A good fund solution for investors who love equity income

There are not that many fund managers who reliably produce alpha for investors – they are a fairly exclusive species. One of them is Matt Kirby from Aviva Investors in London. Matt is an outstanding global equity portfolio manager specialising in equity income. The fund he and the co-manager Richard Saldanha manage is constantly winning awards. So it was a pleasure and an honour to be able to ask him five questions. I highly recommend reading his answers! Thomas J. Caduff, CEO, Fundplat LLC

Mr. Kirby, every investor loves «income». How do you define this term?

For us it’s about finding companies that not only are delivering an attractive income right now (in terms of the dividends they are paying to shareholders) but more importantly are able to grow this income stream over the long-term. This is critical as dividends and dividend growth are key drivers when it comes to long-term real equity returns (adjusting for inflation).

That actually sounds simple. How difficult is it to find the most suitable stocks from the universe?

We initially screen companies across our investment universe, focusing on metrics such as dividend yield, free cash flow generation and return on capital. Then we try and get a clear understanding of the company’s competitive advantage and whether this can be sustained and ultimately drive future cash flow and dividend growth. Having a diverse global universe (ca. 3,000 stocks) certainly helps in terms of providing a healthy opportunity set.

The dividend yield doesn’t say much about the quality of a company – right?

We would argue just purely looking at the current dividend yield of a company gives you little insight into the underlying quality of the company. What we focus more on is to understand the cash flow growth profile of the business (as dividends are ultimately paid from cash) and the resilience of the business model. Often we focus on other metrics such as return on capital (i.e. how much profit does a company generate with the capital they are provided with) as well as their profitability and balance sheet – for us these are a much better lens with which to judge quality.

What are the decisive criteria in the selection process – is that your secret?

Portfolio construction is an area we believe is of paramount importance when it comes to achieving the key outcomes of the fund – namely long-term capital and income growth. We try and understand where the company is in its lifecycle and reflect this in three buckets (mature yield, core yield and income growth). The key part is making sure we maintain a good balance across these buckets in order to balance the dividend yield requirements with the income growth characteristics.

You then put all this into a fund that has won many awards. Can you say something about that?

Whilst it is pleasing to see the fund get recognized for its long-term performance, we remain very focused on delivering on the key outcomes for investors – we think income funds have an important role to play in terms of delivering not just income but also capital growth. Having a long-term focus and being disciplined on they types of companies we choose to invest in we believe will help in terms of building on the track record we have demonstrated already.