The UK has traditionally been viewed as the primary market for income, but Jacob de Tusch-Lec, co-manager of the £1.2bn Artemis Global Income fund, only invests 8.5% of the portfolio domestically, preferring North American (51%), European (21%) and Japanese equities (9.4%).
That’s not, however, because he thinks that the UK has lost its monopoly on income – like Murray International’s Bruce Stout. On the contrary, De Tusch-Lec admitted he envies UK income managers.
Below, he explains why, as well as how he prepared the fund for an environment with sticky inflation and why raising rates may not create more labour.
Performance of fund over 1yr against sector
Source: FE Analytics
Can you summarise your investment process?
We aim to provide UK investors with a non-sterling diversified global income by investing in companies that have the potential to generate high levels of free cashflow, are attractively valued and offer a yield premium.
We also take macro views, identifying discrepancies between what the economic indicators are implying and what investors are factoring in.
Why should investors pick your fund?
One thing that has been a feature of the fund since I launched it is that we tend to be light on UK domestic assets. You will not find Vodafone, Glaxo, Astra, BP or Shell in our portfolio because people have enough of that already.
We provide a bit of emerging market dividend growth, a bit of European value and some well-run defensive names in the US while still getting the income. So the fund might appeal to a UK investor who probably has too much US growth and UK value stocks that might not go anywhere.
We also don't tend to have a lot of the usual suspects globally. It's fine having the Swiss pharmaceuticals or the European telcos or the US tech stocks, but we can't all hold the same names, so we tend to expand the investment universe by looking for companies that might not look like your obvious income stocks, but that do have the yield, the decent balance sheets and a prudent capital allocation policy. And if it quacks like a duck and walks like a duck, it’s probably a duck.
How do you see the UK as an income market from a dividends perspective?
I do envy UK income managers, because UK chief executives and UK chairmen talk about dividends in a way that you don't find anywhere else in the world. The dividend in the UK is understood as a tool with which to communicate with investors.
I do envy Adrian Frost [who manages Artemis’ UK equity income strategies] when he can meet with management teams and they will take the dividend seriously – that is a luxury. You do see a lot of managements around the world where there is a feeling that the dividend is not the shareholders’ money, it’s still the company's money.
Do you have sector exclusions?
We do, not by policy but by outcome. On the one hand, we don't buy the extreme-growth stocks that don't have any prospects of paying dividends anytime soon and are cash flow negative, so we haven’t held biotechnology stocks, tech stock and start-ups in a very long time.
And then we also exclude the other extreme, which are what I would call “very deep value” companies that aren’t growing anymore, for example tobacco stocks, of which we haven’t held any for at least five years. Last year, some very cheap tobacco stocks did very well, and we could and maybe should have got them, but we worry about the level of debt they have.
What were your best and worst calls of the past 12 months?
One of the biggest hitters, and an interesting company in the light of events last year, was Archer Daniels Midland (ADM).
Performance of stock over 1yr
Source: Google Finance
It’s an American multinational food processing and commodities trading company. It doesn’t just process food – it also plays a vital role in transporting food commodities around the world. This is a service that became all the more vital given the disruption to supplies caused by the war in Ukraine.
We had (on average) a meaningful 2.8% position in the fund in 2022. Its share price rose by more than 57% in the course of the year, and it contributed 1.4% to our performance.
Sberbank stands out as the by far biggest detractor from performance. The shares have been completely written off, so this one alone cost us 2.3% of performance in 2022.
Performance of stock over 1yr
Source: Bloomberg
Where are you taking more risk at the moment?
Our biggest overweight is global banks, which are benefitting from higher interest rates and a global recession that seems to have been postponed. Six months ago most people thought that we'd be in a recession by now and the Fed would be cutting, but there is no recession and the Fed isn't cutting.
It's almost like everything's been moved forward and, in the meantime, inflation has proven to be stickier. We thought it would be sticky, so we've been overweight banks for a while. We believe policymakers are going to keep rates higher for longer than people think.
What do you do outside of fund manager?
The taxi driver for my three kids, but they give me a bad Uber rating.