17th July 2013
The Mindful Money fund manager interview. Philip Scott talks to Argonaut’s European Income fund manager Oliver Russ.
UK savers looking to boost the income are getting nowhere fast given the paltry savings rates on offer, writes Philip Scott. But would you invest in the embattled continent of Europe in a bid to make your cash grow?
Figures released this week show that UK inflation, as measured by the Consumer Prices Index continued to rise, jumping from 2.7 per cent in May to 2.9 per cent during June. Given this latest hike there is not a single savings account on offer which beats inflation.
But investing in the shares of dividend paying companies i.e. corporations which share profits with their investors is becoming ever more popular among those looking to get their savings working for them though of course at the price of more risk.
Equity income funds, which aim to deliver attractive income as well as capital growth, invest in such firms. The UK has been well mined for its income paying stocks, and many investors have enjoyed stellar returns over the long term. Funds which look outside of Britain for high income paying stocks are less common. But across the US, Asia and even Europe there is a rising emphasis on returning cash to shareholders through dividend payments.
Oliver Russ manages the £250m Argonaut European Income fund, which aims to boost investor income by investing in stocks across the continent but not in the UK. While Europe’s economy is enduring a severely strained period, he points out that there are many firms listed across the region which are actually in rude health, and paying out generous dividends to shareholders.
Russ says: “People do not think of Europe as a yield market, in the way they do the UK but it certainly is. There are three times as many yielding names in Europe than the UK. Europe is trading at a big discount given the way it is currently perceived. It is very cheap and European income is still in its infancy as an asset class and I cannot see why it will not grow further.” Given Russ is a manager of a European fund, his bullishness is to be expected. He takes Mindful Money through five of his key stock picks to illustrate his point.
Swedbank – (Dividend yield 6.3 per cent)
Swedbank is the bank of choice for many across Sweden and has a presence in Estonia, Latvia and Lithuania. It has the added benefit of being outside of the embattled eurozone and is one of, if not the best capitalised banks in Europe. The company was not immune from the recent banking crisis. Like many other banks, pre-crisis it was expanding and it went big into the Baltic region, which overheated and ultimately blew-up. But back in the early 1990s Sweden endured its own banking crisis when its over-valued housing market imploded. Russ says: “As a result of this previous experience, as a country it knew what to do. The bank cut its dividend to zero, re-capitalised, got rid of the old management and started again. This time around it took the hit early, closed down its more bizarre operations and went back to basics – to retail banking and as a result rebounded robustly.Now it has found itself with too much cash on its books -a problem most other European banks do not have – and this year doubled its dividend. Even though the share price has surged in the past year, I think it is undervalued even now.”
Terna (6.3 per cent dividend yield)
Italian power grid operator Terna, essentially the National Grid of Italy, has just signed a €570 million loan with the European Investment Bank for the upgrading of its systems. In recent years it has not been great to have been in utilities and indeed in the Italian market but Terna has bucked the trend according to Russ. He adds: “Terna has massively outperformed the market despite these disadvantages. It is essentially a boring company, even analysts struggle to say anything interesting about it. It is a classic ‘dull, but worthy stock’ but its business is transparent and performing strongly.”
Seadrill (8 per cent dividend yield)
Seadrill is a leading Norwegian offshore deep-water drilling company. Just last month it was awarded a contract from Brazilian energy giant Petrobras to charter and operate pipe laying vessels. Russ says: “Norwegians are the leaders in oil services, for example, you have sectors and companies you cannot get hold of in the UK. Seadrill is such an example. This is a business which secures long term contracts with the likes of BP and passes the cash back to shareholders. It is yielding a massive 8 per cent; such a stock is gold dust for an income fund.”
Azimut (3.7 per cent dividend yield)
Stock market listed asset managers across Europe are few and far between. But Italian asset manager Azimut has enjoyed a robust start to the year, posting some €1.5bn inflows in first half of 2013 and is now starting to move into the high-dividend territory. Russ says: “This is a growth company, which does not require much capital to finance its continued progress, leaving earnings to be paid out to shareholders. It deals with typically high-net worth individuals, with investment portfolios in the range of generally €1m to €2m. It has been taking market share from the banks and is paying a big dividend for the first time.”