an investor may not get back the amount invested. Returns may increase or decrease as a result of currency fluctuations. Performance of other share classes, when offered, may differ. Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The comparison index is the MSCI World Index with Net dividends reinvested. It is not possible to invest directly in an index.
Quality Matters
In tough times, the market recognises the value of reliable, durable, high quality fundamentals, and companies whose earnings hold up. Managing for downside risk is a signature of our long-standing Global Brands Fund. Since the inception of its underlying strategy in 1996, the portfolio has outperformed the MSCI World in each of the eight years that Index had a negative USD return.
In the most recent setback for markets, driven by the spread of the coronavirus and the economic impact from containing it - including national lockdowns and social distancing — Global Brands Equity Income has done what it was designed for; minimising relative downside participation compared to the broader market. The strategy has outperformed the MSCI World Index by 8.1% in the first quarter this year, as well as its Morningstar Global Equity Income peer group by 7.45%. The first quarterly distribution was a little over 25% of the expected annual distribution and the annual run rate is a little above the 4% target.
Generating 4% Income2
The dividend yield of our Global Brands Equity Income Fund, which has exactly the same holdings as those in our Global Brands Fund (with, as mentioned, the exception of the derivatives held in Equity Income), is close to 2%. The annualised target income is 4%, which the fund has consistently delivered.
In partnership with MSIM’s Portfolio Solutions Group, we seek to add roughly 2% per annum to the portfolio dividend yield through a payment (or premium) received from selling out-of-the-money call options (the overwrite) on equity indices in developed markets. This is a mechanical, formula-driven process. Note the calls are on the equity indices, not the stocks in the portfolio.
How the overwrite works
Income the right way
The combination of the high quality underlying Global Brands Fund and the overwrite offers the ability to generate a reasonable level of income without sacrificing long-term performance; in our view, that’s income the right way.
Past performance is not a reliable indicator of future results. Data as of 31 March 2020. Returns may increase or decrease as a result of currency fluctuations. All performance data is calculated NAV to NAV, net of fees, and does not take account of commissions and costs incurred on the issue and redemption of units. The sources for all performance and Index data is Morgan Stanley Investment Management.
This rating does not take into account other risk factors which should be considered before investing, these include: