SIM Global Equity Income Fund

Globally, interest rates and yields are at historic lows and are likely to remain that way for some time. As a result, investors are searching for alternative sources of yield. The SIM Global Equity Income Fund caters well for these kinds of investors, and offers a very pleasing performance at the same time. The fund’s cumulative non-annualised performance since inception in September 2012 has been a stellar 25% (in US dollar terms) and more than 60% in rand terms.

At the Sanlam Global Investor Days that took place around the country, Douw Steenekamp, Fund Manager, effectively debunked some of the myths around the objectives of the fund.

Essentially it is a dividend-focussed equity fund that offers an alternative source of income by investing in equities. It has nothing to do with fixed-interest instruments – as its name suggests. The objective of the fund is to generate an attractive, reliable and growing income stream for investors, derived from the dividends paid by its investee companies, while also striving to achieve real growth in the capital invested.

Income is derived through a number of hand-picked shares that pay out handsome dividends that are aggregated and paid out every six months, amounting to approximately 4% annualised. This compares very favourably with other equity, unit trust or balanced funds.

A stellar performer in the Sanlam Global stable

The underappreciated power of the humble dividend

 What are dividends?

They are discretionary cash distributions paid to shareholders out of the after-tax profits of a company. Companies pay them to reward shareholders for investing in the company.

 Why we like them:

• They provide a tangible return on investment.
• They are a good hedge against inflation.
• They can provide an attractive yield.
• High pay-outs often signal superior subsequent earnings growth.
• Dividend yields and growth provide the majority of real equity returns.

 The roughly 4% yield that the fund is projected to deliver during the next twelve months should be very attractive to investors who need to generate income from their investment capital, such as retirees.

A source of dual income

Experience has taught us that not only it is possible to produce a steady stream of income but also excellent long-term returns by investing in companies that pay regular and growing dividends. The trick is to find companies that generate significant amounts of cash sustainably, that are committed to a policy of returning a significant share of this cash flow to shareholders via dividend payments, and that have balance sheets healthy enough to sustain this kind of commitment.

The secret to our winning formula: Dividends that keep on growing

By investing in companies that are steadily growing their dividend pay-outs, the income stream from this kind of investment can be expected to grow predictably over time. Also, as an equity-based investment, you can expect significant capital growth over the long term.

 How do we pick winning stocks?

We seek out superior, well established companies that offer:

• shares with a higher than average dividend yield
• robust balance sheets (little or no debt)
• abundant, reliable free cashflow
• a history of growing their dividends steadily over time
• a commitment to growing dividend yields (management incentivised)
• solid, mature companies which are often overlooked in their sector or undervalued.

In the words of Douw Steenekamp, “Our quest is to construct a diversified portfolio of shares with high dividend yields and a low likelihood of dividend cuts or balance sheet problems”.

We tend to have a large exposure to multi-national companies based in or with a head office in the UK, simply because their tax regime is advantageous – they don’t have dividends withholding tax there. This is significant; we always look at after-tax returns.

Sterling performance

The high conviction of this portfolio (35.5% invested in its top 10 holdings) has paid off. The fund’s performance to date has been outstanding; since inception, cumulative performance has been a very attractive 60% in rand terms (30.9% annualised). In US dollar terms, the cumulative performance was 25% (13.5% annualised).