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The Lord Abbett International Dividend Income Fund looks for undervalued stocks with high and sustainable dividends and that have the potential to produce strong total returns. The strategy seeks to outperform its benchmark, the MSCI All Country Ex-U.S. Value Index–Net Dividends,1 over a full market cycle.
Long-run equity total returns are heavily influenced by reinvested dividends. The longer the investment time horizon, the more important is dividend income. Our international dividend strategy is based on extensive academic research, which reveals that high-dividend-yielding stocks are a key ingredient for international equity total returns. Reinvested dividends contributed roughly 50% of any major equity market's total return over any 10-year time period since 1900.2 We believe that a combination of above-average dividend yields3 and below-average valuations produce strong total return prospects.
International Opportunity Set Superior to Domestic
Historically, we have found that stocks in international markets have higher yields than U.S.-based companies. Currently, the yield on the S&P 500 is 2.13% while the yield on the MSCI ACWI ex-U.S. Index is 3.13%. As a result, we are able to assemble a well-diversified portfolio without undue concentration from a sector standpoint.
Our 12-person investment team, with an average of 19 years of industry experience, has long understood the critical role that high dividend yields play over time. Armed with this knowledge, the team then applies a consistent investment process across the high-dividend-yield universe. We believe that an active approach is needed within this strategy; high dividend yields often accompany poor or failing business models.
Our initial potential universe is approximately 2,100 companies, all non-U.S. firms with a market cap greater than $1.5 billion and average daily volume greater than three million. We then rank these 2,100 companies by dividend yield, highest to lowest, and concentrate on the top quintile. Using a bottom-up, value-equity approach, the team looks for high-dividend-yielding companies with an emphasis on dividend sustainability, stable growth/high free cash flow, and significant potential for capital appreciation. The effective universe of high-yielding companies, at any point in time, is approximately 420.
We believe that global sector research is the most effective way to uncover companies that are selling at a substantial discount to our bottom-up fair value assessment. Companies within a sector are valued on a consistent basis globally. This philosophy complements the increasing integration of world capital markets by approaching investment decisions according to global market sectors without imposing the limitations created by a single local-market view of risk and return.
Price targets are established using a combination of discounted cash flow analysis4 (DCF) and a suite of unique sector-specific valuation methodologies that the team has been developing since the 1990s. To allow for meaningful global comparisons, our DCF model inputs are standardized. There are more than 500 securities with fair-value targets in the proprietary database. The team compares each entry's relative attractiveness and risk with the market's view, looking for advantageous anomalies. Portfolio managers and sector specialists constantly discuss how these investment opportunities fit into the current investment strategies and macro environment.
Through extensive interviews with company executives in more than 1,000 management meetings each year, the team creates a particular bottom-up view of key global issues affecting each industry and sector. This is then coupled with our view of the economic, government, and regulatory issues affecting each sector. Through a synthesis of viewpoints regarding the key issues and critical success factors for relevant high-yielding sectors, potential investment ideas emerge for consideration among the team. Our position size will be determined by our price target and the stock's upside potential. Position weightings also will be affected by our risk management and liquidity constraints.
We attempt to make sure that we are getting compensated for the risk we take. We believe our process of looking at risk at three different levels, including hurdle rates at the stock level, differentiates us from other managers.
Each company we analyze is assigned a risk rating based on four sets of factors: the size and liquidity of the company, the cyclical exposure of their businesses, their macroeconomic environment, and the business plan and management track record. (See Chart 1.) A low-risk, blue-chip stock in a mature industry with a stable macro environment would be ranked Tier 1, leading us to require a return of at least 15% over an 18-month time period. As we move out on the curve on the four factors, we will demand higher returns. By the time we get to the highest-risk companies, those in Tier 4, we demand a return of 30%, which is twice the upside of a Tier 1 company. The key is that our individual assessment of business risk, right down to the security level, translates directly into additional return that we will require before we would be willing to invest.
Source: Lord Abbett.
Securities are continuously monitored and evaluated for sale when:
We employ a 20% guideline toward general emerging market equities, but also allow an additional 10% in the foreign subsidiaries of large multinational corporations. These businesses generally have 80–100% payout ratios5 and very high dividend yields. In effect, we are receiving the same cash flow as the multinational parent corporation. We view these unique investments as being less risky than the broad universe of emerging markets.
The Bottom Line
The strength of the Lord Abbett International Dividend Income Fund rests on three pillars: strong team history and experience,6 a record of consistent performance, and a disciplined investment process.
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Foreign securities in which the Fund primarily invests generally pose greater risks than domestic securities, including greater price fluctuations and higher transaction costs. Foreign investments also may be affected by changes in currency rates or currency controls. With respect to certain foreign countries, there is a possibility of nationalization, expropriation or confiscatory taxation, imposition of withholding or other taxes, and political or social instability that could affect investments in those countries. These risks can be greater in the case of emerging country securities. The market may fail to recognize the intrinsic value of particular dividend-paying stocks the Fund may hold. In addition to large company stocks, the Fund may invest in mid- and small-sized stocks, which tend to be more volatile and may be less able to weather economic shifts or other adverse developments. These factors can affect Fund performance.
Diversification does not guarantee a profit or protect against loss in declining markets.
The International Dividend Income Fund may not perform in a similar manner under similar conditions in the future.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.