FUND OVERVIEW
Taking a fixed income lens to equity selection
Bond experts
Falling income levels have been a fixture of financial markets for several decades, exacerbated in recent years by persistently weak global growth and ultra-low interest rates.
Many investors have moved towards riskier assets in their hunt for yield, and valuations consequently look expensive versus historical norms. As a result, the need for company fundamentals to be properly analysed at every level before investment is becoming more important in order to ensure dividends remain sustainable and capital is protected.
It is perhaps with this need in mind that Payden & Rygel is launching its institutional equity income strategy to the UK advisor market this year. The group’s Dublin-domiciled Global Equity Income Fund invests in high dividend stocks with dividend growth and aims, currently to deliver a yield between 3.5%-4%. However, the managers undertake a unique process to maintaining a low risk profile by taking a more considered ‘fixed income approach’ to equity analysis.
“This fund’s investment philosophy refers back to Payden & Rygel’s fixed income heritage,” explains James Wong, managing principal and head of equity strategies at Payden & Rygel.
“By using a fixed income lens to equity selection it allows us to look at a number of financial metrics across the entire capital spectrum; in particular a thorough analysis of corporate cashflows, earnings quality and credit ratings, as well as the company’s access to capital markets. This type of analysis is not traditionally associated with equity investing but provides us with a detailed and holistic view of a stock before we invest.”
While taking a fixed income approach to equity investing may seem unique, for Payden & Rygel it is anything but. The group offers an array of strategies across equity and absolute return space, however it is in fixed income that the bulk of the firm’s £86.5bn AUM sit.
The Global Equity Income Fund is the first equity-only vehicle from Payden & Rygel that will be available to the UK advisor market.
However, Wong and his co-manager, Frank Lee, have a successful long-term track record of managing this strategy in the US where the duo have delivered an annualized total return of 13.4% and a dividend yield of 3.5% since the fund’s inception in 2010. This is ahead of both the Russell 1000 Value and the S&P 500 index.
Importantly, it has achieved this with significantly lower volatility of 8.8%, (versus the Russell 1000 at 11.4% and the S&P 500’s 11%*). The investment philosophy on this US fund matches that on the Global Equity Income vehicle and embraces Payden & Rygel’s philosophy of managing equities from a bond perspective.
“We identify opportunities by conducting proprietary research in a way that other equity managers do not,” explains Wong.
“For example, we may look at a company’s access to capital markets or its debt repayment schedules, alongside other typical measures such as earnings growth, valuations and dividend growth.
“But in analysing from both an equity and fixed income stance it provides a better view as to whether this stock will truly be able and the company’s management be committed to continue paying a dividend in the long term. That is an important factor to consider in the environment today.”
Lee agrees: “Around 85% of the companies held in our equity funds are also held in bond form across our fixed income portfolios. Therefore, 85% of the research on companies in our universe is readily available to us and we draw on it in our own equity research heavily.”
The managers invest in all sectors of the equity universe beyond financials, utilities and consumer staples. Unusually, they also consider master limited partnerships (MLPs), Preference Shares and Real Estate Investment Trusts (REITs).
Preference shares, MLPs and REITs are assets that offer attractive yields, particularly in the face of today’s low yielding environment. REITs offer the potential for capital gains too while MLPs, (publically traded limited partnerships in the businesses of transportation and storage of energy commodities) are able to offer steady to increasing cashflow.
Preference shares generate yields between 5%-6%, and are higher in the capital structure than common shares, making them more secure by some standards. A typical portfolio target allocation for each of MLPs, Preferreds or REITs is maintained at between 5%-20% in the portfolio. The expected yield from these investment usually ranges between 3%-8%.
“There are not many other equity managers that use securities like MLPs, to the extent that we do in an equity strategy. This is because these industries tend to be very specialised. However, these companies are all big debt issuers and therefore Payden & Rygel (and by extension we) are very familiar with them,” explains Lee. D
Though Wong maintains an optimistic view that the global economy will continue to grow at a “moderate” pace and recession is not in the outlook in the “near to medium term”, ensuring downside protection is built in at an asset allocation level specifically is a key part of the Global Equity Income Fund.
“The nature of our investment philosophy allows us to build in protection into the fund. This can be observed from our beta figures which are between 0.6-0.8. But we do aim for higher income, so we will closely monitor the factors that influence markets when making investment decisions,” he says.
Frank Lee & James Wong
Fund Managers, Payden & Rygel Global Equity Income Fund
Downside protection
Payden & Rygel Global Equity Income Fund
geographical and sector make-up
Identifying the investable universe and performing bottom-up fundamental research
FUND SNAPSHOT
Payden & Rygel Global Equity Income Fund
The Payden & Rygel Global Equity Income Fund aims to generate superior risk-adjusted returns with lower volatility and downside protection relative to broader equity markets and competitors.
To do this, the fund managers apply a fixed income lens to pick stocks via a bottom-up research process. Research the group undertakes at a stock level includes analysis of company balance sheet liquidity, historical and relative valuations, and dividend policy, as well as taking into account investor sentiment.
This helps the managers understand stock fundamentals in greater detail and assess dividend sustainability better. The managers aim to only invest in those stocks able to deliver a higher dividend outlook but invest across all sectors and geographies.
The UK version of the Payden & Rygel Global Equity Income strategy is aligned with its US counterpart, and invests in a range of high dividend stocks, REITs, and MLPs. Wong and Lee have managed this strategy since 31 December 2010.
This fund has a proven track record of meeting its objectives and has, to date, consistently delivered a significantly higher income than the index, alongside lower volatility and better risk-adjusted performance and downside protection.
Since inception, the US fund has continued to outperform relative to larger peers and delivered an on-target dividend yield of 3.5%, ahead of both the Russell 1000 Value and S&P 500 index at 2.4% and 2% respectively. The fund’s annualised volatility is also lower at 8.8%.
Fixed income heritage
Expansion plans
Payden & Rygel is one of the world’s largest privately owned independent global fixed income asset managers with £86.5bn under management. The firm manages
money exclusively on behalf of institutional clients, including a number of FTSE 100 corporations, amongst them, two high street banks, an insurance company and a wealth manager.
Already well-known amongst institutional investors in the UK, Payden sees an opportunity to bring its fund management expertise to the wealth management sector with the launch of an innovative Global Equity Income Fund.
“We believe that the combination of high income returns from an equity strategy derived from our fixed income heritage, delivered with an institutional price tag, will appeal to investors looking to generate a higher income in this ultra-low yield environment,” says the group’s managing principal Robin Creswell.
“We aim to offer a combination of investment solutions that can meet clients’ investment return objectives at a competitive fee, with complete transparency.”
Creswell has been at the helm of the UK business since Payden & Rygel launched its first overseas office in London in 1998, when it had already been operating in its native US for 15 years.
In the UK, the group has grown its client base gradually, predominantly targeting investors that value the group’s culture such as the fact it is employee-owned and has low staff turnover.
Now, in a post-RDR world, the firm’s long-standing principles are resonating with the wholesale and wealth manager market. For example, the group has always been committed to providing full portfolio transparency, operating a proprietary platform developed in-house with the express purpose of providing investors 24-hour access to the underlying portfolio details.
Investors are given 100% visibility of any portfolio the group runs including market data, individual holdings re-priced every night, transaction details, performance monitoring and investment guidelines.
“Investors can log on to our platform “Juneau” securely, at any time of the day or night, and see which securities have been bought or sold, the broker that has been used, the price paid, the yield, duration and so on, we provide 30 or more fields of data for every security,” explains Mark Stanley, managing director of Payden & Rygel in the UK.
“On one level it is simply information, but it is a practical demonstration of our commitment to transparency. It also allows our clients to assess properly, in as close to real time as possible, if there are overlaps in their portfolio for example, or gaps in exposures too. In the fund world, this commitment to complete transparency is rare.”
Payden & Rygel also commits to provide fee certainty by operating a cap on Total Expense Ratios for all of its UCITS funds. In the case of the Global Equity income fund, the cap is 65bps. Creswell explains: “In an environment where yields are so low, costs can make a huge difference to the outcome especially when investments are held for the long term. The Total Expense Ratio cap at 65bps includes our management fee, but also the administration, custody, accounting, trustee and all other fund related costs.”
The group offers a range of 16 UCITS funds with strategies drawn from across the firm’s investment expertise. The group has managed equities on behalf of its clients for over 20 years, with the US version of the Equity Income fund having outperformed both the S&P 500 and Russell 1000 index since inception in 2010.
“Payden launching this fund in the UK continues a well-developed strategy of using the firm’s proven global fixed income analysis and expertise to fulfil demand for a higher income global equity strategy.
“As fixed income investors, our analysts consider a company’s entire capital structure looking for evidence of its ability to pay back its debts. This gives us a differentiated perspective and allows us to focus further on a company’s ability to sustain and grow dividends,” says Stanley.
“As a fixed income manager, when we meet corporations and their management teams, the focus of our discussion might be on their willingness, or otherwise to maintain their credit rating and this can tell us a lot about their commitment, or otherwise to paying dividends. It’s helped us steer clear of blow-ups associated with companies slashing dividends.”
Research has indicted that in the past, fund manager ‘brand’ was one of the most significant factors in determining flows. However, now the indications are that fees and performance are becoming more important. “You won’t see our name up in lights, on a building or side of a taxi but now that headline image is becoming less important we think investors will take more time to look at the professionalism and competitiveness of our offering and focus less on old world frills,” Creswell commented.
Payden & Rygel aims to add to its growing investor base in the UK by building partnerships with organisations in the wealth management space and helping them solve core investment challenges – such as where to find income.
“As investors look to secure sustainable income in this low yield environment, we feel it is important to take a global approach and diversify beyond pure ‘common stock’. This allows us to deliver a consistently high income with lower levels of volatility. We think this is a differentiated approach that deserves consideration as a diversifier for all well-managed portfolios,” says Stanley.
THE INTERVIEW
Payden & Rygel: Using our heritage to enhance equity investment outcomes
Robin Creswell & Mark Stanley,
Payden & Rygel
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