The Guinness European Equity Income Fund is designed to provide investors with European (excluding UK) exposure to dividend paying companies. The Fund is managed for income and capital growth and invests in companies that are well placed to be able to pay a sustainable dividend into the future.We focus on profitable companies that have generated persistently high return on capital over the last eight years, that have strong balance sheets, and have a market cap of greater than $0.5bn. With these criteria as our starting point we do not just identify well-known blue-chip companies, we find a broad spectrum of companies that are outside of the traditional dividend-paying sectors. It is a rare achievement for a company to meet our investment criteria and we think it shows a mark of genuine quality. We maintain a high conviction portfolio of around 30 equally-weighted stocks, with low turnover and no benchmark-related constraints. We invest for the long term.
Insight | Sep '17
Why invest in the European Equity Income Fund?The Fund is designed to provide investors with exposure to European (excluding UK) equities through a high conviction, low turnover portfolio of persistently high return on capital, dividend-paying companies.
- Focus on consistent high return on capital
- Consistent high return on capital is a good indication of a company’s ability to pay healthy dividends. The Fund invests in companies that are unusually consistent in generating returns on capital above their cost of capital.
- Growth and income
- Our approach to dividend investing is to focus on companies that can sustainably grow their dividend into the future, rather than simply looking for companies with a high dividend yield.
- High conviction
- The Fund typically invests in just 30 companies, with each company having an equal weighting. This provides a good balance between the benefits of diversification while also allowing each company to add meaningfully to performance. We don’t have a long tail of small positions and by definition we can never just ‘hug’ the benchmark index. Please see our white paper on this topic for more information.
- Fundamentally driven
- We focus on ‘bottom-up’ stock selection rather than trying to make decisions based on an expected outlook for the world economy. We like to invest in good companies that have, in the short term, fallen out of favour, but that have previously shown an ability to weather most economic environments over time.
- Low turnover
- We prefer to invest over the long term. We also recognise the increased costs of trading in and out of companies unnecessarily. Typically we will hold a company in the portfolio for between 3 and 5 years.
- Repeatable and independent
- Ian Mortimer and Matthew Page have managed the Fund since launch. They have developed an investment process that is clear, robust, transparent, and scalable. Their approach filters out much of the noise and hype that surrounds companies to focus on the true signals that drive company valuations. By performing their own company research and analysis, using their own proprietary modelling systems, the managers try to avoid some of the behavioural biases associated with being unduly influenced by market sentiment.
The case for a European equity income fund
"Dividends make a gradual but potent contribution to long-term returns."The European region includes a diversified mix of developed, high-income economies, and is home to around 700m people. Europe has gone through a turbulent time since the 2008/09 banking crisis, both politically and economically. However, due to its diversity, size and exposure to the global market, Europe has navigated this period better than some less developed regions.
Europe has been close to the centre of all aspects of globalisation and has world-leading companies in almost all sectors of the market. Europe also has a large proportion of high quality companies; businesses that can generate persistently high returns and that have demonstrated they can weather a variety of economic storms – and it is companies with these characteristics that are best placed to pay consistent and growing dividends.
Dividend-paying companies are well known to outperform the market in the long term, and companies that grow their dividend year-on-year even more so. Rising dividend payments can also protect against inflation over long periods.
In Europe, there is a well-established dividend paying culture going back to the 17th century, when the Dutch East India Company became the first company to pay a dividend. Companies have been committed to distributing profits to shareholders in this way ever since, reflecting not just history but also good capital discipline on the part of management teams.
"There is a long-term investment opportunity in Europe. But opportunity and risk in this region are inseparable, for better or for worse. The key is identifying proven companies and constructing a portfolio best positioned to take advantage of that opportunity."
Dr Ian Mortimer, CFA
Ian joined Guinness Asset Management in 2006, and is portfolio manager on the Guinness Global Equity Income Fund, Guinness Global Innovators Fund and the Guinness European Equity Income Fund.
Prior to joining Guinness, Ian completed a D.Phil. in experimental physics at Christ Church, University of Oxford, and graduated in 2006. Ian graduated from University College London with a First Class Honours Master’s degree in Physics in 2003. He is a CFA Charterholder.
Matthew Page, CFA
Matthew joined Guinness Asset Management in 2005, and is portfolio manager on the Guinness Global Equity Income Fund, Guinness Global Innovators Fund and the Guinness European Equity Income Fund.
Prior to joining Guinness, Matthew joined Goldman Sachs on the graduate scheme in 2004 working in Foreign Exchange and Fixed Income. Matthew graduated from New College, University of Oxford, with a Master’s Degree in Physics. He is a CFA Charterholder.
How do we run the Fund?
“We don’t chase yield, we want capital and dividend growth.”Although the Fund is designed to invest in dividend-paying companies, our starting point in selecting our investment universe is to identify companies with consistently high return on capital. Specifically we look at companies that have a return on capital of greater than 8% in each of the previous eight years. Our analysis shows that companies with persistently high return on capital are highly likely to continue to do so in the future – meaning they will continue to create shareholder value.
|Why 8% and why eight years?|
|8% return on capital…||8% is well above the average real cost of capital of 6%. This means companies who achieve this level are truly creating value for their shareholders.|
|…every year…||Consistency each year excludes highly cyclical companies or those with high but declining or volatile earnings.|
|…for eight years||Because business cycles tend to last less than eight years, the companies in our investible universe have shown they can weather most economic environments.|
“It's a rare achievement for a company to meet our investment criteria and we think it shows a mark of genuine quality. And this is where our portfolio starts – consistent high return on capital.”On average, only 3% of European listed companies achieve our threshold. We then exclude those less than $0.5 billion in size or with a debt to equity ratio greater than 1. This gives us a pool of around 200 companies from which to build our portfolio.
What about yield?Companies that earn a consistent high return on capital often distribute a proportion of cash they create in the form of a dividend. In the Fund, however, we focus on those companies that can sustainably grow their dividend into the future. From this pool we then select candidates for extended research on the basis of value and sentiment. In depth proprietary modelling of a company’s cash flow, capital budgeting and potential for dividend growth is combined with a subjective analysis of its business model to identify candidates for inclusion in the final portfolio. By selecting companies from a broad range of industries, countries, and market capitalisation we aim to create a well-diversified portfolio which can provide a reasonable dividend yield and growing income stream at an attractive valuation relative to the broad market.
Sell disciplineIt is often easier to find companies to buy that look cheap than it is to identify those companies you own which should be sold. We consider sell discipline as important as selecting companies for purchase and continuously monitor the companies we hold in the Fund. The six core reasons we may sell a company are outlined below.
- The company fails to continue to meet our return on capital criteria
- The valuation becomes too rich
- The balance sheet becomes stretched
- The dividend outlook or management policy to dividends changes unfavourably
- The original investment thesis no longer holds
- Yield contribution to the portfolio is insufficient
How do we construct the portfolioThe Guinness European Equity Income Fund is a concentrated portfolio of around 30 equally weighted stocks. This provides a number of useful attributes:
- It reduces stock-specific risk, as we will not be overweight in a small number of favourite companies.
- We will not have a long tail of small holdings in the portfolio, which can be a distraction and a potential drag on performance.
- It instills a strong sell discipline as we must typically sell a position in order to make way for a new one; and we must constantly assess the companies we own in the portfolio in comparison to the rest of the universe available to us.
- We are truly index independent. All companies held are weighted equally without regard to their weighting in the benchmark index leading the portfolio to have a high active weight.
|Fund||European Equity Income Fund||Basis||Total return, in GBP|
|Index||MSCI Europe ex UK Index||Date (period end)||30.09.2017|
|Sector||IMA Europe Excluding UK||Fund Launch||19.12.2013|
Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested.
|Cumulative performance (GBP, %)|
|X class (OCF: 1.24%)||Year-to-date||1 year||3 years||5 years||From launch (19/12/2013)|
|Annualised performance (GBP, %)|
|X class (OCF: 1.24%)||1 year||3 years||5 years||10 years||From launch (19/12/2013)|
|Calendar year performance (GBP, %)|
|X class (OCF: 1.24%)||2012||2013||2014||2015||2016|
|Discrete year performance to date (GBP, %)|
|X class (OCF: 1.24%)||Sep-13||Sep-14||Sep-15||Sep-16||Sep-17|
Latest Guinness European Equity Income Fund Report
Some thoughts on equally-weighted portfolios
Matthew Page explores the reasons behind running a concentrated, equally-weighted portfolio.
Matthew Page investigates the “science” of economic modelling
To meet or not to meet
Matthew Page discusses the merits of meeting company management
|For information on the Fund’s current investments, please see the latest fact sheet:||English||French||German||Italian|
|Fund managers (start date)||Ian Mortimer (19/12/2013) Matthew Page (19/12/2013)|
|Benchmark||MSCI Europe ex UK|
|IA sector||IA Europe ex UK|
|Redemption fee||2% within 30 days of purchase|
|Underlying currency||US Dollar|
|Valuation||2300 Dublin time|
|Deal cut off time||1500 Dublin time|
|Administrator||Capita Financial Administrators (Ireland) Ltd|
|Custodian||JP Morgan Bank (Ireland) plc|
|UK Reporting Fund status||Yes|
|1.24% OCF||0.74% OCF For early investors (1)||1.99% OCF|
|Currency||GBP / USD / EUR||GBP||GBP / USD / EUR|
|OCF* (Total ongoing charges p.a.)||1.24%||0.74%||1.99%|
|Accumulation or Distribution||Accumulation||Distribution||Distribution||Accumulation|
|Country registrations||UK, CH, LUX, FIN, SWE, SGP EUR class: ES||UK, CH, LUX, FIN, SWE, SGP EUR class: ES||UK, CH, LUX, FIN, SWE, SGP||UK, CH, LUX, FIN, SWE, SGP EUR class: ES|
|Share class name||X Acc||X Dist||Z||C Acc|
|ISIN codes||GBP: IE00BGHQDY74 USD: IE00BGHQF292 EUR: IE00BGHQF078||GBP: IE00BGHQDX67 USD: IE00BGHQF185 EUR: IE00BGHQDZ81||GBP IE00BGHQF300||GBP: IE00BVYPNS63 USD: IE00BVYPNT70 EUR: IE00BGHQDW50|
|Bloomberg tickers||GBP: GUEEXGA ID USD: GUEEXUA ID EUR: GUEEXEA ID||GBP: GUEEXGI ID USD: GUEEXUI ID EUR: GUEEXEI ID||GBP: GUEEZGI ID||GBP: GUEECGA ID USD: GUEECUA ID EUR: GUEECEA ID|
- United Kingdom
- Singapore (professional only)