Emma Wall: Hello and welcome to the Morningstar Series 'Why Should I Invest With You?' I'm Emma Wall and I'm joined today by Alastair Gunn, manager of the Jupiter High Income Fund.
Hi Alastair.
Alastair Gunn: Hello.
Wall: So high income, income obviously being the sort of thing that everybody seems to be after, all investors want. However we have had some bad news recently, the latest Capita Dividend Report suggests that 2016 won't be as good a year 2015 for dividends. There will be lower dividends on the whole and slower dividend growth. How do you match that sort of forecast with the remit you have on higher income to deliver? I think the FTSE 100 plus 110%.
Gunn: Well, I think it's becoming an increasing challenge. At the moment the data that we look at is suggesting that dividends are still going to grow year-on-year but to some extent that maybe a reflection of the strength of the dollar versus sterling and a number of companies pay dividends in dollar. So it's kind of artificial in a way.
But we've seen a number of big companies in the All Share Index and particularly in the FTSE 100, cut dividends over the course of the last six months. I think overall the risks are that we're going to see more of that. So one of the things that I am very keen to do is to try and diversify our income sources. We still have to have exposure to some of those very high dividend income streams that the market is very dependent on.
But I am quite keen to add some international names that diversify the risk if you like around receiving those very high dividends that we are after.
Wall: You manage the equity portion of two funds, two Bronze Rated funds, Jupiter High Income, and Jupiter Distribution. Within both those funds you can have up to 20% in international equities. So I suppose the question is where are you deploying that 20%?
Gunn: The overseas element is inching up a little bit. For me personally I'm much more confident investing in either the U.S. or in Europe. I think the level of disclosure and access to companies and so on is very high for us in those markets. So and when I am looking at investing on generally. It's not just about the income and diversifying the income it's about finding great companies and quite often it's an opportunity to invest in industries that you don’t have exposure to through the U.K. market. So for example we own Renault in our funds. You can't buy a car manufacturing business in the U.K. So Renault looks very interesting from an income perspective it also looks interesting from a growth recovery perspective.
But then there are other industries like the pharmaceuticals industry where there is plenty of choice in the U.K. but some of the best companies are overseas. At the moment some of the best looking balance sheets and security around future dividend income comes from overseas. So one of my key holdings is a company called AbbVie in the U.S. it’s a kind of $95 billion company that very few people have ever heard of. Its growing very strongly and yet from a valuation perspective it looks like just about the cheapest pharmaceutical equity in the world at the moment.
Wall: You said earlier that you can't ignore some of the high dividend payers in the U.K. market. Putting dividend aside for once – for one moment because that’s pounds and pence or indeed dollars and cents. Looking at just the pure yield basis. Some of the highest yielders in the U.K. market at the moment are miners.
Now miners is something that you called early and as a result were able to protect your investors from capital losses which a lot of other income investors have seen over the last year. How would you sit on the mining stocks now because of course when you chose not to hold them their valuations weren’t quite as compelling as they are now.
Gunn: The problem for me with mining is still China. China is over 50% of end demand for all major metal based commodities and China has had a level of investment in fixed asset formation. So the basic infrastructure of the economy on an unprecedented level relative to any other developing nation in history. And that level of investment is on a falling trend going forward. I think we've had a very strong supply response from the industry.
So we've got falling demand from China and we've got rising supply and the companies that we could invest in have generally got pretty poor looking balance sheets. Most of them are being pushed to either cut or completely cancel the dividends. I don’t think this solves itself quickly. So return to the dividend is not eminent and for that reason I can continue to avoid them.
Wall: Alastair thank you very much.
Gunn: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
