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Tuesday, 6 March 2012

Don't focus solely on dividend yield: BlackRock

Investors also told to avoid highly leveraged firms


By BRYAN KOH

HIGH dividend yields should not be the sole focus in assessing equity returns over time, said Stuart Reeve, managing director and portfolio manager at BlackRock.

According to Mr Reeve, data collated over the last 31 years has indicated that more than 90 per cent of long-term equity returns can be jointly attributed to both dividend yield and dividend growth drive.

Generating long-term equity returns successfully thus requires identifying companies with attractive yields that are competitively advantaged and have the ability to sustain business growth.

To ensure a company is able to invest and grow its business, Mr Reeve stressed the need to factor in cost and cash available to a company to fund these developments.

'That is so often a question that people do not ask in this space. What is the cost of growth? In different industries, it is different,' he emphasised.

'In a more stable industry, where the rate of change of the industry dynamic is not significant and not very fast, and you are competitively advantaged, your cost of growth tends to be relatively low.'

Identifying a company with low growth costs has its merits as it enables the company to reinvest and grow its business, with the company better positioned to commit some of that cash back to shareholders in the form of a dividend stream.

Investors should also exercise patience in order for results to materialise.

'You must be willing to buy these investments at fair value and let the yield and growth compound for you and deliver great returns with lower volatility over medium to long-term horizons,' said Mr Reeve.

Investors should also steer clear from companies which are leveraged to the tilt, he cautioned, citing the significant correlation between high leverage and cuts to dividends.

The focus on equity investment comes on the back of BlackRock chief executive Larry Fink's message urging investors to scrap the inadequate 60/40 portfolio mix of stocks and bonds.

Mr Fink personally advocated a 100 per cent investment in equities owing to valuations and higher returns than bonds.

'Virtually every investor has to find ways to achieve better returns than they'll get in cash or government bonds for the foreseeable future,' said Mr Fink.

BlackRock, the world's largest asset manager with assets under management totalling US$3.51 trillion as at Dec 31, 2011, has increasingly set its sights on growing in Asia.

J Richard Kushel, senior managing director and head of portfolio management group at BlackRock, believes that the difficulty in locating economic growth within the eurozone has prompted a sharp focus on Asia, where higher levels of growth are witnessed.

Looking ahead, Mr Kushel expects Asia to be an important hub for BlackRock both as an investment target and as a region to allocate capital to.

'(Asia) is not only an investment location but it is also where you find investors who have capital to allocate, healthier financial services centres and personal balance sheets,' he said.

Concurring, Marc Desmidt, managing director and chief operating officer of Asia Pacific for portfolio management group at BlackRock, said: 'With Asia . . . there is much room to move here compared to the rest of the world which is why we favour some of the asset classes that are domiciled here.'



1 comment:

  1. "Mr Fink personally advocated a 100 per cent investment in equities owing to valuations and higher returns than bonds".

    Unquote:-
    Ha! Ha! When i first started investing i actually did almost something like that. But we was debt free and DINK. Maybe only left a little cash saving.All investible CPFIS's funds definitely were dump into the market. i was really very crazy and believed in about investing in the market for better return. i still do.
    If you ask me whether i will do the same if Time can be back-tracked, i think i will say yes.

    ReplyDelete

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