The SIM Global Equity Income Fund (now four years old) is a unique unit trust in South Africa. The fund aims to deliver an attractive and growing dividend income stream in US dollars as well as capital gains over time, by investing in international shares. While the fund’s strategy and process is different from many locally available global unit trusts in its emphasis, we believe the fund will deliver attractive and competitive total returns relative to other international strategies over the long term.
The fund strategy is a unique strategy in South Africa but is very popular abroad
The SIM Global Equity Income Fund was established in 2012 and has recently surpassed $100 million in assets under management. This is a relatively unique unit trust in South Africa. We believe the very attractive attributes of the fund are not yet fully appreciated by South African investors, given their limited historical exposure to this strategy. Those who have lived and worked abroad, especially in the UK, will be aware of the popularity of this type of fund overseas. Crucially, we have a fund manager who has successfully executed on this strategy before, and a highly experienced team of analysts with international experience.
The primary emphasis on a growing US dollar dividend income leads to attractive total return
The primary focus of the fund is to deliver an attractive initial US dollar dividend yield for investors (currently around 4.0%), and a growing US dollar dividend income over time, by investing in global companies. The secondary objective is to grow the capital value of the fund on a rolling three-year basis. The ‘dividend emphasis’ is slightly different to the way many other global unit trusts are managed. Our experience has been that a focus on both the dividend yield and dividend growth first and foremost, can lead to highly attractive total return (dividend plus capital growth) outcomes over time.
The SIM Global Equity Income Fund has followed this strategy since inception. Net of fees, the fund has delivered 6.1% per year in US dollars since inception in 2012. In rands, the fund has delivered 19.3% per year since inception in 2012.
A focus on the dividend is a focus on cash flow
At the heart of a dividend-focused strategy is an emphasis on cash flow generated by the companies in the fund. While accounting earnings can be manipulated, cash flow statements cannot. Dividends are paid out of real cash generated by a company. Long records of increasing dividends, which is a feature of most of the holdings in the fund, can only be achieved by companies that are winners and that generate growing cash flow streams. The fund therefore effectively comprises of a portfolio of global companies that have demonstrated business excellence over time – and crucially in our analysis, will likely be doing the same for many years to come.
We invest in good companies that generate growing cash flow streams, at attractive valuations
The focus in the fund is on two aspects of the dividend: an attractive dividend yield and also the company’s ability to grow the dividend. This speaks to both attractive valuation (a high dividend yield can indicate undervaluation) and attractive business prospects. The market sometimes categorises many of the established and dividend-paying companies we hold in the fund as ‘low-growth’ companies, but the facts strongly suggest otherwise (see Figure 1). Apparent market disdain for many of our ‘dull’ holdings allows us to buy undervalued companies and generate an attractive return for our investors.
The records of the companies in the fund are very impressive
Figure 1 shows a sample of companies in the SIM Global Equity Income Fund, and highlights what they have achieved in terms of providing both a growing dividend income stream as well as capital growth, over the past ten years. It is particularly striking that almost every stock in the table has beaten the MSCI World Index over the last 10 years. Admittedly these are some of the stocks in the fund with the better records of growing dividends and earnings – but they are a good example of the type of stocks we seek to invest in. From the table, we note the following:
- The annualised US dollar total returns generated by these companies over 10 years is spectacular (column B). Almost all of them are ahead of the MSCI World Index over 10 years (which delivered just 4% per year).
- The companies are all available today on highly attractive starting dividend yields (column A), despite very good operational performance and returns over the past 10 years. This implies that the market believes this level of operational excellence will not continue – whereas our analysis suggests it can.
- The total dividends received (in local currency) as a percentage of your starting price had you invested 10 years ago (again in local currency) is significant – often over 50% of your purchase price (column C). In three of the examples, you would have received over 100% of your starting price back in dividends!
- The 10-year annualised dividend growth rates (in local currency) are generally very high (column D). This runs counter to the viewpoint advanced by some that these are ‘low growth’ companies. It primarily reflects growing cash flow streams, rather than increases in pay-out ratios.
Figure 1: A sample of companies in the SIM Global Equity Income Fund
Source: FactSet, Denker Capital
We do fundamental analysis to determine the prospects for each company in the fund
The judgement we make based on our assessment of the facts is whether the strong past record is likely to continue.
The past is very instructive and is a good guide, but then our real work commences. Our detailed fundamental analysis of the individual companies covers a range of important factors, including:
- balance sheet strength,
- business model and management strategy,
- cash flows, capital deployment and dividend policy,
- returns on capital, source of competitive advantage and ability to maintain it, and
- analysis of the company’s (and industry’s) prospects for the future.
In searching for new ideas, we look for companies with long histories of growing the dividend and management commitment to the dividend, as well as the factors listed above. On valuation, we look for attractive absolute dividend yields, and also companies that are trading at higher dividend yields relative to the market than their historical relative dividend yield histories. We then cross-reference other important valuation metrics.
Fund holding Pepsico is a good example of the companies we want to invest in
Let’s consider fund holding Pepsico as an example. Pepsico is a diversified global snacks and drinks company. It has 22 consumer brands with over $1 billion of sales each, including Pepsi, Gatorade, Doritos, Lay’s, Fritos and Lipton Ice Tea. The company owns another 40 brands each with sales between $250 million and $1 billion. Many people know it is the number two soft drinks company worldwide, but few know that Pepsico owns the global number one savoury snacks business, the jewel in its crown that accounts for over 60% of group profits. The company has grown earnings by 14% per year for 50 years, a record very few companies can even come close to, and boasts a return on equity of over 30%.
We think Pepsico’s prospects are similarly tantalising. 40% of group sales are in emerging markets, where it has over 60% market share in many of the markets it operates in – often at a scale five times bigger than the biggest local competitor. These enormous brand, scale and distribution competitive advantages are likely to endure. The per capita consumption of salty snacks in emerging markets is still materially lower (but growing fast) relative to developed markets, and Pepsico is very well positioned for this growth.
Pepsico has generated an annualised dividend growth of 11% and annualised US dollar total return (dividend and share price) of 8% over the past 10 years. This may not seem exceptional, but when you compare it to the MSCI World Index, your money would be worth 45% more today had you invested in Pepsico, relative to investing in the MSCI World Index over this period*. Despite currently having a lower dividend yield than the fund as a whole, there are a number of reasons we hold the company. Firstly, Pepsico has grown its dividend for 43 years in a row, at an average growth rate of 13% per year. Secondly, dividends are a high priority for management capital allocation, behind reinvestment in the business but ranking ahead of share buybacks and acquisitions, which is very unusual for a US company. Finally, we think the growth potential for the dividend and earnings, and the quality and future prospects of the company as described above, justify its inclusion.
As a whole, the SIM Global Equity Income Fund yields a very attractive estimated 4.0% in US dollars, net of global withholding taxes. There is a good mix of companies in the fund, some yielding a bit lower than the average and some a bit higher.
The prospects for the companies in the fund are promising
While stocks of the sort we own in the fund have been a little ignored lately in the market rush to make a quick buck, an improving global economy (if it materialises) will also benefit the companies in the fund. The short-term ups and downs in economies, sentiment and the stock markets are likely to continue, like they always have. We are confident that the companies in which the fund has invested will continue to survive and thrive, generating attractive long-term outcomes for our investors.
We have delivered an attractive and growing US dollar dividend income stream along with capital growth during the first four years of the fund’s existence, and we aim to keep delivering for our current and new investors in the future.
Interested in investing in the SIM Global Equity Income Fund?
The fund is available both as a direct offshore option in US dollars and as a feeder fund in South African rand, and offers a choice between accumulation and income units. The feeder fund is also available as a tax-free investment. For more information click here or please contact us on +27 (0)21 950 2670.
*Assumes reinvestment of dividends