Four UK stocks we own – and how we differ from a global tracker

Tristan Purcell, co-fund manager of Fidelity Global Dividend, explains how the fund is very different from the wider global stock market index.

Purcell explains why the fund doesn’t back any of the major technology giants – the so-called Magnificent Seven – instead focusing on more defensive areas, such as consumer staples, utilities, and pharmaceuticals.

Speaking to interactive investor’s Kyle Caldwell, Purcell discusses performance, including why the fund has underperformed over the past five years.

He names the four UK stocks the fund owns, and explains the dangers of high yields and high payout ratios, which can spell trouble for companies.

Fidelity Global Dividend is one of interactive investor’s Super 60 investment ideas.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I have with me Tristan Purcell, co-fund manager of Fidelity Global Dividend fund. Tristan, thanks for your time today.

Tristan Purcell, co-fund manager of Fidelity Global Dividend: Thank you for having me.

Kyle Caldwell: So, Tristan, I want to first start with performance. In regards to five-year performance, the fund has underperformed the MSCI All Country World Index. Why has the fund underperformed over that time period?

Tristan Purcell: We have underperformed over five years. The main driving factor for that is the leadership in the market has been in these larger US tech companies that typically don’t pay significant dividend yields and therefore we don’t really consider them part of our universe.

But over the longer term, since the fund’s inception 13 years ago, we have delivered a 12% annual return, which is extremely close to what the broader market has delivered, and we’ve done that with significantly lower volatility and lower drawdowns.

If I want to give a completely politician’s answer, so I dug particularly into that five-year point, and if you think what happened five years ago, this was a period where in September, October 2020, everyone was locked at home, and because of Covid, lots of people were picking up day trading for the first time.

[Forums such as] “wallstreetbets” became very popular and that’s not a type of market where we typically expect to outperform. We don’t own those highly speculative types of companies such as GameStop Corp Class A (NYSE:GME) that performed very well.

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Kyle Caldwell: In that period, and over the past five years, and indeed over longer-term time frames, particularly 10 years, it has been a pretty smart move for investors to just own the global stock market through an index fund or an exchange-traded fund (ETF). Do you think going forwards in the coming years that will continue to be a smart decision by investors?

Tristan Purcell: They’ve certainly been right to own index funds where it’s been serving them very well for a long period of time now. But, if you look back through history, while it’s being good for 15 years - and that sounds like a long time - it wouldn’t have always worked. And as this trend extends, it introduces more and more risk into those products as they get more and concentrated.

What I mean by that is if you imagine a portfolio of just two companies, both with the same weights in each. One company's share price stays completely flat and the other one doubles and then doubles the next year and then doubles the next. You can imagine that that portfolio over time looks more and more like that one company that’s doubling, both in terms of performance and the risk characteristics and so on. And that’s great as long as the company keeps doubling.

But obviously, it can’t go on forever, because ultimately, if that happened in the global market and one company kept going, the whole global market would be in one company. Then obviously, when it unwinds or that one company doesn’t work, you have a period where the long tail of other companies in the market actually outperform that small handful of companies, and you get an environment like you saw [during] the unwinding of the tech bubble in 2000.

So, from 2000 to 2010, the cap weighted index, or what you typically get from an ETF or passive product, only delivered a 10% return. So, over that decade, you only made 10%, not per year, but in total.

Whereas if you look at the equal weighted index, which is exactly the same companies but weighted completely equally, the same weight for every company, and it’s regularly rebalanced to reset it back to an equal weight, that index, the equal weight index, more than doubled over exactly the same time frame.

So, history suggests, and sort of first principles thinking, that it can’t go on forever. But I’ve no idea when it might end. It reminds me of something [independent financial market strategist and researcher] Russell Napier said, which was that if you see something in markets that seems excessive and you think it can’t continue, however long you think it can go on, double it, and then subtract a month.

Kyle Caldwell: The fund invests very differently from the index. You have a high active share. In terms of what you don’t own, two things that stand out for me is that you are underweight the US, and you don’t own any of the Magnificent Seven technology stocks. Could you explain why?

Tristan Purcell: The US market has now become over two-thirds of the global market, and within the US, over half the market now is the Magnificent Seven and the rest of the tech sector, and that’s up from 20% a decade ago, so it’s become increasingly concentrated.

Plus that is not a natural picking pool for us. Obviously in the US, in general, yields are lower, but within the Magnificent Seven in particular, none of them yield over 1%.

I think the highest is Microsoft Corp (NASDAQ:MSFT), which is 70 basis points, or 0.7%, and we really like everything we own to be contributing to our return profile, both in terms of the dividends we’re paying to our end investors and the capital growth of the portfolio. The product has ‘dividend’ in the title, and we expect our end investors to get what it says on the tin.

Even if these companies were paying reasonable dividends, things like Tesla Inc (NASDAQ:TSLA), for example, is not naturally the type of company we’d like. It’s future profits and its current value today are all tied to things that are way out in the future, like robot taxis or humanoid robots. Those things have a huge range of outcomes.

And when you combine that huge range with the fact that it’s a long way away, you discount it back to today. That means today’s share price, you can come up with a huge range of potential fair values. And we don’t like owning companies where there’s a lot of potential downside.

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Kyle Caldwell: In terms of the companies and sectors that you do have exposure to, how would you say the fund is different from the global stock market?

Tristan Purcell: I’d say there are three key features that are different to the global market. The valuation is lower, the yield is higher, and it’s significantly more defensive.

If I put some metrics on those, the price/earnings (PE) multiple of the fund is around 15 times today compared to the broader market at around 22 times. The yield is just over 2.5% compared to the broader market of 1.7%. And, really, we seek to create a diversified portfolio across a range of countries, a range of sectors, a range of different business models.

Because, ultimately, no matter how well you research a company or analyse an industry, something can always come out of left field and hit you.

We don’t like to have all our eggs in one basket, so you can create that defensiveness by having large top-down allocations to classically defensive sectors like staples, utilities or pharmaceuticals.

But again, the trouble with that, [to use an] example from this year is pharmaceuticals got hit by Robert F. Kennedy Jr and tariffs in the US. So, even when you think you own a defensive sector, you can still get hit.

Kyle Caldwell: In terms of your country allocation, at the moment the fund is 10% overweight to the UK. Could you explain that stance and provide some stock examples?

Tristan Purcell: None of our country allocation is down to a top-down view on the economy, whether that’s the UK or the US, or all that market, the US or UK. Everything is selected on its own merit.

Today, we have four UK companies in the portfolio. I can run through them quickly. They are Tesco (LSE:TSCO), Unilever (LSE:ULVR), National Grid (LSE:NG.), and Admiral Group (LSE:ADM).

Tesco, I’m sure a lot of people listening and watching will be familiar with. They obviously grew a lot. Expanded into lots of different products and regions and became quite a complex beast and then, a decade ago, that all unwound.

Since then they’ve become a lot simpler. They’re now in the process of selling the bank, or have just finished selling the bank. They’ve made the pricing more competitive to become more in line with the discounters and they’ve actually started gaining market share again.

The yield there is 3.5%, then you get the same again in buy back, so you don’t really need to grow much on top of that to get a decent return.

Unilever, again, has been quite a complex beast that’s diversified into lots of things. They’re now in the process of simplifying. They are about to spin off the ice cream business, Magnum Ice Creams, which I’m sure people are familiar with. Again, their yield is just under 4%.

Then National Grid, which I think is more broad in that demand in general is rising, particularly in the US, which is half of National Grid’s business, thanks to electric vehicles (EVs) and data centres for artificial intelligence (AI) and so on. The yield there is 4.5%.

And then the last one, Admiral. It is company we’ve owned for a very long time, I think nearly 10 years now. So, a UK car insurer that’s steadily taken share through better data analytics, better claims handling, and ultimately being the low-cost provider in a reasonably commoditised industry. The yield there is around 4%.

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Kyle Caldwell: And when you’re assessing the overall health of the dividend-paying market, what would you say is the biggest risk that could derail the fortunes of dividend-paying companies?

Tristan Purcell: I think most companies that run into trouble because of their high payout ratios or high yields are those where they pay out too much of their free cash flow as a dividend and don’t leave enough left over to service debt repayments, pension obligations, any litigation that might come along, or to reinvest in the business, whether that’s working capital, inventory, paying your suppliers, building new factories, doing R&D to develop products, things like that.

So, if you have a period where all those demands on the rest of the free cash flows start rising, particularly if you combine it with a period where sales and demand is falling, you can have a pretty dangerous mix.

There’s no one sector in aggregate that I’d call out, but you can definitely point to certain handfuls of companies. In beverages, for example, these historically have been extremely stable businesses. They were able to raise a lot of debts, lever up the balance sheet quite a lot. They could pay out a large proportion of their earnings because it was predictable. But ultimately, now people just aren’t drinking alcohol as much. So, they are potentially a bit stretched.

Within industrials, unless you sell a product that goes into a data centre or an aircraft, over the last three years you’ve really had a pretty weak demand environment. So, if you went into that with structurally low margins or a levered balance sheet and so on, eventually it could all run into trouble.

Kyle Caldwell: And, finally Tristan, a question we ask all fund managers we interview, do you have skin in the game?

Tristan Purcell: Yes, I do, I invest in the funds. Actually, when I left the Royal Air Force to join this industry, my ultimate target was to eventually be working on a product that was diversified and I’d want to invest my own money in. So, I’m very happy to now be doing that.

Kyle Caldwell: Tristan, thanks for your time.

Tristan Purcell: Thank you for having me.

Kyle Caldwell: That’s it for our latest Insider Interview. I hope you’ve enjoyed it. You can let us know what you think, you can comment. And for more videos in the series, do hit the subscribe button and the like button. Hopefully I’ll see you again next time.