The fund that’s one of a kind

Douw Steenekamp, portfolio manager at Denker Capital.

The SIM Global Equity Income Fund was launched in September 2012 to offer investors the opportunity to invest in a fund that strives to deliver an attractive and growing annual dividend income stream by investing in global shares. At the same time it pursues real capital growth on a rolling three-year basis. Given the extremely low interest rates and bond yields available in most of the world, funds like this are very popular overseas, particularly in Japan and the UK. Being locally managed by Denker Capital, this fund is the only one of its kind available to South Africans as a rand denominated feeder fund (the feeder fund was launched in June 2013).

It is a fact that the return generated by any equity investment can come from only two sources:

• capital appreciation (change in share price)
• income (dividends received).

Because the former tends to be where most of the short-term excitement occurs, it has become the feature investors and market commentators obsess about – to the exclusion of the incredible long-term returns that can be achieved through the patient compounding of consistent dividend income.

The power of this compounding becomes obvious when one compares the returns generated by the MSCI World High Dividend Yield and the MSCI World indices (see chart below).

The high yield index consists of the highest yielding companies in the global index. In each case the difference between the total return (solid line) and price return (dotted line) is simply the additional return earned by reinvesting the dividends received. Notice how much bigger the reinvestment benefit is in respect of the higher yielding index, while on a price-only basis the performance of the two indices is far more comparable.

It is precisely this compounding effect that the SIM Global Equity Income Fund seeks to harness and what differentiates it from other equity funds. Where the income paid out by a typical equity fund commonly accrues almost by accident, we actively seek out companies that offer an above-average dividend yield and then ensure that we are there to collect our dividends when they are paid. We also don’t hesitate to let go of companies when their dividend yields start to decline. By doing this we have managed to provide our investors with an average annualised yield in excess of 4% in US dollars in each of the past three years. This compares very favourably to the yields that were obtainable from other types of investments during the same period.

The good news for our investors is that our focus on dividends does not mean that the possibility of capital appreciation is excluded. Sustained changes in the share prices of companies result from changes in their earnings. Earnings growth leads to higher share prices, while stagnation or decline leads to lower prices. Gratifyingly, for us, it has been shown that companies that pay a large share of their annual earnings out as dividends tend to grow their earnings faster than most other companies in subsequent years[1]. This counter intuitive truth means that the potential for capital appreciation of the companies that tend to interest us is often underestimated by the rest of the market. Through careful selection we have, as a result, been able to also deliver on the fund’s second objective, namely achieving real growth in the investment capital.

The fund responds well to volatile markets, as it invests in companies that pay a high dividend yield and have robust balance sheets and reliable free cash flows, bolstering them (and therefore the fund) against adverse market conditions. This strategy has worked particularly well for the fund over the past year.

The feeder fund was ranked third among all SA-domiciled retail unit trust funds during 2015, returning 41.5%.

This is particularly impressive, given that the FTSE/JSE All Share Index returned only 5.1% over the same period. Since its launch date up to 31 Dec 2015 the feeder fund has had a cumulative return of 81.8%, which translates to 27.05% p.a. annualised, comfortably outperforming its peers.

We are pleased with the behaviour and performance of the fund during its first three years of existence and remain confident of our ability to continue to achieve the income and capital appreciation objectives that have been set.