For those looking at how to invest for an income in retirement being able to seek impartial advice on the very best of what the market has to offer is invaluable.
Over the last 30 years we have carefully cultivated Killik & Co to remain completely impartial in selecting investments with our clients; a dedicated research team means that as a firm we are not limited to simply investing in to in-house funds, or third party research, and instead we are able to devote time to investigating opportunities and ensuring that our clients can benefit first-hand from this insight. So with a spotlight on Investing for Income we have asked three of our specialists for their perspectives on investing for an income and recent lessons they can share.
What three things do you always look for when picking fixed income bonds?
The company issuing the bond should be cash generative, have a solid balance sheet and good liquidity, with access to various financing options.
We know how easy it can be to get swept up with the herd when it comes to investments, can you give us an everyday example of not getting swept up in popular sentiment with a recent fixed income bond?
The outbreak of the Volkswagen’s diesel emissions scandal led to the sell-off in the company’s bonds, which attracted our attention. The German company, one of the largest car manufacturers in the world, is a frequent issuer in the sterling bond market but due to the company’s solid credit metrics, its bonds had never offered much yield. Although Volkswagen credit ratings were downgraded, the market started pricing in the risk that the company may fall into the sub-investment grade category. We thought this was too pessimistic and that there was an opportunity to buy bonds issued by a strong cash flow generative business with a solid balance sheet, at an attractive price. Almost two years after the crisis, the company continues to be rated investment-grade.
What has been one of your most memorable fixed income bond investment?
Back in August 2014, in the Managed Fixed Income Service we bought bonds issued by Burford Capital. Back then, Burford was a little known AIM-listed company involved in litigation finance, which was looking to raise debt through its first bond issue and was willing to offer an attractive coupon. Since then, Burford’s business has performed phenomenally well, acquiring scale, improving cash generation and increasing diversification.
What three things do you look for when picking dividend paying stocks?
An understandable business model with long-term competitive advantage; an attractive dividend yield supported by robust cash flows; and a strong balance sheet
Can you name a recent event that made you rethink a dividend paying stock?
A conference call with BASF, the German chemicals company, drew our attention to the defensive nature of its assets. At the time, the stock had sold off on concerns over global economic growth and a lower oil price, leaving the company trading on an attractive valuation with a dividend yield above 4.5%. These concerns have proven overblown, and the stock has rebounded nicely.
Can you share an example of how you scrutinised a recent dividend paying stock?
After looking closely at Johnson & Johnson’s three underlying divisions (Pharmaceutical, Medical Devices, and Consumer) it became clear that the market was not applying an appropriate valuation to each individual division when compared to other standalone businesses in the market. This so-called “conglomerate discount” appeared unusually wide, and when combined with a dividend yield of around 3%, gave us an attractive entry point for the stock.
What three things do you look for when picking income funds?
A consistent investment process; a growing income; and a diverse source of income.
What are some fundamental indicators that you keep an eye on with every fund that you curate?
Clearly whenever there is performance which is not in line with what we expect, that prompts closer scrutiny. An example that springs to mind is when we invested in a micro-cap fund and its performance started to go off the boil. Knowing where to look really makes a difference in understanding about whether to ride it out, or whether to move out. A closer look revealed that the fund had grown dramatically in size due to an influx of investment off the back of good performance. This resulted in the fund manager having too much money to invest in micro-cap companies anymore, instead investing in mid and large cap companies which was a complete change in strategy.
We always talk about building investments through patience and compounding, can you recall an Income fund that really typifies this?
In early 2008, ahead of the Financial Crisis, we put out a buy note on a fund mainly investing in shares of companies based in the Asia Pacific region. Since then there have been three instances where the fund has been down 15% or more; 36% in 2008, 16% in 2011 and 24% in 2015. In each case it recovered and since we put out our initial note in March 2008 the fund is up 193%, which really shows the power of patience and compounding.
Investment expertise is the foundation upon which Killik & Co is built and as such, is the lifeblood at the heart of our offering. Please do consider this content as commentary and remember that past performance may not repeat itself. As is the very nature of investing, there are inherent risks and the value of your investments will both rise and fall over time. All investments should be considered as part of an investment strategy tailored to your personal circumstances, for which your Investment Manager would be happy to advise you on. If you are not a currently a client and would like to speak to us about your portfolio please get in touch with the branch closest to you.