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A-rated Inglis-Jones stands by global move after tough summer
by Robert St George on Sep 20, 2013 at 09:10
A tough month for global equity income funds has not persuaded Citywire A-rated James Inglis-Jones that he was wrong to move into the sector over the summer.
The £286 million Liontrust Income fund, which Inglis-Jones co-manages with Samantha Gleave, switched into the IMA Global Equity Income sector from the IMA UK Equity Income category on 1 August 2013. During the month, the average constituent in the latter group outperformed the former by 2.2 percentage points. Liontrust Income nevertheless still beat its new neighbours, losing 2.2% through August compared with their 3.2% drop.
Despite this weakness in global equity, Inglis-Jones (pictured above right, with recently retired Liontrust colleague Gary West) has maintained that his investment approach – which emphasises cash flow, yield and value – should offer better returns and lower risk when not constrained to the UK.
On risk, Inglis-Jones noted that typically no more than 10 UK companies met his stringent criteria, representing 20% of the market’s sectors. But on a global basis, up to 100 firms became eligible, covering 85% of sectors, allowing him to construct a more diversified portfolio.
To explore whether this global elite would in fact generate higher returns, Inglis-Jones back-tested them against companies of equivalent quality in the UK for the period between 1996 and 2012. This revealed that the global subset had posted an annualised return of 12%, and the UK 10%. Inglis-Jones added that the volatility-adjusted return was 20% better for the global cohort, while their Sharpe ratio was three times higher.
In the fund’s portfolio of 27 holdings, 10 are now international stocks and the managers confirmed that they expected this proportion to rise over the coming months.
As examples of international corporations in which Liontrust Income has recently invested, Gleave cited French oil major Total and South African telecoms operator Vodacom.
Gleave acknowledged that Total’s share price had been uninspiring for several years but highlighted its attractive current free cash flow yield of 12%. She also tipped its capex, which has climbed by 40% since 2010, to peak this year and suspected its proceeds from divestment – worth more than £12 billion over the past two years – had yet to do so.
With Vodacom, Gleave underlined its 12% compound annual growth in operating profit between 2009 and 2013, a halving of its net debt and an annualised dividend hike of 23.1% through the period.
According to Inglis-Jones, such dividend growth will become increasingly important to investors in the months ahead as the likelihood of further capital gains from equities has ‘dimmed’ after their rally so far this year.
‘Cash flow has taken a back seat as an investment style but it should now reassert itself,’ Inglis-Jones remarked. ‘We’re not responding to winsome chief executives who are confident about future growth. That tends to be a distraction.’ Instead, he stressed his focus on ‘cold, forensic analysis’.
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- switched into the IMA Global Equity Income sector from the IMA UK Equity Income category on 1 August 2013
- recently retired Liontrust colleague Gary West
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