«We are seeing a lot more client interest and flows into equity income strategies»

On Tuesday, 05.03.2024, I met the successful fund manager Richard Saldanha at the new Aviva Investors offices at 80 Fenchurch Street. We had a coffee and talked intensively about equity income strategies. What sounds simple is actually quite complicated. Richard is a master of his business and has been producing excellent results with his team for many years. He was so kind and explained a lot of details to me that I hadn’t known before. Thomas J. Caduff, CEO, Fundplat LLC

• Caduff: Mr. Saldanha, you are a renowned fund manager for «equity income». How are things going?

Saldanha: We are seeing a lot more client interest and flows into equity income strategies – the reason is really three-fold. Firstly the ability to offer capital protection on the downside is important – whilst we have seen a significant rebound in markets over the past year the reality is there are still a lot of uncertainties, particularly from a geopolitical standpoint and we have a number of elections taking place globally this year as well which may lead to increased volatility. The second element is actually around capital growth – investing in companies that are paying and growing their dividends consistently through time is an important driver of long-term total returns – this has been true over many decades historically and it’s still as relevant as ever. Thirdly, the rapid rise in inflation we saw in the previous couple of years was a stark reminder of the importance of being able to grow an investment income given inflation’s nasty ability to erode real income. This is still relevant with the battle against inflation not yet won, and a global equity income strategy with a focus on income growth can be beneficial for investors.

• Caduff: Are you interested in capital gains as well as dividend income?

The strategy has managed to deliver consistent double-digit returns over a number of time periods. Richard Saldanha

Saldanha: Absolutely – we have a strong valuation discipline which means we are able to find opportunities at attractive cash-based valuations. Ultimately we are trying to find companies that can compound their cash flows through time in a consistent manner as we believe this will drive both income growth but also capital growth as well. The strategy has managed to deliver consistent double-digit returns over a number of time periods which we believe is testament to this philosophy. The portfolio itself is very concentrated and high conviction (40 stocks currently) and we have significant exposure to sectors and industries where we can see strong growth prospects – namely technology and industrials which make up over 40 percent of the portfolio.

• Caduff: Not all dividends are the same – what should investors pay particular attention to?

Saldanha: The key for us is the sustainability of the dividend – it’s tempting to get lured into sectors that pay high yields (for instance some of the more cyclical sectors such as energy, mining and banks) but one also needs to ask the question of whether the dividends will be paid in periods of market and economic stress; in many cases we have seen that these dividends are not sustained through economic cycles. By focusing on companies with resilient business models that are highly cash generative and have attractive returns on their capital and strong balance sheets we think investors have the best chance of generating sustained income and income growth. This is also important in an uncertain inflationary environment where investors want to grow their income in real terms.

We are also seeing the dividend landscape is evolving – for instance in the technology sector we are seeing an increasing number of companies paying dividends (for example we had Meta and Salesforce in the US recently initiate their first dividend payments). This is an important trend as it means income investors can participate more in areas where we are seeing some compelling structural growth opportunities, such as generative AI, cloud computing, electrification and digital payments to name a few.