Investors at risk of over-simplifying valuations, says divi veteran

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Investors are at risk of over-simplifying value investing by ignoring the importance of cross-cycle performance, according to Fidelity’s Dan Roberts.

Roberts (pictured), who runs the Fidelity Funds – Global Dividend fund, he has noticed market perception of valuations in recent years begin to become ignorant of wider investment implications and the importance of cross-cycle performance.

‘I’m essentially a value investor, but this doesn’t mean I look simplistically at PE, PB or dividend yield,’ said Roberts, who oversaw the launch of the Luxembourg-domiciled fund in January 2012.

One sector where cross-cycle earnings analysis paints a different picture from traditional measures is mining, Roberts said.

‘The mining sector looks relatively attractive, with headline PE multiples in single digits. But if you look at cross cycle earnings analysis, they look rather expensive because earnings are at relatively elevated levels and commodity prices are hit hard because of slowing demand from China.’

Elsewhere, Roberts said he is also paying close attention to dividend sustainability.

‘You do get companies which increase dividends despite the fact that their cash flow isn’t increasing,’ said Roberts, who pointed to a potential red flag in companies which take on debt to pay dividends.

This, he said, may temporarily boost dividends but usually leads to problems as the company’s ability to manage volatility is reduced.

Demand for income has been high in recent months, Roberts said, and money flowing into ‘good quality income stocks’ has led to prices being pushed up.

‘In short that means yields offered by those stocks are lower, because dividend growth can’t keep pace with a market that runs up 20% for instance.’

Portfolio positions

One of Roberts’ core positions is pharmaceuticals company Sanofi, which he believes is in an attractive sector at present.

‘Sanofi has gone through its patent cliff, and you’re now left with a portfolio of businesses which are long duration assets, including a good diabetes franchise, an animal healthcare business, and a vaccine business. The yield is about 4%, and is more than twice covered by free cash flow.’

Roberts is also bullish on banking firm HSBC. He said: ‘The business is diversified geographically and well-funded. Capital ratios are strong with a good mix of net interest income and non-interest income. It’s a pretty good franchise with around 4.5% yield.’

In the 12 months to the end of April 2013, the fund returned 22.38% in US dollar terms. Its Citywire benchmark, the MSCI World TR, rose 17.4% over the same period.

Roberts said one of the drivers of this performance has been a high percentage of stocks in the portfolio which have outperformed the market.

He added: ‘Also, not owning mining has been helpful, and having a healthy exposure to European companies when everyone was panicking did well.’