Berkshire goes global in search of income

The Royal County of Berkshire Pension Fund has appointed Kames Capital to manage a £70 million global equity income mandate. The appointment has been seen as a sign of a greater emphasis on income by pension funds, as they need to ensure benefits are paid, in the face of low yields on UK government bonds.

Kames Capital head of overseas equities, Piers Hillier, will manage the mandate and said: “The Berkshire pension fund is one of the first local government funds in the UK to adopt a global equity income approach. For many similar pension funds, very low nominal yields are a big problem when their obligations to beneficiaries are rising in line with the Consumer Price Index (CPI). This means that they could face an income shortfall in both the short and medium term, as they would expect nominal income to cover their net cash obligations.”

Hillier said that Berkshire wants Kames Capital to ensure that it achieves forecast dividend yield expectations. The portfolio has a target of an initial dividend yield of 130% of the MSCI World Index and income growth ahead of UK CPI. Normally, Hillier said, the target yield is 150% of the MSCI World Index. “When we have run this strategy for other clients we have targeted an initial dividend yield of 150% of the MSCI World index, so if the index yield was 3%, we would target a yield of 4.5%. For the Berkshire Pension Fund we are targeting a slightly lower yield of 130% because they want to see the dividend yield grow at more than the CPI index. It works out as a similar strategy, but Berkshire wanted us to separate out quite clearly two specific targets. We have been running this strategy since December 2010, when the forecast running yield was 4.9% and we achieved 4.9% in the 12 months to December 2011.”

Hillier said the stocks held for global equity income fell into three buckets. One is compounders, or companies which grow their income over a long period of time, such as Roche, McDonalds and Johnson & Johnson. Another is hoarders, or companies which have under distributed in the past, such as family-owned companies. “BMW was majority owned by the family, but its external investor base is growing and has a desire for income. Another example is companies which are have been through a capital expenditure phase and are now producing a strong cash flow, such as Sky in the UK. The third bucket we call ‘de-equitisers’, which are essentially companies taking advantage of the markets to issue cheap debt, at a low spread over government bonds, then using the funds to buy back equities which are yielding a higher income.”