In this piece we will repeat the trick, but this time by borrowing a single quote from the father of modern economics, John Maynard Keynes: "When the facts change, I change my mind."The material exposure of the Invesco Perpetual Global Equity Income fund to the media sector is an illustration of this sentiment being put to work.
Investments in the sector represent 17.1 per cent against an MSCI World index weight of 2.5 per cent. Yet traditionally the sector has not been seen as the typical hunting ground for an income strategy, even one like ours that attributes equal value to yield, sustainable income and capital upside.
However, as the borrowed quotation hints, things do change, and we believe the media sector now includes many companies that offer the virtues we outlined above.
Of all the acronyms that have entered financial jargon in recent times, TMT stands out as one of the most emotive. The period in and around the dotcom bubble will forever remain the best example of herd economics and momentum investing.
Reality was suspended on a systemic scale as many market participants fell over themselves to fund the next technological concept.
The relationship between revenues, profits and cash with stock market valuation was discarded as the new paradigm took hold and it seemed that any company vaguely associated with the new world saw its share price soar.
The media sector was an active participant in the frenzy, both in its upward trajectory as the bubble inflated and in its subsequent collapse.
This should confirm people’s expectations that the collapse of the new paradigm led to the reassessment of business models, a process of deleveraging and a focus on cash flow.
Healthier balance sheets have been generated not solely by deleveraging but by business models that have generated attractive and sustainable levels of free cash-flow in the years since the dotcom crash.
These characteristics have taken media from a high-Beta sector with a free cash-flow yield approaching zero, to a financially healthy sector, generating sustainable free cash-flow and an attractive free cash-flow yield.
In other words, from a sector at odds with our investment philosophy, to one where we have significant representation.
So far we have referred to the sector in broad terms in order to show how in our view it has become a more attractive investment proposition.
Our bottom-up approach does require us to move on to discuss those names which we feel stand out as the most attractive options relative to our investment targets.
Managers Paul Boyne and Doug McGraw separate the companies that they hold into infrastructure media and content media.
The infrastructure side is currently represented by stocks such as SES, a global satellite company; Time Warner Cable, a US cable company; and BSkyB.
These three businesses have a number of common components, one of which is falling capital expenditure (capex) leading to higher free cash-flow.
Recognising this, the respective management teams have committed to return a significant amount of free cash-flow to shareholders. In addition, the high level of capital required to participate in this space acts as a barrier to entry.
On the content side, companies such as Viacom (MTV, Nickleodeon) and Time Warner Inc. (Warner Bros, HBO, CNN) have also built up significant barriers to entry through their scale.
Compared with only five years ago, content media companies like these have committed to return a more meaningful amount of capital to shareholders. In the case of Viacom, the managers identified the potential for cash returns before the company initiated dividend payments.
Invesco Perpetual Global Equity Income is an FE five crown-rated portfolio with £244m assets under management (AUM). It has returned 67.33 per cent since launch compared with 63.17 per cent from its IMA Global Equity Income sector average. It is currently yielding 3.19 per cent.
Luke Stellini is global equity product director at Invesco Perpetual. The views expressed here are his own.