Low growth doesn’t have to mean low returns

Stuart Reeve |23-Sep-2016

Investing in a world of low economic growth need not mean accepting low portfolio returns.

You rarely have to look far to find evidence that the global economy is struggling. In September, for example, the International Monetary Fund warned that 2016 would be the fifth year in a row that global economic growth would fall below its long-term average of 3.7%. 2017 could easily be another year with below-average growth (Source: IMF September 2016).

But as investors, rather than economists, we believe there are still areas of the market which can offer attractive returns. While we have to be aware of the economic environment, of course, we are confident that companies focused on sustainable growth should still be able to generate healthy returns for shareholders. Our portfolio is built by investing in these high quality companies.

An important first step towards identifying such businesses is to accept that we do live in a world of low economic growth. The factors depressing growth are fairly well known: the rebalancing of China’s economy, while it should ultimately prove positive and a more sustainable model, is resulting in an inevitable slowdown; demographic trends, particularly ageing populations, are dragging on productivity; and many countries and organisations are still managing down debt burdens rather than pursuing growth aggressively.

That is the reality of the world facing investors. The clearest implication is that we cannot simply rely on markets to produce high returns for us thanks to rampant economic growth; we must be far more selective and work harder to find the best businesses that we believe can thrive despite this environment. This is what we look for in the BlackRock Global Income Fund.

Companies focused on sustainable growth should still be able to generate healthy returns for shareholders

It's over five years since we started running this portfolio, but the qualities we seek in the businesses we buy have not changed. We look for the potential for a high and repeatable operating return on investment, sustainable growth, the ability to fund growth internally rather than rely on borrowing, and the ability to return some excess value and cash flow in a sustainable and growing dividend. By investing in these companies, we have been able to deliver positive absolute returns in every calendar year*, with less risk than the global market, as demonstrated by a standard deviation & beta consistently lower than the market since the fund's inception**. (Fund inception 31/08/16.)

In our portfolio we focus on companies with sustainable, growing dividends, rather than those with the highest yield. This is absolutely vital to the construction of this portfolio. This is because research has shown that once dividend yields pass 6%, the risks often begin to outweigh the benefits. In fact, fewer than half of stocks yielding more than 10% typically distribute the entire expected dividend (Source: SocGen Cross Asset Research as at 30/06/16).

In our portfolio, one of our Top 10 holdings which we’ve held since the fund’s inception, is British American Tobacco. The stock currently yields 3.5%, something which may not set many pulses racing, but over the past five years that dividend in absolute terms has risen from 119.10p to 150p – a growth rate of 26% (Source: Bloomberg, data reflects total dividends paid in 2011 and total dividends paid in 2015). That would be impressive in any period, let alone during the five-year downturn highlighted by the International Monetary Fund.

It is through owning businesses like this we have been able to deliver strong returns*, ranking in the top decile of our Morningstar Peer Group over 5 years, crucially with less risk than the broader market, as demonstrated by a standard deviation & beta consistently lower than the market**. We've delivered these outcomes to clients through different market environments. (source: BlackRock, Morningstar, from fund inception to 31/08/16).

Meet the portfolio managers
Stuart Reeve
Managing Director and portfolio manager, is the Head of the London-based Global Equity team within BlackRock’s Active Equity Group
Learn more

*Source: BlackRock. Since fund inception 06/05/2011 to 31/08/16 the BlackRock Global Income Fund D Shares in GBP have delivered a total return of +12.13% vs +10.23% for the MSCI ACWI. This is calculated on a bid to bid price basis with income reinvested. Performance figures are calculated net of annual fees. Past performance is no indication of current or future performance. The performance data does not take account of the commissions and costs incurred on the issue and redemption of units.
**Source: Morningstar. The fund has a beta of 0.8 since fund inception, 6/5/2011 to 31/08/16, and a standard deviation of 10.1% vs 10.9% for the MSCI ACWI. Data for the D shares of the fund. Calculation based on the NAV of the portfolio.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 14 September 2016 and may change as subsequent conditions vary.

Reference to individual investments mentioned in this communication is for illustrative purposes only and should not be construed as investment advice or investment recommendation.

Overseas investment will be affected by movements in currency exchange rates. Investors in this Fund should understand that capital growth is not a priority and values may fluctuate and the level of income may vary from time to time and is not guaranteed. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation. Where some or all of the fund's charges are taken from capital rather than income, this will increase yield but decrease the potential for capital growth.

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