The Portfolio Manager, Nick Dravitzki, sheds light on some areas of interest
1. Can you explain your role at Devon and how long you’ve been with the company?
My name is Nick Dravitzki and I am the Portfolio Manager of the Devon Dividend Yield Fund, previously named the Devon Equity Income Fund. This means I decide what companies are included in the portfolio. I have been with Devon since May 2010.
2. How long have you been managing the Dividend Yield Fund for?
The Dividend Yield Fund was established in wholesale form in December 2011 and as a retail PIE in December 2012. I have managed both products since inception.
3. Can you explain a bit about the strategy behind the Dividend Yield Fund?
The Dividend Yield Fund is 100% invested in companies listed on the New Zealand and Australian share markets. The Fund invests in companies that have higher than average dividend yields. The portfolio as a whole targets a dividend yield more than 1% above the overall market yield, taking into account imputation credits available to New Zealand investors. The rationale for investing in this way is two fold. Firstly, the historical performance of high dividend yield investing is very good, which is probably because investors typically underestimate the contribution to returns from dividends and overestimate company growth rates. Secondly, focusing on dividend yields naturally directs investment towards companies that have stable and predictable cash flows and can accordingly pay out a high proportion of their earnings as dividends. In general these businesses tend to have lower earnings risk than the rest of the market, and therefore lower value risk.
4. The Fund has recently changed its name and the number of stocks it can invest in. Can you walk us through the reasoning behind this?
We changed the name of the Fund from the Devon Equity Income Fund to the Devon Dividend Yield Fund to better reflect the purpose of the Fund, which is to provide attractive returns over the long term by investing in a portfolio of shares that generates an above average dividend yield. The Fund has paid out an after tax and fee yield of 5%, and has generated strong capital growth.
We also increased the number of securities the Fund can invest in from the previous limit of 25 to a range of typically 25 -35. We believe this range still keeps the Fund relatively concentrated while allowing for more diversification.
These changes took place on the 1 August 2015 and everything else with the Fund has remained the same.
5. How would you see this Fund fitting into an investor’s portfolio?
The Fund is appropriate for investors wanting an Australasian equity allocation, but particularly those with more of a yield focus.
6. Although this Fund is an Australasian equity fund, does Devon still pay close attention to what is happening globally?
Yes we do. In the short term factors that drive off-shore markets can have a very significant impact on local markets. Over the longer term global economic factors may materially impact the economic performance of Australia and New Zealand which will obviously affect local listed companies.
7. When someone invests in the Dividend Yield Fund, where is the money invested?
The money is invested in a pooled fund (a Portfolio Investment Entity) that collectively owns the stocks chosen by the Portfolio Manager. With regard to security of clients’ funds, the money is never held by Devon directly, it is held by a third party custodian (in this case BNP Paribas), who is appointed by the Trustee (Supervisor)
8. How do you decide what the most suitable/appropriate investment options are for the fund?
The Dividend Yield Fund management process begins with a screen that ranks all stocks in the market (the NZX50 and ASX300) by their 12 month forward dividend yield (calculated as a gross yield to a New Zealand resident investor). Dividend estimates are a combination of consensus forecasts and internal modelling. The ranking identifies the universe from which the portfolio is then constructed. The portfolio targets a running yield greater than 1% above the overall market yield.
The companies that populate the portfolio are then chosen using fundamental analysis. Potential companies are modelled using data from publically available sources (primarily company financial statements), meetings held with management and then an assessment of valuation is made. Work is peer reviewed within the investment team. Essentially the analytical process used to conduct detailed analysis of potential holdings is identical to that used across Devon’s other funds.
9. Could you explain your thoughts on the risk this fund carries?
It is important investors understand that the Dividend Yield Fund is at all times primarily invested in listed equities. It can have up to 10% invested in cash but it does not (and cannot under its mandate) invest in bonds or fixed interest instruments. Consequently it has equity risk and in the event of overall share market declines the capital value of the Fund will also decline. It is designed to be somewhat less risky than the typical equity fund in that it has significant exposure to more traditionally defensive sectors (in the sense of earnings predictability) e.g. listed property, utilities, transport infrastructure and telecommunications. However it should be borne in mind that even though these sectors have less earnings risk, the price the market is prepared to pay for those earnings can change significantly.
10. Does this Fund pay distributions? If so when?
Yes, it currently pays an annualised after tax distribution of 5% p.a. 1.25% is paid quarterly in January, April, July and October, but is subject to change. Clients can elect to have this distribution paid to their bank account or to have it reinvested in additional units on their behalf.
11. What methods does the Fund use to minimise foreign exchange risk?
The Dividend Yield Fund typically fully hedges its Australian positions. This is done to reduce volatility. Hedging is done by way of rolling foreign exchange forwards with major local trading banks, split over two separate time periods to manage cash flow risk.
12. What specific performance objectives do you set for the Fund?
The specific objective of the Fund is to generate a dividend yield income above the overall market and to achieve sufficient capital growth to maintain the investors’ value in real terms. The benchmark the Fund is measured against is a 50/50 blend of the ASX200 and the NZX50 Gross. Because the Fund can essentially only ever invest in half of the market (the higher dividend yielding half) performance will at times diverge significantly from underlying market.
13. Do you expect a level of cyclical fluctuation in the Funds price?
Yes. As discussed above the Fund is an equity investment and capital values will fluctuate.
14. Why should someone invest in this Fund?
There are three key reasons. Firstly, over time dividend yields have been shown to be a very significant component of overall returns and the evidence from markets around the world is that investing in higher yielding stocks has significantly outperformed market returns. Secondly, for those investors who want to invest in equities but also derive an income from their equity investments the Fund generates a meaningful cash yield which means investors receive cash without having to sell units. Thirdly, the management of the Fund is informed by the collective experience of the broader Devon Funds team who bring significant experience and expertise to portfolio management.
15. For someone who is new to funds management, what are some important considerations to take into account before investing in the Devon Dividend Yield Fund?
The most important consideration is that investors understand they are taking a position in an equity fund and that all equity investments are subject to potentially material capital value fluctuations. The Investment Statement provides more information about the Fund and its risk characteristics. If you still have questions we recommend you talk to an Authorised Financial Adviser.
16. Given there is a choice in equity-based income funds, why should an investor choose Devon’s Dividend Yield Fund?
Unlike some competitors the Devon Dividend Yield Fund is solely invested in equities so investors know the exposure they are getting. The combination of a screen and detailed fundamental research means that the Fund follows a disciplined approach. All of the holdings in the Fund are forecast to pay significant dividends which is appropriate for a yield focused Fund, but is not the case with some competitors. Each holding is analysed closely and clear views are taken on valuation, dividend paying capacity and growth outlook. This is entirely different than some more quantitative approaches.
Should you have any further questions regarding the Devon Dividend Yield Fund, please download the combined Investment Statement found on our website,
OR contact us via firstname.lastname@example.org
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