Fund Manager Interview – Olly Russ Ignis Argonaut European Income Fund

Olly Russ, partner of Argonaut Capital and manager of the Ignis Argonaut European Income Fund

In this article James Davies, poses some questions to Oliver Russ, manager of the Ignis Argonaut European Income Fund, where Mr. Russ gives his views on investing in Europe for income.

Why should an investor consider a European income fund and do European companies have the same culture of paying dividends as UK firms?

The key point is one of diversification - Europe offers diversification by currency, type of economy, stage in the economic cycle and individual stocks. There are, for example, sectors such as oil services and shipping which are not well-represented in the UK market. In terms of yielding names, one thing to be wary of in the UK is the overwhelming concentration of yield amongst a few mega-caps. Around 57% of UK market yield is generated from the top ten stocks in the index, almost a quarter from the oil majors alone. In Europe, things are much more diverse - the top ten stocks account for just 29% of market-wide dividends. Also, it makes sense as part of a portfolio to have at least some part overseas, given that most people's key assets and job remain exclusively in the UK. Overseas income funds tend to offer a somewhat lower risk method of investing abroad.

In terms of dividend culture, there has been an increasing trend to dividends as European companies mature and shareholder activism increases. This is best gauged by index yields, with both UK and Europe now offering a very similar level of absolute payouts.

Do you expect continental Europe as an economic block to be better placed than the UK over the next 2-3 years?

European consumers are in general considerably less-geared than those of the UK. This means that, one or two problem countries notwithstanding, the credit crunch has not been so severe. Most European banks survived the recent turmoil, and of those that took state aid, many are now repaying it in full. Germany remains the world's biggest exporter (bigger than China), and the region's diversity in economic structure (less dependent on finance and housing as growth drivers) means it has exited recession more quickly than the UK. Fiscal situations, whilst tight overall, are in general also much more balanced than the UK. However, the Eurozone's commitment to a strong currency has meant that devaluation has not been an option to boost growth.

What makes you include a stock within your fund?

We look for a company capable of generating a yield in excess of 3.5% over the next two years - and hopefully, significantly in excess of that. We like to see an earnings stream rising into perpetuity, from which dividends can be paid. These companies tend to be defensive in nature, but not exclusively so - there are many growth companies that are not capital intensive and can maintain a high payout whilst still growing. Hennes & Mauritz, the retailer here known as H&M but Swedish in origin would be one such stock.

How satisfied are you with the performance of the fund over the last year and where have the main drivers of return been for you?

Income funds in general have had a fairly difficult time over the last two years. First, there was the credit crunch, which severely affected financials that had provided the majority of dividends. Then in the rebound this year, which has been stronger than any probably since the 1930s, companies still robust enough to be paying dividends have lagged. However, income funds have remained popular precisely because they do well over the long term, exhibiting lower volatility than the market. The reason is that managers are forced by the dividend discipline to buy safer, cash generative companies. Many of these look exceptionally underpriced relative to the market, notably in areas such as telecoms, which bodes well for the future. We did very well out of these in the final quarter of 2008, and expect to do so again this year. Given that there are around 19 major telcos in Europe, there is plenty of choice.

Where next for the Euro?

A very difficult question. We have been surprised by the continued weakness in sterling, probably prompted by the extension of the Bank of England's Quantitative Easing programme. That said, we are probably oversold on sterling barring some new disaster, and so trading in a broad range is probably more likely for the foreseeable future, rather than a breakdown to fresh lows. Currency diversification is one of the long-term benefits of overseas investing, but of course, it can cut both ways.

The Ignis Argonaut European Income Fund forms part of the Chartwell Top 100   The normal initial charge is 5.25% discounted down to 0% initial charge.

For more information on the fund please click here http://investorcentre.chartwell.co.uk/Europe.htm

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