Buy-side Awards 2016
When two of investors' highly cherished assets are high-dividend companies and low-volatility smart beta funds, a fund that combines the two ought to sell well.
Invesco's PowerShares S&P 500 High Dividend Low Volatility Portfolio exchange-traded product (ETF) has seen its global assets under management rise from $1.6 billion in May this year to $2.6 billion at the time of writing.
The Ucits ETF for European investors, launched in May 2015, has net assets of $525 million and returned 17% to investors over the past year.
Invesco's PowerShares was founded 13 years ago to provide value-added ETFs, says Bryon Lake, head of Invesco PowerShares, pre-dating the fashion and enthusiasm for "smart beta" funds that track equities weighted by a different investment theme. The high-dividend, low-volatility ETF has become one of its most popular – "one of my favourite children", Lake says – testifying to the potential of multi-factor smart beta funds.
"We start with the investor: asking what are they trying to achieve in their portfolio... A tremendous amount of investors are looking for income in the current environment, based on the fact that most bonds are negative-yielding. You also have investors that still remember 2008–09 and want to invest with a little lower volatility; they want a smoother ride," Lake says.
The demand for a steady stream of income led to setting up the high-dividend, low-volatility fund.
S&P Dow Jones Indices (DJI) takes 75 US equities with the highest 12-month trailing dividend yield, capping the number of stocks from each sector at 10. S&P DJI then strips out 25 equities with the highest realised annual volatility.
The 50 companies are weighted by dividend yield, with sector caps of 25% and company caps of 3%. The index is reconstituted every six months.
"It eliminates any dividend trap: companies that may be paying a lower dividend because their price has gone down or there's something structural on the rest of the balance sheet," says Lake.
At the time of writing, utilities make up 18% of the index, industrial companies 15% and real estate 12%. Tech firms, healthcare stocks and financial companies – which make up half of the S&P 500 for investors in vanilla passive funds – are weighted less heavily, comprising 12%, 5% and 6% respectively of the index.
In S&P DJI's research paper, The beauty of simplicity, published in October 2015, the index provider found its other high-dividend indexes, such as the Dow Jones US Dividend 100 Index and S&P 500 Dividend Aristocrats, did not have as high an allocation to utilities, which many investors value for their steady stream of income.
The academic argument would be it's very difficult to factor time, to understand if the current regime favours a high dividend factor, a momentum factor or a quality factor... even if they're high historically, it doesn't mean they can't go 10 times higher
Bryon Lake, Invesco PowerShares
Invesco argues high-dividend companies tend to have higher volatility, such that risk-adjusted returns are highest in the second highest quintile of dividend-paying companies.
From 2000 to September 2015, S&P DJI calculated that its low volatility, high dividend index had a higher annualised return of 10.9% than any of its four other dividend indexes – generated mostly from higher dividend returns – despite the fact that the others track high-dividend-characteristic companies alone. By comparison, the S&P 500 generated 3.7% annualised returns.
"The [S&P 500 Dividend] Aristocrats strategy holds those companies that have increased their dividends for 25 years – which is interesting, but it's kind of an arbitrary number and not rooted in any investment thesis," Lake says.
He thinks the greatest attraction of the Ucits fund is the low volatility and the price. "Thirty basis points is quite compelling for any investor, both retail and institutional," he says.
With the fund investing in some of the most crowded large-cap stocks, is there a risk an investor sell-off would cause the fund price to plummet? Lake sees low risk of a sell-off. The fund has no gates, no swing pricing and no redemption fees. The vast majority of investors are using the fund as a long-term vehicle to allocate to, he believes.
"The academic argument would be it's very difficult to factor time, to understand if the current regime favours a high dividend factor, a momentum factor or a quality factor... even if they're high historically, it doesn't mean they can't go 10 times higher," he says.
The week on Risk.net, March 10-16 2018Receive this by email