RaboDirect's Key Accounts & Investments Manager, Michael Courtney, sat down with Nick Dravitzki, Portfolio Manager of the Devon Equity Income Fund to get you the details on the newest addition to the RaboDirect Managed Funds Platform
1. Can you explain your role with Devon and how long you've been with the company
I am the Portfolio Manager of the Equity Income Fund which means I decide what stocks are included in the portfolio. My background is as an equity analyst so I spend most of my time researching stocks for the Fund. I have been with Devon since May 2010.
2. How long have you been managing the Equity Income Fund for?
The Equity Income Fund was established in wholesale form in December 2011 and as a retail PIE in December 2012. I have managed both products since inception.
3. Can you explain a bit about the strategy behind the Equity Income Fund
The Equity Income Fund is 100% invested in companies listed on the New Zealand and Australian share markets. The Fund invests in companies that have higher than average dividend yields . The portfolio as a whole targets a dividend yield more than 1% above the overall market yield, taking into account imputation credits available to New Zealand investors. The rationale for investing in this way is twofold. Firstly, the historical performance of high dividend yield investing is very good, which is probably because investors typically underestimate the contribution to returns from dividends and overestimate company growth rates. Secondly, focusing on dividend yields naturally directs investment towards companies that have stable and predictable cash flows and can accordingly pay out a high proportion of their earnings as dividends. In general these businesses tend to have lower earnings risk than the rest of the market, and therefore lower value risk.
4. When someone invests in the Equity Income Fund, where is the money invested?
The money is invested in a pooled fund (a Portfolio Investment Entity) that collectively owns the stocks chosen by the portfolio manager. With regard to security of clients' funds, the money is never held by Devon directly, it is held by a third party custodian (in this case BNP Paribas).
5. How do you decide what the most suitable/appropriate investment options are for the fund?
The Equity Income Fund management process begins with a screen that ranks all stocks in the market (the NZX50 and ASX300) by their 12 month forward dividend yield (calculated as a gross yield to a New Zealand resident investor). Dividend estimates are a combination of consensus forecasts and internal modelling. The ranking identifies the universe from which the portfolio is then constructed. The portfolio targets a running yield greater than 1% above the overall market yield.
The stocks that populate the portfolio are then chosen using fundamental analysis. Potential portfolio stocks are modelled using data from publically available sources (primarily company financial statements), meetings are held with management and an assessment made of valuation. Work is peer reviewed within the investment team. Essentially the analytical process used to conduct detailed analysis of potential holdings is identical to that used across Devon's other funds.
6. What are Devon's views on the NZ, Australian and wider global economies at the moment?
Naturally we keep a close eye on what the markets are doing and publish a monthly commentary of our views, which can be read here, and is part of our regular monthly report that is available on the RaboDirect website.
7. Although this fund is an Australasian equity fund, does Devon still pay close attention to what is happening globally?
Yes we do. In the short term factors that drive off shore markets can have a very significant impact on local markets. Over the longer term global economic factors may materially impact the economic performance of Australia and New Zealand which will obviously affect local listed companies.
8. How would you describe the performance of the fund in recent times? And would sort of performance should customers expect from this fund going forward?
Performance has been very strong over recent years (29.2% net of fees and expenses for the 12 months to 31 January 2015) however the Fund has been the beneficiary of both very strong local markets and the desire of investors to seek dividend yield in the current low interest rate environment. It would be highly unrealistic to expect such a level of returns going forward.
9. Could you explain your thoughts on the risk this fund carries
It is important investors understand that the Equity Income Fund is at all times primarily invested in listed equities. It can have up to 10% invested in cash but it does not (and cannot under its mandate) invest in bonds or fixed interest instruments. Consequently it has equity risk and in the event of overall share market declines the capital value of the Fund will also decline. It is designed to be somewhat less risky than the typical equity fund in that it has significant exposure to more traditionally defensive sectors (in the sense of earnings predictability) e.g. listed property, utilities, transport infrastructure and telecommunications (which currently make up more than 50% of the Fund). However it should be borne in mind that even though these sectors have less earnings risk, the price the market is prepared to pay for those earnings can change significantly.
10. What methods does the fund use to minimise foreign exchange risk?
The Equity Income Fund fully hedges its Australian positions (which currently account for 48% of the Fund). This is done to reduce volatility. Hedging is done by way of rolling foreign exchange forwards with major local trading banks, split over 2 separate time periods to manage cash flow risk.
The Fund typically has approximately half of its investments in Australia. If the NZ dollar rises against the Australian dollar, all else equal, the value of those positions in NZ dollar terms will decline. Conversely, if the NZ dollar falls, the positions will become more valuable. Typically investors like less rather than more movement in value so the Fund's default position is to remove the impact of currency.
11. What specific performance objectives do you set for the fund?
The specific objective of the Fund is to generate a dividend yield income above the overall market and to achieve sufficient capital growth to maintain the investors' value in real terms. The benchmark the Fund is reported as being measured against is a 50/50 blend of the ASX200 and the NZX50 Gross however because the Fund can essentially only ever invest in half of the market (the higher dividend yielding half) performance will at times diverge significantly from underlying market.
12. Do you expect a level of cyclical fluctuation in the funds price?
Yes. As discussed above the Fund is an equity investment and capital values will fluctuate.
13. Does this fund pay distributions? If so when?
Yes, it pays 1.25% (of the year beginning unit price) 4x a year (Jan, April, July, October).
14. Why should someone invest in this fund?
There are 3 key reasons. Firstly, over time dividend yields have been shown to be a very significant component of overall returns and the evidence from markets around the world is that investing in higher yielding stocks has significantly outperformed market returns. Secondly, for those investors who want to invest in equities but also derive an income from their equity investments, the fact the Fund generates a meaningful cash yield enables investors to receive cash without having to sell units. Thirdly, the management of the Fund is informed by the collective experience of the broader Devon Funds team who bring significant experience and expertise to portfolio management.
15. For someone who is new to funds, what are some important considerations to take into account before investing in the Devon Equity Income Fund?
The most important consideration is that investors understand they are taking a position in an equity fund and that all equity investments are subject to potentially material capital value fluctuations.
16. How would you see this fund fitting into an investor's portfolio?
I would see it as appropriate for the Australasian equity allocation for all investors, but particularly those with a more conservative bent.
To the extent that any information, analysis, opinions or views provided above constitute advice, they do not take into account any person's particular financial situation or goals and, accordingly, do not constitute personalised advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any persons.