Last updated: 13:17 / Wednesday, 12 November 2014
Neil Dwane, CIO Allianz GI

Quality Growth and Income, Two Strategies to Invest in Europe by AllianzGI

Quality Growth and  Income, Two Strategies to Invest in Europe by AllianzGI

In order to obtain returns in the current low-rate environment, risks have to be taken. For Neil Dwane, CIO of European Equity at AllianzGI, it is essential to choose the type of risk you assume. “There is growth in the world, but you have to look around carefully for companies which do show growth. In periods of low growth such as now, stocks with high dividend yields are a good choice, and those with high quality growth are the other.”

With these two tips, Dwane focuses his discussion on what type of product is currently more attractive when investing in European equities. Focusing on quality growth, he cites late 2007 as an example as the situation was a similar to the present moment “in which quality was more affordable than companies with more questionable fundamentals; in that environment, Quality Growth, managed to rise in 2008 compared to a market which fell by 40%.”

Delving deeper into this “return to quality,” Dwane points out that it may come either from quality of growth, “as in Inditex’ case”, as from  quality of dividends, “as Repsol’s or Royal Dutch’s.” Dwane explained that right now, the right decisions must be taken, even within sectors, and gives the example of the banking sector: “between two large global banks such as HSBC and BBVA, we currently opted for HSBC. Firstly, BBVA is more expensive, and secondly, the recovery in Spain and much of Latin America is questionable, while HSBC bank is more diversified. “
For investors who prefer something less volatile, a strategy focusing on a high dividend yields is more appropriate.

In the high income strategy, Allianz GI’s management team scouts for companies which have a 25% higher yield than the market’s. “It is a quantitative process that we carry out each and every Monday to see which companies meet this criterion. Once we have the candidates, we see which securities have solid fundamentals ​​by looking at the sustainability of the dividend, the generation of cash flows, the quality of the management team, etc. Businesses that meet our criteria will enter the portfolio. In turn, the sales discipline is simple: when a security we have in the portfolio reaches the market’s dividend yield, it’s offered for sale” Dwane explains.

In an interview with Funds Society, Neil Dwane talks about bPost, the Belgian postal company, as an example of a company which fits these criteria. “bPost met the criteria of high yield dividends, but is also recently benefiting from Amazon's entry into the Belgian market since most of the packages distributed by Amazon in Belgium travel through the bPost postal service. As befits a company of this type listed in Europe, bPost trades at a PE ratio of 6x and has an attractive yield of 6.5%, with an expected dividend growth of 10% due to improved cash flows” he adds.

Allianz GI’s European Equity Dividend strategy has an average dividend yield of 5.1%, with expectations that the yield will rise to 5.8% next year. “Therefore, a higher yield than that offered by high yield debt in the Euro zone is obtained through this strategy, and also, in the case of investing in dividends, you do so in high-quality companies, whilst if investing in high yield debt you are positioning yourself in companies with poor credit quality whose emissions, going back to par, have a potential drop of 35%,” argues Dwane.