Speaking to InvestorDaily, Grant Samuel Funds Management chief executive Andrew McKinnon said that due to quantitative easing (QE) in the United States and low interest rates around the globe, the market has been driven by a re-rating of markets rather than earnings.
“In most cycles you get that P/E adjustment in the early stages of a bullish market and then you have to move to that earnings stage,” Mr McKinnon said. “That’s probably where we’re at.
“We don’t think you are going to get a lot of help from a P/E expansion, so you really are looking at a more earnings-driven market, which suggests that returns are going to be far more moderate than 2013.”
GSFM distributes products for three funds managers that have all experienced considerable growth in 2013: Tribeca Investment Partners, Payden & Rygel and Epoch Investment Partners.
Grant Samuel Epoch Global Equity Shareholder Yield Funds offer a globally-diversified equity portfolio of listed global companies that have a history of attractive dividend yields and positive growth in free cash flow.
The funds have surpassed the $1 billion mark in assets under management, more than doubling in size over the past 12 months, Mr McKinnon said.
“The funds are attractive because they offer lower volatility than most equity products and distribute high levels of income. This has proven to be of great interest to SMSF investors who desire capital growth with substantial income as an investment objective,” he said.
The funds are managed by New York-based equity manager Epoch Investment Partners, having been launched to retail investors in Australia in May 2008 during the GFC.
“We believe the key to producing superior risk-adjusted returns is to focus on companies that are generating free cash flow and are run by management teams committed to deploying that free cash flow for the benefit of shareholders,” Epoch chief executive William Priest said.
“This strategy identifies companies that return approximately 6 per cent of their market capitalisation to shareholders on a per annum basis in the form of cash dividends, share buybacks and debt reductions as well as possessing an annual underlying growth rate of free cash flow of at least three percent,” he said.
“These distributions are characterised as ‘shareholder yield’ in that they represent capital returned to shareholders.”
Mr McKinnon said there is no other global equity fund on offer in Australia with such characteristics.
“The income yield on this strategy is still over 4 per cent, based on free cash flow rather than just targeting high dividend paying companies,” he said.
“We see it as a more sustainable income, and we also look for companies that buy back their stock or reduce the amount of debt that they’ve got.”
The fund has an aspirational target return of 9 per cent, Mr McKinnon said.
“That’s the six per cent from shareholder yield plus another 3 per cent from an increase in operating cash flows,” he explained.
Given his view of a more moderate outlook for 2014, Mr McKinnon said the fund offers a “reasonably attractive return”, a fair proportion of which will come from income.
