“This is not income at any price,” says Stuart Reeve, manager of the BlackRock Global Income fund of his investment philosophy. “But valuation is one of the last steps in our process, not the first. We’re looking for great businesses at a fair price. Great quality businesses are often not cheap.”
Instead, Reeve and his co-manager Andrew Wheatley-Hubbard prioritise cash flows, evaluating global stock markets the way that bond investors do – looking for stocks which they consider to be high quality, or the equity equivalent of an investment grade bond.
These are not bond proxies the team is quick to add – the much-maligned stocks which offer little growth but investors are willing to pay above the asking price for in return for a steady income flow. Investment grade equities are “cash generative, reinvest in their businesses, have growth prospects and good cash flows” says Reeve. “We are looking to capture a profit stream as companies grow.”
Equity income funds have grown significantly over the past eight years, since the Bank of England first cut interest rates to record low levels. It is no surprise that investors, forced out of cash and bonds offering little or no yield looked to first homegrown and then international stocks for income. There are 84 UK equity income funds, and 35 global equity income funds on the market, with nearly £70 billion assets under management between them.
But these crowded trades have pushed up prices, making it harder for professional and private investors alike to find good-value income opportunities. But the BlackRock Global Income team says that value is not everything when it comes to long-term returns.
“There are four main ways to make money investing in equities,” says Reeve. “Valuation, momentum, small cap and quality. There is more than one way to beat the market. Our particular fund harnesses quality – steady returns with low volatility.”
The manager admits that it will not be among the best performers in the peer group every year, but over the long-term the lack of volatility – and losses – will deliver. The fund up 90% since inception in 2010. Over this time however, the fund has featured in the bottom 10% of its peer group on at least three occasions.
“This fund is not for everyone all of the time,” says Reeve. “But it was launched in response to what our investors were telling us – investors are scared of losing cash. Our 3.5% yield is not the highest in the sector, but our volatility is among the lowest. People often say to me, I am waiting for the market to pull back before I invest – but I ask them what they did in 2009, when the stock market was at its lowest, and they say they did not invest. Investors do not like losses.”
What are Investment Grade Stocks?
The high-quality equities the team prefers are those in charge of their own destiny – management and businesses that can create their own growth.
“The more you are reliant on external factors for growth, the less likely we are to invest,” says Wheatley-Hubbard. “Mining companies reliant on the oil price for example. We prefer returns which are driven by dividends and internal growth”.
One such stock is lift operator Kone (KNEBV). Wheatley-Hubbard pitched this idea to Reeve, who admits at first, he did not see the growth potential, as Reeve dislikes industrial stocks as by nature they have a cyclical growth pattern.
“I realised that this was not actually a cyclical industrial stock. The maintenance part of the business means it offered growth, dividends and had extra cash to use for stock buybacks or acquisitions,” said Reeve. “This is exactly the type company we like.”
Their largest holding is British American Tobacco (BATS), and the top 10 also features Canadian telecoms company Rogers Communication (RCI.B) and consumer stock Johnson & Johnson (JNJ).
