Each month, we look at the economic and investment world from a different view point…
May 2014: Paul Boyne and Doug McGraw from Manulife
Fund managers Paul Boyne and Doug McGraw will be familiar to many St. James’s Place’s global equity investors, although the US-based investment firm Manulife Asset Management, which has $250 billion under management, may well be a new name to many in the UK. Boyne and McGraw have been recently appointed to manage the St. James’s Place Global Equity Income fund, which they previously managed before they left Invesco Perpetual at the end of 2012. The return of Boyne and McGraw to head up the Global Equity Income fund again offers St. James’s Place investors access to their experience and specialist insight into global equity income. St. James’s Place’s chief investment officer, Chris Ralph, discusses with the pair their approach to investment.
Chris Ralph: Equity income investing has traditionally been focused on developed, Western markets. How has that developed in the past 5–10 years and which regions now provide good opportunities?
Paul Boyne: As we employ a fundamental, bottom-up stock selection process, geographical positioning will be a direct outcome of the stock opportunities in the portfolio. The St. James Place portfolio will typically hold 40–50 stock positions and can take advantage of an opportunity irrespective of domicile. As such, the portfolio today reflects more opportunities found in the Western markets including the UK, Europe and the US where we are finding companies with the combination of good valuations and quality. We have not ignored other regions in our investment scope and have found select opportunities within emerging markets and Asia, areas where we have not historically seen the majority of opportunities that fit our investment philosophy and process. We have the luxury of comparing all stocks globally and will go where the stocks offer the best reward/risk profile.
Chris Ralph: Is a portfolio of typically 40–50 stocks a more concentrated investment universe than normal for your approach?
Doug McGraw: It does represent a slightly more concentrated portfolio, customised for St. James Place, than our standard strategy, which is slightly more diversified with an average of 60 stocks. While the St. James Place portfolio is slightly more concentrated, the strategy’s investment universe, which we run through our quality income and valuation screens, does not discriminate between portfolio style and type. The St. James’s Place portfolio offers a portfolio more focused on income generation and capital growth.
Chris Ralph: Although this is an income fund, the portfolio also has exposure to businesses that are positioned for capital growth. Can you explain their role in the overall strategy and provide an example?
Paul Boyne: Our strategy’s main objectives are focused on: companies with the potential for capital gain; companies whose dividend is greater than the index; and companies displaying dividend growth. In order to achieve this balance we seek quality income and attractive valuations, as dividends alone are not a guarantee of capital protection. The Media industry is an example where we have found strong dividend yields, good valuations, capital growth opportunities and dividend growth.
For example, we initially purchased Viacom when we recognised a change of position by management in terms of capital allocation. The company began to simplify and split off elements of the business. Additionally, management initiated an inaugural dividend which has subsequently grown and promised a multi-year return of $20 billion of total capital to shareholders, eschewing further merger and acquisitions. Multiples and returns for the company benefited from this strategy. This is in contrast to a higher-yielding sector like utilities where over the last three to four years we thought European utilities had stressed balance sheets and US utilities were too expensive.
Chris Ralph: The investment team travel extensively and place importance on getting to know the management teams of businesses they own. Why is this so critical to their approach?
Doug McGraw: Our process involves understanding the growth prospects within a business and how management plans to reinvest its cash to meet those growth opportunities, as well as understanding what management will do with the excess cash or capital. This is best done in person. At the end of the day, we want management to return the cash to shareholders. Conversations with management are an important part of the investment process in order to better understand the company’s plans and how these plans may change. Travelling to see these management teams gives us a better perspective for what is happening ‘on the ground’ in certain regions and countries. It is more difficult to gain that local knowledge from our seats in Boston.
Chris Ralph: Does your long-term view allow you to take advantage of short-term market volatility to trade around existing positions?
Paul Boyne: The fund is designed to look through short-term volatility and take a long-term view of our portfolio holding and, as such, our turnover is quite low and averages at about 30% annually (which equates to an average holding period of over three years). However, short-term market volatility will offer us valuation opportunities to enter into or exit out of stocks that we have thoroughly researched. We compare stocks against each other based on their upside to fair value and secondarily their upside to downside ratio. If the market moves, we may adjust position sizes where those stocks with the best upside to fair value on a risk-adjusted basis will represent larger position sizes in the portfolio. This adjustment process would include stocks on our watch list, which may become attractive enough against current stocks in the portfolio to replace an existing holding or simply be added to the portfolio.
Chris Ralph: Manulife is a new name to our roster of fund managers. Could you share your thoughts on the rigour of Stamford’s due diligence process?
Paul Boyne: The due diligence process that Manulife Asset Management and our global equity team went through with Stamford Associates was thorough and rigorous. The process started with face-to-face meetings with senior management and portfolio managers, numerous update calls and emails and the process culminated with extensive due diligence questionnaires covering a wide range of matters designed to better understand the firm and its capabilities. Follow-up to the due diligence questionnaires included additional calls and an onsite meeting with our most senior executives and the portfolio management team. Although the process was rigorous and precise, our firm likes to spend time upfront with consultants and clients so that they fully understand the strategy they have selected, to ensure that the partnership we have with our clients is one that lasts for a very long time.
The team we interacted with from Stamford were professional, courteous, and extremely knowledgeable in representing the interests of St. James Place.
Points and Views
- Boyne and McGraw adopt a fundamental, bottom-up stock- selection process, and geographical positions are a direct outcome of the stock opportunities in the portfolio.
- The portfolio will typically hold between 40–50 stock positions and presently reflects the greater number of attractive valuations and quality opportunities available in Western markets.
- Boyne and McGraw focus on companies with the potential for capital gain and dividend that is greater than the index; and companies displaying dividend growth.
- Meetings with management focus on understanding the growth prospects within a business and how management plans to reinvest its cash to meet those growth opportunities.
- The team takes a long-term view on its holdings; consequently turnover is quite low and averages about 30% annually.
- Stocks are compared against each other based on their upside to fair value and secondarily their upside to risk/reward ratio.
- The due diligence process that Manulife’s global equity team underwent with Stamford Associates was “thorough and rigorous”, says Boyne.
The opinions expressed are those of Paul Boyne and Doug McGraw and are subject to market or economic changes. This article is not a recommendation, or intended to be relied upon as a forecast, research or advice.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.
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