The Dividend Deluge

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Almost exactly three years ago, I penned an article titled ‘The Dividend Dilemma’. It was the depths of the Covid-induced market selloff; companies were cutting or suspending dividends left, right and center; and analysts were predicting big cuts to global dividends from which they would take years to recover. I anticipated a fall of around 30%.

Yet for all the cataclysmic predictions, payouts took just one year to bounce back. 2021 was a record-setting year for global dividends at $1.47 trillion, a mark that was bettered in 2022 at $1.56 trillion and is forecasted to be exceeded yet again in 2023 at an estimated $1.60 trillion (see Exhibit 1).

We have now gone from the dividend dilemma to the dividend deluge. With 2022 also setting a record for share buyback authorizations, the picture is clear – companies are returning record amounts of capital to shareholders.

 

The volatility we saw across asset classes last year served as a reminder that dividends are typically much less variable than earnings and can provide an important source of total return in challenging markets. Dividends also have a solid track record of keeping pace with inflation and while annual growth wasn’t quite the low double digit level that we saw inflation hit at its peak, there was less erosion in real terms than we saw in payouts from most other asset classes.

So where does this leave us now? Deep value areas of the market, characterized by companies with lower-quality earnings and high debt levels had their day in the sun last year. Such rallies tend to be sharp but also short-lived, which played out in the first quarter of this year as we saw momentum fade abruptly. Investors are likely questioning whether such companies can continue to be successful in a slowing growth (or recessionary) environment. In addition, with interest rates looking like they will be higher for longer, indebted companies will likely see more of their cashflow eaten up by interest payments, rather than being available to distribute to
shareholders.

In contrast to the riskier, deep-value end of the market, we believe a focus on ‘quality’ dividend paying companies, those with strong balance sheets and high returns on equity, can be a powerful factor over time. As shown in Exhibit 2, the top quintile of companies, based on quality1 within the MSCI All Country World Index, has significantly outperformed the wider market over time.

This quality approach will, we believe, be especially important if the harsher economic conditions that many expect come to fruition. Indeed, despite the uncertainty in the market right now, over two-thirds of the companies within a representative global equity income portfolio have increased their dividends in the first quarter of 2023.

These increases suggest companies are generating plentiful free cash flow, and returning it to shareholders is signaling, what we believe is, a healthy confidence in their financial situation.

A few examples of high dividend increases include:

What is striking about these examples is not only the magnitude of the increases but also the diversity of the companies involved, on both a geographical and sectoral basis, which implies broad-based strength.

All of this suggests we may be in a golden period for dividend investing. Companies are returning record amounts of capital to shareholders and are doing so while recording payout ratios that are below long-term averages, meaning these dividends should remain even in the face of slowing growth.

Dividend strategies themselves tend to come into their own in more choppy market environments, where income streams become an even more crucial part of total returns and a lower beta approach may offer some protection from volatility. This serves to highlight the excellent shape of global dividends and should provide equity income investors with significant opportunities – despite volatility, they remain well positioned in the market.

Piece of opinion by Mark Peden, Investment Manager of Aegon Asset Management.

AIS Financial Group Appoints Erik Schachter as Chief Investment Officer

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Photo courtesyAIS Financial Group new Chief Investment Officer, Erik Schachter

Swiss brokerage firm and third-party fund distributor AIS Financial Group has recruited a new Chief Investment Officer (CIO), Erik Schachter, to bolster its coverage of global markets.

He will report to Samir Lakkis, founding partner of the company.

Schachter brings a wealth of expertise with 10 years of experience working in Finance: Research, Equity, Trading, Derivatives and Consulting. He focused on the analysis of the international financial market to generate efficient investment portfolios. He has a profile oriented to seek opportunities through traditional and alternative financial products. He was a Portfolio Manager at a MultiFamily Office in Argentina, analyzing the international market through research and calls with fund houses to find the best investment strategy.

Geneva, Switzerland-based AIS has offices in Panama, the Bahamas and Madrid and provides brokerage, asset management and fund distribution services. AIS currently distributes more than USD 2.5 billion a year in structured products and is diversifying its business line.

The company seeks to consolidate its position and to partner with those asset managers who want to outsource their sales force and benefit from the knowledge and expertise the company has in the region.

US Banking Sector to Enter Consolidation Phase with Recent Collapses

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The US is currently grappling with the dual challenges of elevated inflation and regional banking crises, causing concerns among investors. These could potentially trigger a period of consolidation in the banking sector, said Murthy Grandhi, an analyst at GlobalData in a report.

“The US is currently grappling with the dual challenges of elevated inflation and regional banking crises, causing concerns among investors. These could potentially trigger a period of consolidation in the banking sector. In March 2023, Silicon Valley Bank was acquired by First Citizens and Signature Bank by Flagstar Bank. Now, First Republic Bank is acquired by JPMorgan Chase,” the expert said.

On May 1, 2023, First Republic Bank, which had more than $200 billion in total assets, collapsed, following the earlier collapses of Silicon Valley Bank and Signature Bank, which serve as a stark reminder of how quickly the effects of risky decisions taken at one bank may impact the whole financial system.

First Republic Bank’s failure was attributed to its business model, which focused on catering to high-net-worth individuals and corporations and offering large loans, including jumbo mortgages, using the deposits it received. With historically low interest rates, the bank hoped to entice customers to expand into more profitable products like wealth management. As a result of this, many of the bank’s accounts had deposits exceeding the federally insured $250,000 limit, the report said.

As of December 31, 2022, the bank had uninsured deposits of $119.5 billion accounting for 67.7% of its total deposits. As of March 9, 2023, the bank’s total deposits were $173.5 billion. Following the collapse of Silicon Valley Bank on March 10, 2023, the bank experienced unprecedented deposit outflows, reaching $102.7 billion by April 21, 2023, representing a 41% outflow.

“In this scenario, other midsize banks such as Comerica, KeyCorp, PacWest, Western Alliance Bank, and Zions Bank came under pressure with their share prices falling by 26.6%, 21.5%, 67.5%, 30.3%, and 33.5%, respectively, between March 13 and May 4, 2023, and by 53%, 49%, 86%, 68.9%, and 58.9%, respectively, year-to-date. Recently, Moody’s also downgraded ratings for Zions Bank, Western Alliance Bank, and Comerica.

“For the fiscal year ended December 31, 2022, Comerica, KeyCorp, PacWest, Western Alliance Bank, and Zions Bank reported uninsured deposits of $45.5 billion, $67.1 billion, $17.8 billion, $29.5 billion, and $38 billion, respectively, accounting for 63.7%, 47.1%, 52.5%, 55%, and 53%, respectively, of their total deposits”, the text added.

“Other banks with notable high uninsured deposits include East West Bank, Synovus, Bank of Hawaii, and First Horizon Bank, with 66.7%, 51.3%, 51.9%, and 47.7%, respectively, of their total deposits.

“This high percentage of uninsured deposits points to the fragility of these banking companies and may result in a similar situation that was created by Silicon Valley Bank and Signature Bank.”

Thornburg Plans Leadership Transition

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Photo courtesyJason Brady, president & CEO de Thornburg Investment Management

Thornburg Investment Management, a global investment firm that oversees $42 billion in assets, announced that Jason Brady intends to step down later this year from his role as president & CEO and portfolio manager, as well as from the Board of Directors of Thornburg, and depart the firm.

Mr. Brady will continue in his role to allow for a smooth transition while Thornburg’s Board of Directors undertakes a search for his successor.

“Since joining Thornburg in 2006, I am proud of what we have achieved, particularly the strength of the team we have developed, and I’m grateful for the opportunity to serve as the firm’s president and CEO for nearly eight years,” said Mr. Brady.

“This is the appropriate time for a new leader to step in and I remain fully involved and engaged while the Board searches for a successor,” he added.

“I thank Jason for delivering strong results across our business and notably assembling an experienced group of world-class leaders at the organization,” said Chairman Garrett Thornburg. “Our 41-year foundation leaves us well positioned to make the next phase of our growth the most exciting in our company’s history.”

Record Debt and Soaring Interest Costs Mean Governments Face a Reckoning, but Investors Stand to Benefit

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Governments face a painful reckoning as record debt and higher interest rates mean borrowing costs will double over the next three years, according to the annual Sovereign Debt Index from Janus Henderson. This will put significant strain on taxpayers and public services, but there are opportunities for investors.

2022 and 2023 have seen dramatic changes for government finances around the world. By the end of last year, the total value of global government debt had leapt by 7.6% on a constant currency basis to a record $66.2 trillion, double its 2011 level. The US government accounted for more additional borrowing in 2022 than every other country combined.

Costs are mounting sharply. Government interest bills jumped by almost over a fifth in 2022 (+20.9% constant currency basis) to a record $1.38 trillion. This was the fastest increase since 1984 and reflected both rising rates and the swelling stock of sovereign borrowing. The effective interest rate, which includes older, cheaper borrowing, rose to 2.2% in 2022, up by one seventh, year-on-year. 

This cost continues to rise as new bonds are issued at higher interest rates and older, cheaper debt is retired. The effective interest rate in 2025 is set to be 3.8%, almost three quarters more than 2022’s level. 

This will prove very expensive for governments. By 2025, the governments around the world will have to spend $2.80 trillion on interest, more than double the 2022 level. This will cost an additional 1.2% of GDP diverting resources from other forms of public spending or requiring tax rises. The US is particularly exposed on this measure. 

On top of this come losses on central bank portfolios of QE bonds which must be filled by tax dollars, reversing the pre-2022 flow of profits on these bonds paid by central banks to government finance departments. 

Ongoing annual deficits mean debts will continue to rise, reaching $77.2 trillion by 2025. The global debt burden will rise from 78% of GDP today to 79% of GDP in 2025.

Jim Cielinski, Global Head of Fixed Income at Janus Henderson said: “The level of government debt and how much it costs to service really matter to society, affecting decisions on taxation and public spending and raising questions of generational fairness. Since the Global Financial Crisis, governments have borrowed with astonishing freedom. Near-zero interest rates and huge QE programmes by central banks have made such a large expansion in government debt possible, but bondholders are now demanding higher returns to compensate them for inflation and rising risks, and this is creating a significant and rising burden for taxpayers. The transition to more normal financial conditions is proving a painful process.

We expect the global economy to weaken markedly in the months ahead, and for inflation to slow more than most expect. The market expects the world economy to have a relatively soft landing – a slowdown in growth, but no outright contraction, except in a handful of national economies, he added. Cielinski said that believe this is incorrect.

The sheer volume of debt owed by governments, corporates and individuals nevertheless means that rates do not need to climb as far as in the past to have the same effect. The interest rate tightening cycle is nearing its end. 

Investors stand to benefit. Bonds of all maturities are likely to see yields fall in the year ahead, meaning prices will rise. Short-dated bonds offer higher yields at present because they are more closely connected to central bank policy rates. This is good for those wanting income and tolerating lower risk, but they will see less capital appreciation. The scope for capital gains is significantly greater for longer-dated bonds which we expect to perform very well in the next year as the economy comes under pressure.”

Barbara Reinhard named Chief Investment Officer for Voya Investment Management’s Multi Asset Strategies and Solutions platform

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Voya Investment Management (Voya IM), the asset management business of Voya Financial, Inc. (NYSE: VOYA), announced that Barbara Reinhard, CFA, has been named chief investment officer and head of Asset Allocation for Voya IM’s Multi Asset Strategies and Solutions (MASS) platform, effective Nov. 1, 2023.

Reinhard will succeed Paul Zemsky, CFA, who will retire at the end of 2023. Reinhard will report to Matt Toms, Global Chief Investment officer, Voya IM.

“Barbara is a seasoned investment professional with 30 years of investment experience. She is well respected both within our industry and with our clients,” said Toms. “Since joining Voya seven years ago as head of asset allocation for MASS, Barbara has been a key driver of alpha and risk management for our multi-asset platform and has both attracted and developed a strong team of talented investment professionals.

“In the nearly 20 years since Paul founded the MASS team, it has grown to over $31 billion in assets. In addition, Paul has served as a mentor to many of our employees and has been instrumental in the creation and evolution of Voya IM’s award-winning culture. I know our MASS team will build upon the success and client-centric commitment to delivering results that was started by Paul,” added Toms.

Reinhard joined Voya IM in 2016 and most recently served as head of asset allocation. She is also a portfolio manager on Voya IM’s target date and multi-asset strategies. Prior to joining Voya IM, Reinhard was a managing director and chief investment officer in Credit Suisse’s private banking division.

“We are focused on the needs of our clients and investing in our firm. Equally important, we want to prioritize the continuity of our portfolio management teams while elevating the next generation of our leaders — both of which we have done today,” said Toms.

Voya IM also announced today that Lanyon Blair, CFA, CAIA, Head of Manager Research and Selection, will join Reinhard as a named portfolio manager on the firm’s target date and multi-asset strategies. Blair joined Voya IM in 2015 and is responsible for manager research and selection activities across equity, fixed income, real estate and commodities asset classes for all of MASS’s multi-manager solutions.

Liontrust to acquire GAM Holding AG

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Liontrust announces that it has conditionally agreed to acquire the entire issued share capital of GAM Holding AG (GAM), a global investment management firm with GAM’s Investment Management division having AUMA of CHF 23.3 billion (£20.9 billion) as at 31 March 2023.

The Proposed Acquisition of GAM will accelerate Liontrust’s strategic progress and growth through the broader investment capability and global distribution of the enlarged company, according the firm press release.

Liontrust will provide an environment to enable the investment teams to focus on managing their portfolios without distractions within a strong risk and compliance framework and with the support of the rest of the business to deliver performance and a growth in assets.

The broad range of funds and asset classes will enhance Liontrust’s product range. The expanded range will offer the potential to grow the combined client base and provides Liontrust with differentiated performance across the fund range through the market cycle.

GAM’s existing product offering is complementary to Liontrust’s especially in fixed income and alternatives. GAM will strengthen Liontrust’s fixed income offering, adding capabilities in: Asset Backed securities, Emerging Markets debt, Global Credit, Global Rates, Catastrophe bonds and Insurance Linked Securities.

Equities will continue to be the largest product for the enlarged company, with GAM adding and strengthening capabilities in: Asia, Japan and Emerging Markets, Thematic Global Equities, Europe, Luxury Brands and UK Income. GAM will also expand the multi-asset and alternatives propositions and provide a capability in wealth management.

This increased product depth will be expected to support growth in Liontrust’s market share over time and enable us to better mitigate against market volatility and changing demand for investment styles. The Proposed Acquisition will lead to a step change in scale, with 12 funds having more than £1 billion of AuMA (two for Economic Advantage, one for Global Fundamental, four for Sustainable Investments, four for GAM Fixed Income and one for GAM Multi-Asset).

Liontrust intends to rebrand all GAM funds as Liontrust as soon as possible after completion of the Proposed Acquisition and for the GAM business to operate under the Liontrust brand.

The acquisition will enhance distribution globally and the opportunity to increase sales and market share. GAM is geographically diverse with 3,500 clients based in almost every continent, with 2,700 in Europe. Switzerland, Germany, Italy, the US, Iberia and Latin America are GAM’s largest markets outside the UK.

Liontrust and GAM are both focused on providing excellent client service and the enlarged company will deliver engaging experiences for investors globally.

The fund managers and other employees at GAM will benefit from the environment at Liontrust, the enhanced distribution, strong brand and marketing, and the resources of the enlarged company.

John Ions, Chief Executive of Liontrust, said: “We have been impressed by the quality of the investment teams at GAM. There is commonality in that Liontrust and GAM are both committed to independent and distinct processes for each of their investment teams. Liontrust specialises in providing an environment in which investment teams can thrive, including through the excellence of our sales and marketing and a robust business infrastructure, strong risk and compliance culture, and the stability that comes with financial strength.”

Peter Sanderson, CEO of GAM, said: “I am delighted we have agreed this transaction with Liontrust. Our distinctive approaches to investing and culture are closely aligned, and this combination represents the best opportunity for our talented team of professionals at GAM to continue to provide clients with high conviction active investment strategies. The resulting business will have a strong balance sheet, a broader array of excellent investment products, and a global distribution footprint from which to deliver growth that our shareholders can participate in the future.”

David Jacob, Chairman of GAM, said “I would like to thank all my colleagues at GAM for their hard work and dedication while we worked to determine the best option for the future of the firm.  I am confident that the loyalty of our clients will be rewarded since they will now benefit from the increased capabilities and stability of the combined firm. Our shareholders have been patient, and I and my fellow Board members are unanimous in our recommendation that they should tender their shares in response to the offer from Liontrust.”

Advisors’ Front-Office Technology Is Here to Stay

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Driven by the need to facilitate a digital work environment, advisor use of front-office technology has evolved significantly over the past three years. New research from Cerulli, State of U.S. Wealth Management Technology 2023, finds front-office technology has made a lasting impact on both client satisfaction and advisor productivity.

Between 2019 and 2022, the greatest rates of growth in advisor adoption occurred with technologies that facilitate a digital work environment, such as e-signature, client portals, and video conferencing, driven largely by the needs imposed by the pandemic. Advisors tell Cerulli that these technologies were critical to their ability to operate effectively during the pandemic, but that the benefits experienced go well beyond that. Thus, many patterns of technology use that emerged during the pandemic are likely to continue into the post-pandemic world.

The technologies that are most frequently cited as positively impacting the client experience include e-signature (77%), video conferencing (75%), and client portal (64%). Likewise, the technologies that are most frequently cited as positively impacting advisor productivity include video conferencing (75%), e-signature (73%), and CRM (70%).

“This data aligns with the many conversations Cerulli has had with financial advisors who share how e-signature technology has drastically reduced the time and effort required for clients to open accounts, and create linkages between accounts, for example, obviating the need for papering and re-papering of accounts,” says Michael Rose, associate director. The same applies to virtual meetings, which were rare prior to the pandemic, and are now often a preferred meeting option for clients and advisors. “The precipitous rise in advisors’ use of these applications over the last three years underscores the importance of creative, outside-the-box thinking when it comes to the ways in which they do business altogether,” he says.

Overall, the ways in which advisors source technology varies between affiliation models. For instance, 88% of advisor practices affiliated with captive broker/dealers (B/Ds) source their suite of technology from their home offices with relatively little control over product selection. Independent registered investment advisors (RIAs) represent the other end of the spectrum, with 50% building custom technology stacks sourced entirely from third parties.

“The diverse ways in which advisor practices source their technology are testament to the varying approaches for operating a wealth management practice in the modern day,” concludes Rose.

Morgan Stanley Capital Partners Acquires RowCal

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Investment funds managed by Morgan Stanley Capital Partners (“MSCP”), the middle-market focused private equity team at Morgan Stanley Investment Management, have acquired RowCal. MSCP is partnering with the current management team led by CEO Jake Christenson, who founded the business in 2018, the firm said in a press release.

Headquartered in Minneapolis, Minn., RowCal is a provider of outsourced homeowner association (HOA) property management services, offering a comprehensive solution to better manage and maintain HOA communities. RowCal currently serves the Minnesota, Colorado and Texas markets and has scaled rapidly through market-leading organic growth and strategic add-on acquisitions.

The company’s differentiated approach, which leverages advanced technology and an integrated care team to enhance the customer experience, has enabled RowCal to quickly emerge as a leading and trusted provider in the space since inception.

Adam Shaw, Managing Director and Head of Business Services at MSCP, said: “We are delighted to partner with Jake and the RowCal team as they continue their mission of building a leading HOA property management provider. RowCal’s impressive growth trajectory coupled with a client-focused culture are a testament to what the management team has built since its founding. We look forward to working together to advance RowCal’s vision to serve its client base and pursue continued expansion of the company through robust organic growth and M&A.”

MSCP’s acquisition of RowCal is consistent with the team’s focus on target subsectors where MSCP has deep institutional knowledge and domain expertise. It is MSCP’s third acquisition in 2023 following those of Apex Companies and Allstar Services.

“Since founding RowCal in 2018, the company has experienced strong growth through our focus on delivering a high-quality experience to HOA managers. We believe our partnership with MSCP will enable us to continue our national buildout and growth trajectory by investing in the capability set to drive organic growth and expand our geographic footprint,” said Jake Christenson, CEO of RowCal.

Debevoise & Plimpton served as legal counsel to MSCP. TD Cowen and William Blair served as financial advisors to MSCP. Robert W. Baird & Co served as financial advisor to RowCal.

The Siegel Group Enters Florida With Its Siegel Select® Extended-Stay Brand

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The Siegel Group, a real estate investment and management company, announced that it had acquired the former Stay Suites of America located in Orange Park, Florida.

The property, which suffered from deferred maintenance and management issues, was purchased in an all-cash transaction for $7 million and quickly closed in under 30 days. This acquisition increases the number of Siegel Suites® and Siegel Select® properties throughout the United States to 61 and marks the brand’s first location in the Florida market. This location is in addition to the company’s significant presence throughout Nevada, New Mexico, Arizona, Texas, Tennessee, Louisiana, Mississippi, Alabama, Ohio, Oklahoma, South Carolina, and Georgia.

The Siegel Group, which operates a sizable commercial real estate portfolio consisting of apartments, extended-stay hotels, flexible-stay apartments, hotels, retail, office, and development projects, will be operating the property under its successful Siegel Select® brand which provides the option of either short-term daily stays or longer term extended-stay accommodations.

The property, which will be renamed Siegel Select Orange Park, is located directly off Interstate 295 and in close proximity to Downtown Jacksonville. Built in 1998, the 3-story exterior corridor property totals approximately 57,060 square feet and is comprised of 144 units that are all equipped with kitchenettes. The Siegel Group will be making a number of improvements including updating flooring and cabinetry, as well as installing new furniture and appliance packages in all units. Additionally, the exterior of the property will be painted along with other cosmetic upgrades, including branding and signage that are characteristic of the Siegel Select brand.

Chigozie Amadi, Chief Financial Officer of The Siegel Group stated: “We have been looking for the right opportunity to enter the Florida market and are excited to introduce our Siegel Select brand to Orange Park. Now that we have established a presence in this new market, we plan to further expand our Siegel Select and Siegel Suites brands throughout the state.”