With investments, adversity leads to invention too

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Some of the best investment strategies have their genesis in personal circumstances or adversity. For Martin Currie, which manages one of Australia’s oldest and best performing equity income strategies, it was both. The firm last month celebrated the 10th anniversary of the Martin Currie Australia Equity Income strategy, which accounts for more than $6 billion across segregated mandates, retail funds and SMAs.

Reece Birtles, Martin Currie Australia’s CIO, portfolio manager for the strategy and the chief architect of the firm’s retirement income platform, says: “Our aim 10 years ago was to build an income solution that solves the problem of what we call a ‘sufficient income for life’. To us, this means a high and stable franked dollar income stream to support annual expenses, income growth for inflation protection, and capital growth with lower capital volatility to manage longevity risk. We are very happy to say that the strategy continues to achieve these goals since its inception in May 2010.”

The strategy has provided investors with a franked income higher than that of the S&P/ASX 200 index and has also outperformed the Australian market in terms of total returns, and with lower volatility. Total annual return for the strategy, including franking, in the 10 years to May 31, is 9.6 per cent, versus the index’s 8.7 per cent[1]. Within the three components of that total return, both dividend yields and franking credits have been higher but capital gains have been slightly lower than the index.

The personal circumstances surrounding the strategy’s genesis for Birtles were to do with his parents, who had recently retired. “We developed our Equity Income solution for a specific client, but real-life situations also helped us to form our views and put the actual experience of retirees into focus,” he says. “My parents had just retired, having sold their small business and were for the first time trying to live off a retirement income stream at a time where markets were very volatile. It was a similar story for the family of our head of research, Michael Slack.”

Birtles says: “Looking at the results as a real-life example, if a retiree had invested A$500,000 at inception in 2010, both a term deposit (TD) and the Equity Income portfolio would have had an expected annual income of around $30,000. Fast forward to today, and the term deposit is now yielding around $4,000, while the investment in Equity Income is still paying more than $30,000. And, unlike a TD, the capital base has grown, offsetting the impacts of inflation.”

The circumstances of ‘adversity’ giving added impetus to the development of the strategy were, of course, the global financial crisis. The old saying is either: ‘adversity is the mother of invention’, or sometimes referred to as ‘necessity is the mother of invention’. Whatever the preferred saying, it’s all about trying to find a solution to a problem. During the GFC, starting in late 2007/early 2008, quantitative easing meant interest rates were headed south. They subsequently headed lower and lower and lower. For retirees, this was a disaster.

Birtles says: “In 2010, retiree-focused equity products were few and far between (and in reality, they still are today) so we used first principles to turn traditional portfolio methodologies on their head by building a portfolio specifically aimed at providing an income stream for retirees. We wanted to improve the dollar income stream to facilitate a better standard of living. We wanted to lower income variability and provide inflation protection. And we also wanted to provide good income & capital growth for longevity. So, we built a strategy that invests in Australian securities, but looks very different to the broader market:

  • We focus on the quality of businesses, and sustainability of dividend payments to enhance dividend security.
  • We use a non-benchmark portfolio construction approach to limit security and sector concentration risk, and this helps avoid income shocks.
  • We align our portfolio construction with inflation drivers.
  • We fully value franking credits for retirees and keep turnover low.
  • We avoid costly derivatives strategies for income enhancements or capital protection that could be detrimental to long-run income and returns.

“This looks very different to term deposits, annuities, fixed income, or even ‘high yield’ equity strategies,” he says. The strategy spawned a range of other client-driven income solutions such as the ‘Australia Real Income’ fund in late 2010, ‘Diversified Income’ in 2014, ‘Ethical Income’ in 2015 and ‘Asia Pacific Real Income’ in 2016. Within the next month or so Martin Currie aims to launch the ‘Global Real Income’ strategy, which extends the franchise to access global opportunities driven by the demographic mega trends seen in Australia and Asia.

Meantime, COVID-19 has presented a new challenge. The unprecedented and unexpected impacts have meant that the near-term outlook for dividends remains an immediate issue. But Birtles says: “We worked hard to carefully re-position our portfolio and protect the near-term income stream while ensuring that the long-term income potential of the portfolio remains robust. And true to our income focus, we have achieved a much lower reduction in our dividend stream than the broader market since the start of the crisis.

“Going forward, we recognise that the fall in income is a critical issue for investors who rely on that income for living expenses. But now is also a great opportunity to build a diversified portfolio of businesses with the ability to generate sustainable dividends at attractive valuations. An example of this is our recent investment in BHP. In the past we had seen resource companies such as BHP as having high volatility of their earnings and dividends, but we added BHP in March as it was reasonably priced, and the positive outlook for the iron ore price means it can offer a differentiated dividend stream to the consumer environment that is exposed to the COVID-19 crisis.”

– G.B.

Note: Martin Currie is a sponsor of Investor Strategy News. Any opinions expressed, though, may be those of the author, not necessarily those of Martin Currie.

[1] Past performance is not a guide to future returns. Source: Martin Currie Australia, Factset; as at 31 May 2020. Assumes zero percent tax rate and full franking benefits realised in tax return. This strategy is not constrained by a benchmark, however for comparison purposes is shown against the S&P/ASX 200 Accumulation Index. Martin Currie Australia (MCA) claims compliance with the Global Investment Performance Standards (GIPS®). The Australian Equity Income composite (EQ_09) contains fully discretionary Australian Equity accounts containing diversified portfolios of Australian equity securities with an income investment focus. For purposes of compliance with the GIPS®, the Firm is defined as Martin Currie Australia (“MCA”) formerly Legg Mason Australian Equities (LMAE), and comprises all assets managed or advised on a discretionary or non-discretionary basis. MCA is a division of Legg Mason Asset Management Australia Limited (LMAMAL), which is a wholly owned subsidiary of Legg Mason Inc. MCAs predecessor firm for GIPS® purposes, was LMAMAL. The MCA team has and continues to manage the Australian domestic equities portfolio of LMAMAL. The Australian Dollar is the currency used to express performance. Returns are presented gross of investment management fees, custody fees, administration fees, tax and net of trading expenses, and include the reinvestment of distribution income. Returns are presented net of non-reclaimable withholding taxes. A GIPS compliant presentation and/or the firm’s list of composite descriptions can be obtained by contacting info@martincurrie.com. Inception Date: 1 June 2010.

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