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Dividend investing amid rising inflation

Michael Price, Portfolio Manager of the Ausbil Active Dividend Income Fund, discusses the biggest dividend opportunities in the short and medium term.

Paul Sanger: I’m Paul Sanger for the Finance News Network. Today we’re talking to Michael Price, who is the Portfolio Manager for the Ausbil Active Dividend Income Fund. Michael, welcome back to the network.

Michael Price: Thanks, Paul.

Paul Sanger: Let’s kick things off, Michael. First up, could you provide us with some detail on what the fund aims to achieve?

Michael Price: So, the fund’s got three objectives. The first is high levels of income. We’re trying to distribute to our clients typically 7 to 8 per cent per annum, so that’s after fees but including franking credits, which is important for the fund. Secondly, we are trying to outperform the market. We want to deliver our clients some capital growth over time, and to do that we think you do need to outperform the market as well. And then the third thing is appropriate levels of risk. We are a diversified fund. We don’t want to take too much concentration risk. And because we exclude companies that don’t pay a dividend, we also tend to outperform when the market falls.

Paul Sanger: Where do the constituents of the fund mainly come from? Is it predominantly S&P/ASX-listed names or do you look at unlisted targets?

Michael Price: No, we do start with basically listed names. We’re looking at really the S&P/ASX 300, the top 300 companies, but we do have two filters that we apply to the fund. The first is it does have to be investment grade according to Ausbil’s investment process, and secondly it does have to be expected to pay a dividend in the next year or two.

Paul Sanger: Michael, given the current state of the economy both globally and locally, how does the rising inflation and interest rate environment impact the fund and its investing criteria?

Michael Price: Yeah, good question. The Ausbil investment process is top-down to begin with, and we do think it’s important to have a look at the prevailing macroeconomic environment and then identify attractive sectors and themes to invest in on the back of that. So, we haven’t had to change our investment approach despite the significant change and the fact that we do think there will be lower earnings going forward over the next few years. One important thing, though, when it comes to looking at inflation again is considering the importance of capital growth, and the fact that when you invest in shares for income you can actually get some protection against inflation. That’s unlike bank accounts, term deposits, where your balance is being continually eroded by inflation.

Paul Sanger: So, Michael, does the fund focus on growth or a value approach, or a mixture of both?

Michael Price: So, Ausbil’s investment approach is style-unconstrained. It’s based around the key investment philosophy that earnings and earnings revisions are the key drivers of share prices. So, that means we can buy both value or growth securities depending on where we see the opportunities, and have a bias towards where we see the most opportunities.

Paul Sanger: What strategies do you employ to deliver tax-effective income to investors?

Michael Price: What we use is something we call active dividend investing, and it’s not about buying high-dividend securities, but instead it’s about taking advantage of the fact that not every company pays its dividend on the same day, to collect more dividends over the year. So, we start with a high-quality portfolio of companies that we already like, and what we do is we increase the weight around the time that they pay their dividend in order to collect extra income over the year.

Paul Sanger: To finish off with, what sectors do you see providing the greatest opportunity in the short and the medium term?

Michael Price: Yes, so as I said earlier, we do see that the higher interest rates will lead to a slowing economy and lower levels of overall earnings growth for the Australian market. However, having said that, we do see there are some pockets of opportunity where we can get superior earnings and superior earnings growth. So, maybe the first one of those would be just high-quality companies, high-quality growth companies, which can continue to outperform. I would say healthcare would be a good sector for that. Secondly, we’d be looking at companies that can benefit from the higher inflation to grow their revenue, and if they can maintain their margins, that leads to some good earnings growth as well. I think the general insurers fit in that category, and probably the supermarkets will be there as well. Thirdly, we’d be looking for companies — this is a little bit longer term — that can benefit from what we see as one of the really big themes of the next few years, and that’s decarbonisation and electrification. So, the copper producers, companies that produce battery materials, we think they can definitely exceed the market’s expectations. And, finally, we’re going to go bottom up, and within the various sectors there are some companies we think can provide some opportunities for superior earnings growth based on some bottom-up features.

Paul Sanger: Michael Price, thank you for your time.

Michael Price: You’re welcome, Paul.