‘Selling Microsoft was the right decision – but cost us’

Global stock funds tend to be dominated by high-growth firms such as Apple or Google, which do not pay good dividends. Investing in companies of this type has produced huge capital gains, but strategies based on chasing such “growth” stocks could be vulnerable to an economic slowdown.

Run by Nick Clay, the £5.7bn BNY Mellon Global Income fund takes a different approach to buying international firms. He says a focus on “income first, capital growth second” lets investors get the best of both worlds, and why he follows strict buying and selling rules.

WHO IS THE FUND FOR?

The fund invests in global stocks that pay a healthy dividend. It suits investors who want an above-average yield but also exposure to some of the most exciting companies in the world.

Because income-paying stocks tend to be more defensive, this fund offers good protection during downturns while also capturing gains during rising markets. If you had reinvested all the income since the fund’s launch in 2005 it would have accounted for half of the total returns. We have performed in line with our peers for capital growth as well.

HOW DOES THE FUND INVEST?

We look for sustainable dividends. We believe this is an indicator of a highquality company.

We can only buy ones that yield a quarter more than global markets. The MSCI World index currently yields 2.3pc, so we can only buy companies that yield more than 2.9pc.

We have to sell companies that yield below the global average. This strict discipline means that we never fall in love with a company that no longer serves the purpose of the fund.

International stock picker Nick Clay tells Sam Benstead why strict selling rules mean income always comes first

IS IT TOUGH TO FOLLOW THESE RULES?

It can be – but they are there for a reason. Statistically they make us do the right thing. Of the 100 stocks we have sold since 2017, 62 have gone on to underperform the index over the next 12 months. The rules work and we stick to them.

DOES THIS DISCIPLINE STOP YOU OWNING FAST-GROWING COMPANIES?

It can do. We bought Microsoft in 2013 when it traded on a price-toearnings (p/e) ratio – a measure of how expensive a stock is – of 11. It was almost valued to go bust.

We were forced to sell it in 2018 when its yield dropped below the market average. But over this period it had gone up by 320pc. We had fallen in love with the stock and it was one of our best investments – but our rules forced us to sell it because it had become too focused on growth and not on income. Unfortunately it has since risen by about 85pc.

Of course Microsoft is still a good company, but the risk of owning it now, relative to the likely reward, is too great for our fund. It could double in size in the next three years, but that is highly unlikely. The last time it was this expensive was in the Nineties tech bubble.

From 2000 to 2013 it trebled its cash flow but the share price halved. It would have made a terrible investment because the starting price was too

high. Valuations matter because they dictate future performance. We made a lot of money because we bought it at the right price.

WHERE ARE THE BEST OPPORTUNITIES TODAY?

We recently bought into retail companies with exposure to Asia. Recession and trade war fears last year opened up a buying opportunity when prices fell. We bought Richemont, which owns Cartier, as well as Inditex, which owns retailer Zara.

We like retail names because they have strong brand power and an “ability to suffer”. Some have been

£1,000 invested at launch would be worth £4,130 today

around for more than 100 years.

We have a “watch list” of about 50 companies. These firms currently do not meet our rules for inclusion based on yield or price, but we are ready to buy them if an opportunity arises.

WHAT’S BEEN YOUR WORST INVESTMENT?

We bought Barbie-maker Mattel in 2013 and sold it in 2018 after a 60pc loss. Its toys weren’t selling in 2013 but we thought that they would make a comeback. Changes in taste meant that kids spent more time playing online and playing with toys linked to films, where rival Hasbro had a stronger position. Eventually in 2018 it cut its dividend and we had to sell it.

HOW ARE YOU PAID AND DO YOU HAVE YOUR OWN MONEY INVESTED IN THE FUND?

I am paid a salary and a cash bonus annually. I have 60pc of all my investments other than my house invested in this fund.

WHAT WOULD YOU BE IF NOT A FUND MANAGER?

I am basically a frustrated artist and would love to be a theatre set designer. I can see myself helping at a local theatre in the future.