23 May 2019
Dan Roberts, Portfolio Manager - Fidelity Global Dividend Fund
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We have a very strict valuation discipline when it comes to assessing potential investments for the Fidelity Global Dividend Fund. So periods of market weakness can create opportunities for us to re-allocate capital within the portfolio as well as to build positions in new ideas.
Of course, we do not buy stocks just because they have fallen in price and appear ‘cheap’ on metrics such as dividend yield or price-to-earnings. Instead, we value businesses by taking a forward-looking view of cross-cycle cash generation.
This approach leads us to demand certain characteristics from companies – such as a strong balance sheet (something a traditional PE multiple tells you nothing about), predictable cashflows and management that recognise the importance of good capital allocation – to help provide clarity over a stock’s true value and the sustainability of its earnings and dividend.
Media company Informa was particularly hard hit during the volatility we saw in the second half of 2018. Its share price fell by around 30% from its 2018 peak, which left the stock on an attractive 8% free cash flow yield.
The market was seemingly taking the view that Informa is a cyclical business so it was heavily punished when expectations for global growth started to deteriorate over the course of 2018. This view was based on the Informa experience of the 2008/9 financial crisis - but the work done by Nick Wilkes, Fidelity’s media analyst, highlighted changes in the group’s mix of businesses over the last 10 years which suggests that it will be much more resilient in the next downturn.
His analysis gave us confidence in the longer-term prospects for the business, while a low starting valuation also provided a margin of safety if we are faced with a more difficult economic outlook. We added Informa to the portfolio and it now represents 2.5% of the fund.
In the current environment - where at an aggregate level corporate profit margins are at all-time highs - we believe it is sensible to focus on companies that can defend their margins and sustain attractive returns on capital. Informa’s high recurring revenues gives us confidence that its cashflows can support its dividend irrespective of what is happening in the broader economy.
Informa’s significantly improved business mix since the last recession
Source: Fidelity International, Informa company reports, February 2019
Nick Wilkes - Fidelity Media Analyst
Informa is the global leader in exhibitions and trade shows, which account for around 60% of the company’s profits today. This is a growing market, with visitor and exhibitor numbers in a gentle upward trend - as more and more transactions become ‘digitised’, exhibitions and events create rare opportunities for face-to-face interactions between buyers and sellers, allowing them to build trust, generate leads and drive sales.
Informa holds events across different sectors, such as Arab Health (which brings together 80,000 healthcare professionals in Dubai) and World of Concrete (with an attendance of 50,000 construction professionals in the US).
Exhibitions have favourable competitive dynamics. The network effect creates a competitive ‘moat’, as once a critical mass of buyers attends an exhibition, it becomes increasingly important for sellers to attend, and vice versa. The events require fairly limited capital investment, and have a positive cash-flow profile, with deposits collected up-front.
Aside from these attractive economics, exhibitions tend to be reasonably resilient in a downturn. Given their importance in generating new leads and maintaining existing relationships, trade exhibitions are seen as essential rather than optional. Informa also has good cost negotiating power with venues, as attendees generate business for the surrounding hotels and restaurants.
By going back and checking historical records and company reports from the last recession, I was able to determine that the effect on major exhibitions was not nearly as significant as was being discounted in Informa’s share price.
This resilience is not fully appreciated by the market consensus, which explains why the stock significantly underperformed peers in late 2018. The market’s view seems to be based on the disastrous -13% organic growth number the company produced during the last global recession in 2009. However, this misses the fact that Informa’s business mix has transformed since 2009, with management selling out of many lower quality businesses (such as corporate training) and increasing focus on exhibitions.
These changes have led to the proportion of pre-booked or recurring revenues increasing from 46% in 2008 to 65% in 2018. This transformation, along with the underappreciated resilience of exhibitions, gave me confidence in recommending an investment in Informa for the Fidelity Global Dividend Fund.
Further information: To learn more about the Fidelity Global Dividend Fund and to download the new RSMR Fund Profile, please visit the fund factsheet page.
Important information
This information is for investment professionals only and should not be relied upon by private investors. The value of investments and any income from them can go down as well as up so the client may get back less than they invest. Past performance is not a reliable indicator of future returns. The Fidelity Global Dividend Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The annual management charge for the income share class is taken from capital, therefore distributable income may be higher but the fund’s capital value may be eroded, which will affect future performance. Changes in currency exchange rates may affect the value of an investment in overseas markets. This fund invests in emerging markets which can be more volatile than other more developed markets. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0519/24096/SSO/NA