Dundas Global Investors in pursuit of capital and dividend growth

Funds Management

by Jessica Amir

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Dundas Global Investors Senior Partner, Alan McFarlane introduces the Apostle Dundas Global Equity Fund, its objectives, approach to investing and the academic evidence around the importance of focusing on dividends.

Jessica Amir: Hello I'm Jessica Amir for the Finance News Network. Joining me today from Dundas Global Investors is portfolio manager Alan McFarlane. Alan, welcome to the network.

Alan McFarlane: Thank you.

Jessica Amir: So you manage the global equity strategy available to Aussie investors via Apostle Funds Management. Just give us an introduction to the fund.

Alan McFarlane: The fund is a global equity fund, and it does what it says. It invests all around the world, we make no distinction between developed and emerging markets, we think that's a bit yesterday as a distinction. We hold somewhere between 60 and 100 stocks, it averages about 70, and we have about 3,500 stocks to choose from. So we're picking two percent, one in fifty, of the opportunity. I think it's also important to say is, we invest our own money. We don't invest in the Australian fund simply because we're not taxpayers here, but we have a twin sister fund in the UK and we hold all the same shares, so anyone investing in the fund, we're investing alongside them.

Jessica Amir: And Alan, who is the fund most suited to?

Alan McFarlane: Definitely for people who are patient. It is not for short term speculation. I have no idea whether it will go up or down tomorrow or next year, but my confidence is that, if you give it time it will do its job because of the stocks we've picked for it.

Jessica Amir: Changing pace now Alan. So there's a lot of academic research now about companies that pay dividends, and investors who favour those dividend paying stocks, what can you tell us?

Alan McFarlane: When we set the business up in 2010 and then started managing money for Australians in 2012, we'd set out our stall as investors for growth, growth in dividends and growth in capital. What's been great is that since then, there has been a lot of material come forward from academic and other sources that say, "Yes, you were right, that is exactly where returns come from."

And the message is clear. Long term investors returns come from dividend growth, and dividend reinvestment. Dividends represent the board of a company’s view of what they can pay you from this year's profits, as a distribution, after paying everybody else. It's a very clear message about their expectation of growth. So that's why we think dividends brings together governance, good business management, and a clear insight into how our company's growing. So that's why we think it's so important.

Jessica Amir: And Australian investors have a special affinity with dividend paying stocks due to the franking credits, is this something you're seeing around the globe? And also coming back home to Australia, what will happen if franking credits are removed?

Alan McFarlane: Every system struggles with the fact that if you and I form a company, that company has a legal identity separate from the shareholders and it is taxed. But then, when it pays the dividends to us we have a tax status. So the system here in Australia that's been running for years, is probably one of the most elegant from the standpoint of reducing the tax bills of the individuals who own companies.

What will happen if it changes? Very difficult to forecast, but I would suggest one possibility that perhaps is not in the press. Australian companies pay out a lot of their profits as dividends every year, they are much, much higher. If you compare an Australian company with its equivalent overseas, say CSL (ASX:CSL) with Grifols (BME:GRF), both in the plasma business, you'll see that CSL pays out more of its profits as dividends. If they stop paying as much, big if, because imputation changes, then they might have more for internal reinvestment. There might be a slightly difference balance between reinvestment and distribution.

Jessica Amir: So now let's dive into the fund in a little more detail. Just tell us about the investment style.

Alan McFarlane: The first decision is, what do you say no to? So the first element of our style is that which we sift out, that which we exclude, and we are running a financial analysis on all of those companies, and we're looking for the ones with weaker sales growth, weaker profitability, but critically that don't make good decisions about the deployment of the cash they generate.

So what are we sifting into? We're sifting into companies that we can see unit growth in sales and services. Will Microsoft sell more Office 365 next year, and if so, at good prices? Will Grifols open new blood transfusion laboratories, or plasma labs and generate more sales that way? Will they do so profitably? Do they generate cash? Do they deploy that cash wisely, and does the board organise the company’s finances so that it is not susceptible to short term risks? So our style is to invest in businesses like that.

Now, what are the consequences of that style? Higher growth, lower financial leverage, we hope less risk. Not all recessions come from too much debt, but about 101% of them have too much debt as part of the problem, and that has made the portfolio in its seven-year life reasonably robust in tough markets.

Jessica Amir: And how has the overall fund performed?

Alan McFarlane: It's delivered about 15 per cent per annum in Australian dollars, and in the time we've owned it. In the time we've run it, I apologise, which is since August 2012, we lagged a bit. We lagged Mr Market a bit at the beginning. He was just off running up courtesy of ever lower interest rates. We don't change what we do, we stick out all the time. And about two and a half, three years ago, there was a change. So we're about eaksy-peaksy with Mr Market over that period, and we're very much encouraged by what's happened recently.

Forgive the cliché, but it's a when the going gets tough fund. If markets are just rising because they're on a warm bed of hot air generated by central banks, that's tough for anyone to do well. When that stops, that's when you find the great growth companies.

Jessica Amir: Alan McFarlane, thank you so much for your time.


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