Download UK Equities for income and total return

UK equities for income and total return
Fidelity MoneyBuilder Dividend Fund
April 2017
Michael Clark
Portfolio Manager
For investment professional use only and not for general public distribution
Michael Clark
30 years of investment experience
Experience at Fidelity
Portfolio Manager
Michael Clark
Portfolio Manager
Based in:
London
Pan European Research
Analyst
FF European Dividend Fund
2010 – Present
FIF Enhanced Income Fund
2009 – Present
FIF MoneyBuilder Dividend Fund
2008 – Present
Automotive and Mining
2005 – 2007
Construction and House building
2003 – 2005
Oil Services
2002 – 2003
Other experience
Years of investment experience:
30
Equity research analyst, JP Morgan
1994 – 2002
Equity research analyst, Enskilda
1989 – 1994
Education:
BA, Modern Languages,
Cambridge University
Equity research analyst, Morgan Grenfell
1986 – 1988
Awards
Source: Fidelity International, as at 31 March 2017. UK portfolios managed by Michael are available to UK investors only.
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Contents
Current environment for investors
Finding opportunities in the UK market
Appendix
Key objectives
Sustainable and growing
income stream
Lower risk in the form
of lower drawdown
and volatility
Source: Fidelity International, as at 31 March 2017.
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Superior cross-cycle total
returns
Safety of Income at a Reasonable Price
“SIRP”
Safety
Income
Reasonable Price
What we look for in
companies
Understanding the
dividend stream
Stock valuations
 Simple, understandable business
models
 Attractive headline yields
 A clear valuation framework
supported by Fidelity’s global
research capability
 Predictable, consistent cashflows
 Industry structure
 Healthy dividend cover
 Positive dividend growth forecast
 Dividend sustainability
 Management who understand the
importance of good capital allocation
 What is the projected Total
Shareholder Return?
 Companies with pricing power
Commitment to significant yield premium and dividend growth
Source: Fidelity International, as at 31 March 2017.
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Current environment for investors
Weakness of sterling
Higher inflation
110
6.0%
105
5.0%
100
4.0%
95
3.0%
90
2.0%
85
GBP effective exchange rate
Weaker pound driving UK inflation
Source: Datastream, March 2017. Trade-weighted value of sterling
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Consumer Price Inflation
Feb-17
Feb-16
Feb-15
Feb-14
Feb-13
Feb-12
Feb-11
-1.0%
Feb-10
70
Feb-09
0.0%
Feb-07
75
Feb-08
1.0%
80
UK GDP growth has remained strong
3.3%
P/E
Yield
Legal & General
11.6x
5.8%
2.5%
Lloyds Banking
9.3x
4.0%
2.3%
Next
9.2x
3.9%
Go Ahead
9.5x
5.6%
15.0x
3.9%
3.0%
2.8%
2.0%
1.8%
FTSE All Share
1.5%
2014
2015
2016
UK GDP Growth
2017 (est)
UK domestic stocks undervalued
Source: GDP growth data, ONS 2014-2016; Bank of England 2017 estimate. P/E and yields from DataStream, as at 31 March 2017.
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Dividends are well supported by corporate cash flows
UK payout ratio (ex oil and mining) is below 30-year average
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
Q3 1985
Q1 1989
Q3 1992
Q1 1996
Q3 1999
Payout ratio (ex oil and mining)
Q1 2003
Q3 2006
Average payout ratio
Corporate balance sheets are in good shape
Source: HSBC Bank plc, as at 31 March 2017. Calculated on an accounting year basis.
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Q1 2010
Q3 2013
Q1 2017
The revolution in consumer staples
The bid for Unilever
Operating Margin (2017 est.)
 Kraft Heinz revolution drives up margins, and
shareholder returns without raising prices or
undermining the commercial strength of the
business
 Margin gap was the reason for the bid for
Unilever
 Unilever and Nestle will now follow Kraft Heinz.
Margins, profits and dividends will rise
 Returns will therefore rise to shareholders
35%
30%
25%
20%
15%
10%
5%
0%
Nestle
Unilever
Reckitt
Benckiser
Kraft Heinz
Powerful effect of radical cost cutting in a strong non-cyclical business
Source: Fidelity International, as at 31 March 2017. Reference in this document to specific securities is included for illustration only and should not be construed as a recommendation to buy or sell these
securities. Performance of the security is not a representation of the Fund’s performance. Third party trademark, copyright and other intellectual property rights are and remain the property of their respective
owners, and not by Fidelity International.
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Diversified pharma with proven businesses
Strong drug portfolio and focus on shareholder returns
% of group turnover
 GSK is diversified: the focus is on vaccines,
consumer products as well as prescription
drugs
Pharmaceuticals
26%
Vaccines
Consumer Healthcare
58%
 Both Developed Markets and Emerging
Markets
 The valuation is low: 15 x earnings, 5% yield
GSK share price (Total Returns)
rebased to 100 (in
pence)
 Group is cash generative, and pays a high
dividend
16%
180
160
140
120
100
80
2012
2013
2014
2015
2016
2017
Good quality pharmaceuticals stock with stable income, IRR 7%
Source: Fidelity International, as at 06 April 2017. Reference in this document to specific securities is included for illustration only and should not be construed as a recommendation to buy or sell these
securities. Performance of the security is not a representation of the Fund’s performance. Third party trademark, copyright and other intellectual property rights are and remain the property of their respective
owners, and not by Fidelity International.
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Finding opportunities in the UK market
Finding opportunities in the UK market
Additions
Disposals
Source: Fidelity International as at 28 February 2017. Stocks represent additions and disposals in Fidelity Moneybuilder Dividend over the last 12 months.
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Focus on sectors with dependable dividend growth
Utilities
Consumer Goods
Industrials
 Regulated utilities should
continue to outperform in
anticipation of higher
inflation
Financials
Health Care
Utilities
Financials
 Focus on
insurance rather
than banks
 Avoid the
complex, opaque
and highly geared
Health Care
Technology
 Fundamental
characteristics lend
themselves well to this
strategy
Telecommunications
Consumer Services
Oil & Gas
 Remain
underweight
 Oil companies still
in a difficult
position
 Valuations still look
attractive, esp. relative to
wider market
Basic Materials
Oil & Gas
-12% -6%
0%
6%
12% 18% 24% 30%
 Very little sales exposure
to the UK
Source: Fidelity International, as at 31 March 2017. Comparative index - FTSE All Share. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only.
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Ensure underlying revenues are internationally diversified
Regional weights by domicile (%)
Regional weights by economic exposure (%)
US
5%
1%
2%
1%
4%
6%
3% 2%
EM
16%
UK
2%
2%
42%
UK
20%
89%
Australia
UK
France
USA
US
Germany
Netherlands
Japan
Canada
UK large caps have significant global exposure
Source: Fidelity International, as at 31 March 2017. FactSet.
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Switzerland
Italy
Offset FX movements with high quality non-UK investments
Non-UK exposure (maximum 20%)
Kraft Heinz
US, Consumer Goods:
2% 1%
5% 1%
UK
USA
Switzerland
France
Germany
 Significant operating improvements expected post
Heinz deal
 Dividend yield of 2.6% plus special dividend
Roche
Switzerland, Healthcare:
 Premier company in oncology
 Strong drug pipeline
 Dividend yield of 3.2%
89%
Munich Re
Germany, Financials:
 Strongest reinsurer globally
 Fortress balance sheet
 Dividend yield of 4.7%
Source: Fidelity International, as at 31 March 2017. DataStream for dividend yield.
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Outlook
Equities should remain a solid source of income and capital growth
Returns should be in excess of inflation despite the devaluation of sterling
Economic growth remains strong worldwide
Some volatility to be expected as interest rates rise in the US
to more normal levels
Source: Fidelity International, as at 31 March 2017.
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Appendix
Fidelity MoneyBuilder Dividend Fund
Performance over tenure
250
Down
Market
Up
Market`
Up
Market
Down
Market
Up
Market
Down
Market
Down
Market
Down
Up
Market Market
Up
Market
Down
Market
Up
Market
+123.4
+102.7
Indexed Return
200
+91.0
150
100
50
Jun-08
Sep-09
Dec-10
Fidelity MoneyBuilder Dividend Y Inc
Mar-12
Jun-13
FTSE All Share
Sep-14
Dec-15
IA UK Equity Income Sector Average
Mar-17
Fund (%)
Index (%)
Relative (%)
Quartile ranking
3 months
5.3
4.0
1.3
1st
1 year
13.4
22.0
-8.6
3rd
3 years
25.4
123.4
24.9
91.0
0.5
2nd
32.4
1st
Tenure
Source: Morningstar Workstation, as at 31 March 2017. Tenure performance and quartile ranking data as of 31 March 2017. data Basis: Bid-Bid net income reinvested at UK basic rate of tax in GBP. Fidelity
Enhanced Income is based on the Fidelity MoneyBuilder Dividend Fund which is also managed by Michael Clark. The track record of Fidelity MoneyBuilder Dividend is displayed above as Michael Clark has a
longer track record on this fund than Fidelity Enhanced Income (which was launched on 2 February 2009). Down Market, Up Market is defined by performance of the FTSE All Share Index.
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Fidelity MoneyBuilder Dividend Fund
Limited drawdown vs. the market and sector
Maximum drawdown (%)
Up / down capture vs. largest competitors
5 years
0
-2
-4
-6
-8
-10
-12
-14
-16
120
UK Equity Income
Sector Average
FTSE
All Share
110
Up Capture Ratio
Fidelity
MoneyBuilder
Dividend
-7.3
100
Fidelity
MoneyBuilder
Dividend Y Inc
90
80
IA UK Eq Inc
Sector Avg
FTSE All Share
Fidelity
Enhanced
Income W Acc
70
60
-11.9
-14.5
Emphasis on capital preservation
30
50
70
90
Down Capture Ratio
110
Low down capture indicates relative outperformance
in down markets
Source: Morningstar Workstation, as at 31 March 2017. Basis: Bid-Bid net income reinvested at UK basic rate of tax in GBP.
Each bar represents the maximum drawdown since launch of Fidelity Enhanced Income. i.e. largest peak to trough based on month end performance. Source: Morningstar Direct. Basis: bid-bid, income
reinvested in GBP to 31/03/2017, net of fees. Up/down capture measured vs. FTSE All Share.
Up/Downside Capture Ratio measures manager's performance in up/down markets. A down-market is defined as those months in which market return is less than 0. In essence, it tells you what percentage of
the up/down-market was captured by the manager. For example, if the down ratio is 110%, the manager has captured 110% of the down-market and therefore underperformed the market on the downside.
Primary share classes according the IA are shown.
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Fidelity MoneyBuilder Dividend Fund
A healthy yield underpinned by a diverse and resilient income stream
MBD - Income by sector
FTSE All Share - Income by sector
Consumer Discretionary
Consumer Staples
Energy
Financials
Funds
Health Care
Industrials
Information Technology
Materials
Real Estate
Telecommunication Services
Utilities
Consumer Discretionary
Consumer Staples
Energy
Financials
Funds
Health Care
Industrials
Information Technology
Materials
Real Estate
Telecommunication Services
Utilities
Cumulative distribution of yield
Breakdown of portfolio by yield
100%
35%
30%
25%
20%
15%
10%
5%
0%
80%
60%
40%
20%
0%
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77
Number of stocks
Source: Fidelity International, as at December 2016. FactSet.
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Sub 3%
3-4%
4-5%
5-6%
6% and
above
Fidelity MoneyBuilder Dividend Fund
Top ten holdings
Portfolio weight (%)
Dividend yield (%)
Date position initiated
GlaxoSmithKline
5.2
4.8
Jun-08
Imperial Brands
5.1
4.0
Jun-08
British American Tobacco
4.7
3.2
Jun-08
AstraZeneca
4.5
4.5
Jun-08
HSBC
4.3
4.9
Jun-08
BAE Systems
3.9
3.3
Jun-08
Altria
3.5
3.4
Aug-10
Unilever
3.4
2.8
Jul-08
Reckitt Benckiser
3.2
2.1
Sep-09
Legal & General
3.1
5.8
Nov-15
A high quality portfolio with international exposure
Source: Fidelity International, as at 31 March 2017. DataStream for dividend yield. For the purposes of illustration only and should not be construed as a recommendation to buy or sell the mentioned security.
Top security holdings are those securities in which the largest percentage of the fund’s total assets are invested. Holdings in different securities issued by the same company are listed separately and any
exposure achieved by derivatives is not shown. This means that the data may not always represent the total exposure of the portfolio to any given company. A full list of holdings, including derivatives, can be
found in the fund’s annual and/or semi-annual report and accounts.
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Fidelity MoneyBuilder Dividend Fund
Portfolio characteristics
Fund yield*
c.110% benchmark
Typically 60 – 80 holdings
Number of holdings
79
Max. stock position
Up to 10%
Max. sector position
Up to 25%
Active money**
Benchmark - FTSE All Share Index
Stock weightings typically between 1% and 10% of NAV. Sector positions
are an outcome of stock selection. Normally expect a max of 25% in any one
sector
Typical active money of between 60 – 70%
59.9%
Beta
0.80
Expect beta to be significantly <1
Tracking error
4.2%
Monitored but no formal target
Annual turnover
14%
Low turnover
Fund
Index
GBP 37.1bn
GBP 37.1bn
Volatility
11.49%
13.79%
Expect fund volatility to be below Index
ROE
21.9%
16.6%
Bias towards quality companies
Median market cap
Focus on large cap stocks
The right balance of conviction and diversification
Source: Fidelity International, as at 31 March 2017. *The yield is net of withholding tax and charges taken from income. As a result of the annual management charge being taken from capital, the distributable
income may be higher but the fund’s capital value may be eroded, which will affect future performance. The yield is not guaranteed and will fluctuate in line with the yield available from the market. The fund
should only be considered as a long term investment. **Active money includes cash.
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Important information
This information is for Investment Professionals only and should not be relied upon by private investors. It must not be reproduced or circulated without prior permission. This
communication is not directed at, and must not be acted upon by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the
relevant funds are authorised for distribution or where no such authorisation is required. Research professionals include both analysts and associates. Fidelity/Fidelity International
means FIL Limited and its subsidiary companies. Unless otherwise stated, all views are those of Fidelity. Top security holdings are those securities in which the largest percentage of
the fund’s total assets are invested. Holdings in different securities issued by the same company are listed separately and any exposure achieved by derivatives is not shown. This
means that the data may not always represent the total exposure of the portfolio to any given company. A full list of holdings, including derivatives is available on request. Reference
in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors
should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is
gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. Fidelity only offers information on its own products and
services and does not provide investment advice based on individual circumstances. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL
Limited. The Authorised Corporate Director of Fidelity Investment Funds and Fidelity Investment Funds IV OEIC, and the Manager of Fidelity Unit Trusts is FIL Investment Services
(UK) Limited. Please note Fidelity Unit Trusts are not registered for sale in Jersey or Guernsey. Holdings can vary from those in the index quoted. For this reason the comparison
index is used for reference only. This document may not be reproduced or circulated without prior permission. No statements or representations made in this document are legally
binding on Fidelity or the recipient. Past performance is not a reliable indicator of future results. The figures refer to simulated past performance and that past performance should
not be used as a guide for future performance. The value of investments can go down as well as up and investors may not get back the amount invested. For funds that invest in
overseas markets, changes in currency exchange rates may affect the value of an investment. Foreign exchange transactions may be effected on an arms length basis by or
through Fidelity companies from which a benefit may be derived by such companies. Data Source - © 2013 Morningstar, Inc. All Rights Reserved. The information contained herein:
(1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor
its content providers are responsible for any damages or losses arising from any use of this information. Copyright - © 2013 Morningstar Inc. All Rights Reserved. Third party
trademark, copyright and other intellectual property rights are, and remain, the property of their respective owners. Issued by FIL Investments International (FCA registered number
122170) a firm authorised and regulated by the Financial Conduct Authority. FIL Investments International is a member of the Fidelity International group of companies and is
registered in England and Wales under the company number 1448245. The registered office of the company is Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent
TN11 9DZ, United Kingdom. Fidelity International’s VAT identification number is 395 3090 35.
EQINC223-0717
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