Our Approach to International Equities
We believe that where dividends grow, share prices follow.
Our research team is tasked with finding those few special businesses that we believe can deliver the most attractive rates of long-term dividend growth for our investors. In doing this we require all the companies we hold to be able to meet the same high hurdle rate, regardless of where it is listed or what sector it happens to fall into.
This high hurdle rate has profound implications.
Firstly, it means we only own the very best companies we can find internationally: those that are the global leaders in their industries, and which have the capacity to compound their dividends at double digit rates far into the future. For a US-based investor, this means no dilution of the high-quality growth characteristics they enjoy from owning US equities. And for us it means our international businesses are highly complementary to those we own in the US.
Secondly, it means we run a highly differentiated portfolio. At the time of writing (July 2024), we have allocated the majority of capital in the portfolio to growing, dividend-paying businesses in the Healthcare and Information Technology sectors, and little to nothing in areas such as Energy, Materials, Real Estate, Telecommunications and Utilities which are the typical hunting ground of our dividend yield focused peers.
Underlying this, one of the cornerstones of our approach is that a company’s destiny is not dependent on where it is listed - what really matters is its ability to drive strong growth in sales, profit, and cashflows through profitable reinvestment. This freedom to stay true to dividend growth –wherever it may be found, means we can focus our time on getting to know those few special businesses that have the potential to drive excess long term returns for our clients.
This is doubly important since research1 shows that stock selection is even more important outside the US, with just 1.41% of companies driving more than 100% of index wealth creation between 1990-2020 (in the US, it was 2.4%). The same piece of work showed that 30% of the top wealth creating equities globally between 1990 and 2020 were listed outside the US. Ergo, you would have increased your chances of outperformance by investing in an actively managed international equity fund.
For example, consider some of the wonderful companies we have invested in as a result of broadening our horizons. Our global research approach drove us to own Dutch lithography champion ASML (10-year dividend growth of 23% p/a), innovative diabetes drug developer Novo Nordisk (10 year dividend growth of 13% p/a) and the premier luxury goods company LVMH (10 year dividend growth of 13% p/a).
This experience is why we would ask you to join hands with us and take the oath of optimism, expand your horizons, and invest with a global mindset.
1 Bessembinder, H., Chen, T. F., Choi, G., & Wei, K. C. J. (2023). Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks. Financial Analysts Journal, 79(3), 33–63. https://doi.org/10.1080/0015198X.2023.2188870
DISCLAIMER
Dundas Partners LLP is authorised and regulated by the UK Financial Conduct Authority, registered as an Investment Adviser with the US Securities and Exchange Commission and holds a Foreign Financial Service Providers License with The Australian Securities and Investment Commission. It operates as Dundas Global Investors and/or Dundas.
This document is for information purposes only and does not constitute a recommendation to purchase or sell any fund, security or investment. If it prompts an interest in Dundas, please contact us for detailed information on our strategies and funds. It is not a substitute for a fund’s prospectus or disclosure document. The material in this document addresses general investment matters only, not Dundas’ specific strategies. Past investment performance is not a reliable indicator of future investment performance. You should be aware of the risks associated with investments in any fund, security or investment strategy.
Although Dundas Partners LLP’s information providers, including without limitation, MSCI ESG Research LLC and its affiliates (the “ESG Parties”), obtain information (the “Information”) from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness, of any data herein and expressly disclaim all express or implied warranties, including those of merchantability and fitness for a particular purpose. The Information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for, or a component of, any financial instruments or products or indices. Further, none of the Information can in and of itself be used to determine which securities to buy or sell or when to buy or sell them. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
© Dundas Partners LLP 2023.
SUSTAINABILITY DISCOSURE:
Sustainability label. The Financial Conduct Authority (FCA) has issued new standards governing the use of sustainability vocabulary in the promotion and description of fund and asset management services. Funds may adopt one of four FCA labels describing their approach, or they may opt not to have a label. For reasons discussed below, Dundas has decided for the present to operate without a label for its two UK domiciled funds – Heriot Global and Heriot Smaller Companies.
Dundas makes investment decisions in large part based upon audited annual reports which in recent years have expanded to address wider sustainability matters. Disclosure on CO₂ emissions and sustainability has improved but remains incomplete, inconsistent, and heavily reliant on estimation. In response new IFRS Sustainability accounting standards were issued in 2023 (now out for adoption across the world outside the USA, where GAAP standards are moving in the same direction) effective 1 January 2024. Dundas welcomes the new standards. They are thorough, stringent and, when fully adopted, will raise and level the playing field for corporate sustainability reporting.
Dundas is already engaged with the companies in which it invests about the new standards. We will re-evaluate the appropriateness of adopting a label once our analysis of improved sustainability reporting is complete.
Sustainability Goal: to invest in companies with long-term growth potential that are simultaneously becoming more environmentally and socially sustainable. Progress will be measured largely via reporting under the new IFRS Sustainability standards. Dundas believes that companies which shoulder these responsibilities and communicate effectively will gain competitive advantage which is why we advocate for sustainable practices by those we invest in.
Investment Policy and Strategy: Dundas invests in global equities for dividend and capital growth with an investment horizon of five years or more. Where dividend growth leads, share prices follow. Sustained dividend growth is produced by well managed companies that respect all their stakeholders’ interests. The case for responsible investment in sustainable businesses is readily made by its opposite. A portfolio of irresponsible companies with unsustainable businesses will not meet clients’ long-term investment needs. The actions of the companies Dundas invests in (i.e. the enterprise contribution) are the main driver of sustainability metrics.
Stocks we decline to own on principle because their principal activity is one of the following:
• Manufacture, production or distribution of tobacco products;
• Manufacture of controversial and indiscriminate weapons (including cluster bombs or similar anti-personnel weapons);
• Corporate structures that deny investors title to the underlying operating business assets, such as Variable Interest Entities;
• State-owned or controlled companies where minority shareholders’ interests are not respected.
• Thermal coal mining or its use in power generation.
Relevant Metrics: Dundas monitors the progress of the businesses it invests in on behalf of clients against metrics such as: carbon footprint, carbon intensity, weighted average carbon intensity (all for Scope 1 and 2 emission), MSCI ESG ratings, board independence, workforce pay & conditions, employee turnover, productivity. We rely upon MSCI and Bloomberg reports whose accuracy will improve as IFRS Sustainability standards are applied.
• Progress on these metrics will be covered in our annual Stewardship Report and TCFD document along with discussion on quality and availability of data from audited sources.
Resources and Governance: The firm’s Investment Committee is responsible for all aspects of its investment activities, including sustainable investment policy. Within the investment committee, a partner has lead responsibility for Sustainability, supported by other team members.
Voting / associations: Dundas’ investor contribution includes voting all proxies aided by a proxy advisor. Its PRI report is available on the firm’s website. The firm’s Stewardship Report sets out how it upholds the UK Stewardship Code and the EU’s Shareholder Rights Directive II.
Lexicon: The FCA’s labels tighten up how the word ‘sustainable’ can be used in fund marketing. Whilst agreeing that greenwashing needed to be confronted, Dundas may use ‘sustained’ in reports and communications in its plain English sense of ‘something continuing into the future’. We’ll take care not to use it inappropriately.
Accessing other relevant information: the sustainability disclosures section of the Dundas website discloses all relevant information.
