On July 10, the MainFirst Global Dividend Stars celebrated its fifth anniversary. This was a good opportunity for a conversation with the two Fund Manager, Thomas Meier and Christos Sitounis from the Global Dividend/Value Eurozone Equities Team.
The MainFirst Global Dividend Stars follows a barbell strategy with a value investment approach. On one hand, the fund invests in conservative, defensive core investments, while on the other hand there is a significant mix of high-growth small and mid-cap companies, e.g. family-run medium-sized companies, so-called "hidden champions". Thomas, how has the strategy performed over the past five years?
Thomas Meier: "The past five years have really been a trial by fire for the strategy! In our opinion, the strategy, or rather the fund, has performed well in the face of a wide range of events, such as the China hard landing, Brexit, an ongoing trade war between the US and China, and now the coronavirus pandemic. The basic concept of creating a dividend fund with a balanced approach (barbell strategy) offers added value for investors. The barbell strategy combines the attractive long-term growth and dividend potential of small and mid-cap companies. Over a longer time horizon, family- or owner-managed companies, in particular, have proven to be true hidden champions. One such company is, for example, the Italian family business "Carel Industries", which specializes in system solutions and control units for air humidification and cooling systems, as well as air conditioning technology.”
How do you rate the fund’s performance compared with competitors?
Thomas Meier: "The performance of our fund stacks up well against that of competitors, ETFs and the benchmark index. We achieved a relative performance that overshadows a large number of our German competitors, as well as global dividend ETFs. Last year alone, our fund just managed to get into Morningstar's top decile in terms of performance. Given our high proportion of small and mid-cap companies, which currently stands at 50%, even in market phases with high volatility we can usually keep pace with the large-cap dividend funds and their highly defensive character, although our fund can diversify much more.”
Looking back over the past five years, what were the biggest challenges for you as a Fund Manager?
Christos Sitounis: "The challenges we have faced in recent years are in line with the general market themes: value versus growth, low-volatility stocks, large cap versus small cap, the US versus Europe, and the structurally low interest level. The fundamental "bottom-up" approach is one of the key building blocks in our strategy. Here, valuation is one of the foundations of the selection process. In recent years, we have observed that business models with low fluctuation intensity, in particular, have degenerated into dividend surrogates. In many cases, we are concerned about the valuation of traditional dividend sectors that correspond to these characteristics. They have experienced unprecedented investment demand due to the structurally low interest rate environment. We have deliberately bucked this trend to some extent, but unfortunately - and I say this with a bit of a smile - our nerves suffered somewhat. In the end, we were able to compensate for this accepted disadvantage by an underrepresented weighting and believe that we are well prepared for a potential trend break or sector rotation.”
On the subject of dividend yields: these are very popular with investors. The investment objective of the MainFirst Global Dividend Star is to generate an appropriate performance through medium to long-term capital growth and regular distributions to its shareholders, which are paid out twice a year. Thomas, what is the dividend yield of the fund?
Thomas Meier: "It’s true that dividend funds have increased in popularity in recent years, fuelled by the investment crisis caused by the structurally low interest rate environment. We focus on the sustainability and quality of the dividend, in other words, we do not select solely on the basis of a high absolute dividend. This approach is accompanied by a fundamental analysis of the business model, the balance sheet structure and the free cash flow. Our approach is rounded off by a model-based approach to ensure that no artificially high dividends are paid out due to underinvestment. The result is companies with a great deal of substance. For example, almost 20 % of our companies currently have a net cash position.
We differentiate ourselves from our competitors by virtue of our distributions twice a year and by having achieved an average dividend yield of 3.4 % since our launch.
Of course, the corona pandemic will also leave its mark on our dividend payout, but we are confident that we will return to our old levels from next year.”
The 5-year anniversary has fallen in the middle of the coronavirus crisis, a period that is posing new challenges for us all. Christos, what are the current investment themes and what changes have taken place?
Christos Sitounis: "Of course we would have preferred a more favourable environment. However, we are sticking with our investment philosophy regardless of market events, as we want to ensure long-term added value. We have actively used the short and significant correction to acquire companies with successful business models, an excellent market positioning and a strong corporate culture at an attractive price. These companies include Linde (industrial gases), IDEX (fluidic systems), Lamb Weston (frozen potato product supplier), Sika (construction chemicals) and Corticeira Amorim (cork producer)."
Thomas, what outlook can you give our investors?
Thomas Meier: "We recommend that investors not only consider the past and current situation, but also look ahead. Corrections or volatile phases have always been a good long-term entry point. However, the success of a company - and by extension the success of a dividend fund - depends on how it is positioned for the coming years. We want to raise awareness among investors that yesterday's traditional dividend payers are not synonymous with tomorrow's successful distributions. It is essential to take a detailed look at the dividend concept if you want to increase your capital adjusted for inflation in the long term!
Thank you both for your time and for the interesting conversation!