Martin Connaghan, Samantha Fitzpatrick, Co-Managers, Murray International Trust
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Meta and Alphabet have paid their first dividends to shareholders
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There have been technology options for income investors for many years now
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We look in less fashionable parts of the market, where opportunities are more attractive
Technology giant Meta paid its first dividend to shareholders on 26 March. Alphabet followed with a dividend payment on 17 June. New companies coming into the dividend fold is always welcome, but are these AI giants likely to become a feature of Murray International?
Technology and income investing have often been seen as distinct – investors needed to choose one or the other. In reality, it has been possible to blend technology and income investing for many years. While some high profile technology stocks prioritise capital growth and have no intention of paying a dividend, there are plenty of companies that pay a high and/or fast-growing dividend and have featured in Murray International. This includes companies such as Broadcom, TSMC, and BE Semiconductor.
An issue with the technology sector, and AI-focused companies in particular, has often been the price we have to pay for that income, and we are always careful about the price we pay. Many of these stocks have seen extraordinary rises in their share prices over the past year. In fact, we have had to trim a number of the technology stocks we hold to stay within our risk parameters.
Against this backdrop, while Alphabet and Meta are interesting companies, both have dividend yields of below 0.5%. We want to ensure the companies in which we invest are committed to growing their dividends over time. For these technology giants, which have plenty of demand for their shares with or without a dividend, there may not be the same incentive to do this.
Under-the-radar
It is our natural inclination to look in the less fashionable areas of the market, rather than those areas that have been in the spotlight. Carmakers, for example, have been a difficult area. The transition to electric cars has required significant expertise and capital investment. It has been unclear how the new competitive landscape would emerge.
Mercedes has been no exception. It has also struggled because it has been seen as a luxury manufacturer at a time when the economy looked fragile. Its exposure to China has also weighed on its share price. Nevertheless, we believed it had financial strength, decent growth prospects and, importantly, an attractive dividend. This prompted us to look at it more closely.
It is a similar instinct that led us to add to our consumer staples exposure over the past year. Some of these businesses have suffered from a post-Covid hangover. During the pandemic, there was high consumption across the globe, and share prices did well. However, in the immediate aftermath of lockdowns, people adjusted their spending habits, and these companies were hit.
As recession looks increasingly unlikely, consumption is picking up. Several of these companies look well-valued, with strong and stable dividends. The sector has tended to prove defensive in a range of market conditions and we believe they can provide a strong backbone for the portfolio.
This approach has its limits. Since the start of the year, we have sold out of the holding in China real estate business, China Vanke. Recovery has taken far longer in China than we would have hoped, and we don’t see an imminent turnaround. Our view is that we have some exposure to the region through our auto and consumer staples exposure should the economy turn, but the businesses in which we invest have plenty more strings to their bow if it doesn’t.
Balanced exposure
Another reason not to follow the herd into the mega cap technology companies is that we believe at a time of great geopolitical uncertainty, it is particularly important to have balanced geographical exposure. Unlike many global funds, which have the majority of their exposure in North America, we strive to be well-balanced across North America, Latin America, Europe and Asia. We currently have 27.6% in North America, approximately in line with our weightings in Europe and Asia Pacific. This compares to a 72% weighting to the US for the MSCI world index, where Amazon, Apple, Microsoft, Nvidia, Meta and Alphabet form 20% of the index.
This level of exposure to the US could prove risky in the current environment. The US election is already bringing a lot of noise. Investors are concerned that a second Trump presidency could bring a trade war 2.0. China is likely to be top of his agenda, but he has talked about imposing tariffs elsewhere as well, which could have an impact on both global and domestic companies. It is something we keep a close eye on.
Elsewhere, we have selectively reduced exposure to areas we believe are vulnerable to geopolitical problems. Last year, for example, we exited from Taiwan Mobile. China continues to make territorial claims over Taiwan and while our other Taiwanese holdings Hon Hai and TSMC have operations and manufacturing sites in other countries, Taiwan Mobile is a purely domestic operator. If China raised the stakes on Taiwan, its business model would struggle.
Overall, this is where having a global mandate is vitally important. We are invested in 22 different countries and that provides an element of protection. We can move away from countries that look fragile, and towards those areas with greater stability. Most of all, we are focused on dividends and on those companies delivering sustainable and solid dividend growth.
While it is exciting to bring new dividend paying companies into the fold, we are not rushing to embrace the technology giants. We could invest if the time and price were right, but in the short-term, we prefer to look amid the undiscovered parts of the market. This is where the real opportunities lie.
Important information
Risk factors you should consider prior to investing:
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The value of investments and the income from them can fall and investors may get back less than the amount invested.
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Past performance is not a guide to future results.
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Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.
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