Resilient portfolios

Why a focus on quality can bring rich rewards through income and growth

Abrie Pretorius, manager of the Global Quality Equity Income strategy, explains how achieving long-term income and growth can be best achieved through a focus on quality companies.

Jun 23, 2020

7 minutes

Investing in high dividend payers has long been a path taken by investors seeking to meet their income needs, especially when yields elsewhere have been scarce during the last decade of ultra-low interest rates. But what happens when this income disappears during a downturn as companies slash dividends to shore up their balance sheets?

In our view, the yield that should matter most to income investors is not the initial yield on an investment at the time of purchase. Instead it should be the yield that is accumulated over time — the longer-term realised yield which takes account of companies’ growing dividends. To capture this, a differentiated income approach is required — one that is focused on sustainable dividend growth.

Such growth is typically generated by companies that we would describe as quality – with enduring competitive advantages, strong free cashflow support and low capital intensity. These businesses are more resilient and tend to be more able to deliver investors a compelling mix of sustainable income and growth. When the effects of compounding this income and growth is factored in, these companies can generate truly substantial yields over time. Additionally, the prudent nature of this growth is typically reflected through share price appreciation during rising markets, and resilience during downturns.

At Ninety One, we have been running our Global Quality Equity Income strategy since 2007, investing exclusively in these high-quality companies with the aim of delivering sustainable income. We have deliberately avoided the highest yielding stocks and focused on those with scope to grow both the dividends and the companies themselves – the two key attributes that can potentially generate these exceptional long-term yields that we seek.

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Specific risks:
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.

Authored by

Abrie Pretorius

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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