High Yield Equity Fund - Reviewing 2024 & Outlook 2025

High Yield Equity Fund performance

The Aviva High Yield Equity Fund returned 21% in 20241, slightly behind the MSCI ACWI’s 25% return2. While absolute performance is strong, this underperformance versus benchmark was understandable, given that non-dividend-paying stocks drove equity markets. Despite this, the fund performed well compared to its peers.

High Yield Equity Fund posts strong returns gross vs peer group to 01 January 20252³

Warning: Past performance is not a reliable guide to future performance.

Over the long-term term, we believe global high yield equity strategies can provide a resilient source of real equity returns for clients however where they have been most challenged is keeping pace with strongly rising markets. This is why we place great emphasis on balanced portfolio construction through our three income buckets, with Income Growth being the main contributor to returns in 2024 supporting the strong performance of the Fund.

 

 

Top contributors to returns

The top two contributors to 2024 relative performance were long-term semiconductor holdings Broadcom and TSMC, which are in the Income Growth bucket. Deutsche Telekom provided downside protection in August, helping relative performance.

Broadcom has benefited from structural demand growth in their custom silicon chip business from key clients Google, Microsoft, and Meta (not a bad list…) and the acquisition of VMWare, which is expected to boost Broadcom’s software revenues. Their shareholder return focus remains important, with a 15% growth in dividends over the past 5 years, and they plans to resume share buybacks reflecting the desire to continue to return cash to shareholders enabled by strong free cash flow generation.

TSMC is a cornerstone of the global semiconductor industry and is increasingly pivotal to the rapidly evolving Gen AI ecosystem as the world’s largest pure-play semiconductor foundry. It offers the industry’s leading process technologies and a portfolio of design enablement solutions. TSMC’s revenue and earnings surpassed analyst estimates in 2024 as demand for advanced chips used in AI applications continues to rise.

Deutsche Telekom, the German telecommunications company in our Mature Yield income bucket, almost telepathically lent a helping hand to relative performance in 2024 – particularly during the sharp market sell-off in early August. This is what we expect from this income bucket. We initiated a position in July 2015, given its mission-critical businesses that provide attractive yields to investors. The company offers broadband, mobile communications, internet to consumers, and ICT solutions for corporate customers – all of which are crucial services to our society’s current digital generation. We view this as a defensive business positioned to benefit from the combination of above-average European growth and high growth of American business via owning ~50% of T-Mobile.

Top detractors from returns

Of positions held in the Strategy, Total Energies was one of the main detractors, particularly as the oil price started to wane over the summer, alongside being caught up in a US equities rally in favour of European Equities from November onwards. We initiated a position in the oil & gas company in March 2016, and it is an example of us finding Mission Critical businesses that provide attractive yields to investors (sitting in our Mature Yield income bucket). Total Energies is a top 5 worldwide renewables producer with the most ambitious renewable power capacity targets of its peers, backed by strong prior project execution. Given its sector, we regularly engage with Total Energies to monitor and challenge management on their key commitments and energy transition strategy.

Elevance Health, the health insurance company, was another detractor in 2024. Mid-October saw a guidance cut promoted by snags in the Medicaid business – this was further compounded by a market rotation out of healthcare care post the Trump rally in November. We initiated a position in Elevance in July 2023 (Core Yield income bucket) as we saw strong growth potential from Medicare/Medicaid and their commercial business. We view Elevance as a beneficiary of the shift to value-based healthcare, where they have been building their Carelon business (behavioural health/services). Similar to other managed care names at the time, Elevance has been under pressure as investors focus on rising costs as procedural volumes normalise, but we believe they are well placed to manage this over the long-term.

Portfolio Changes

As a reminder, our centralised analyst sector hub model drives idea generation for Aviva Investor’s Equity portfolios. The High Yield Equity portfolio management team utilises this continuous idea flow through the lens of our three income buckets and evaluates suitability for the Strategy when making the final investment decision. It was pleasing to see new or exciting ideas come from an array of industry sector hubs.

New positions

• AIA (Core Yield) in January. We view AIA as a leading operator in life and health insurance and protection with broad exposure across Asia. We saw some share price weakness impacted by concerns around their China business, where margins have contracted. We still saw a strong franchise with future growth potential, and while we expect some volatility in share price in the short term, we see an attractive longer-term investment case.
• Alphabet (Income Growth) in July. Google’s parent company has been on our radar for some time now, but up until June, it did not pay a dividend and so was ineligible for the Strategy. We believe the business is well positioned to deliver future cash flow growth through increasing demand for its Google Cloud and YouTube services, in particular.
• CRH (Income Growth) in September. Despite positive share price moves in the lead-up, we believe the market is not appreciating the materials company’s vertically integrated solutions approach that CRH has vs. more focused, pure aggregate US peers.
• TJX (Core Yield) in October. We believe consumer company TJX (owner of TK and TJ Maxx) has multiple structural tailwinds such as continued department store closures, inflation-weary consumers seeking value and benefiting from migration from malls towards local shops.
• Novo Nordisk (Core Yield) in November. We have monitored the Danish healthcare company closely for some time. They are a global leader in diabetes and obesity care through their production of insulin and GLP-1 products, with the latter market continuing to grow at a rapid pace. With a strong Return on Capital Employed and a 1.5% dividend yield that has grown at close to 20% over the past five years at the time of purchase, we decided to buy, given prior share price weakness.
• Apollo (Income Growth) in December. We believe Apollo is a high-quality insurance business funding growth in private credit, a market we are optimistic about. Their balance sheet and funding appear to be in a good place, which helps increase our Financials exposure in the Strategy following the strong US banks rally post-Trump’s election victory. We have typically had very limited, if any, exposure to banks in the Strategy given the lower predictability of cash flow generation given their sensitivity to external market factors.

Exited positions

• Rentokil (Core Yield) in March. It is a leading pest control and hygiene business with a strong global footprint. The company announced the acquisition of US peer Terminix, further increasing its exposure in the attractive US pest control market. We saw signs that the company was struggling to manage the integration, and there was potential for value destruction, hence exiting the position.
• Capgemini (Income Growth) in December. The software company seems to be losing share vs. peers even accounting for the different end market exposures vs. Accenture and the Indian Business Process Outsourcing names. Capgemini is exposed to the European economy due to its client base, and in our view appears to be suffering, which looks likely to persist for some time.

In addition to new or exited positions, other trading activity throughout 2024 can be broadly summarised by trimming names to take profit and manage portfolio risk mindful of valuations in several income growth names, and selectively adding to other existing names where we see no fundamental change in the investment thesis but have seen potential share price weakness mainly through shorter-term market rotations.

 

Outlook 

We’ve had two back-to-back years of c.20% global equity market returns and a lot of market commentary around stretched valuations, particularly in US equities. Whilst this observation has merit, a lot of recent performance and valuation stretching has been highly concentrated – meaning we think earnings could come through in 2025 to maintain valuations and potentially broaden out. Of course, many unknowns could significantly affect the path of global equities next year – high on the list being what the new US administration implements in terms of policy.

For the High Yield Equity Fund, we go back to the importance of balanced portfolio construction across the three income buckets and remain confident each could play an important role in 2025. The starting point is our aim to provide some relative drawdown protection should markets pull back in 2025 – the Mature Yield bucket should be the main contributor to that outcome. We also want to compound cash flow growth for our clients through market cycles – the Core Yield bucket aims to deliver that. Finally, we could very easily see another strong market in 2025 – the Income Growth bucket aims to keep pace in these environments.

Looking beyond 2025, we believe several themes could shape equity markets over many years to come – and excitingly, we think several dividend-paying companies in the Strategy have exposure to them.

^{1. Source: Longboat Analytics to 01 January 2025 based on calendar year returns. The returns quoted include the reinvestment of net income and are net of trading costs, but before deduction of annual management charges and other insurance contract charges and as such do not represent the returns on insurance contracts linked to these funds. Details of all charges for a particular product are available on request.
2.Source: Bloomberg, as of 31 December 2024, in EUR, gross of fees
3.Source: Longboat Analytics to 01 January 2025. Performance is quoted gross of fees. Equivalent funds in the peer group are Cantor Fitzgerald Global Equity Income, New Ireland IQEQ (previously Davy) High Yield Gross, Aviva High Yield Equity Fund Series C, New Ireland Goodbody Dividend Income 6 Net, Standard Life Diversified Income, Irish Life IL/Setanta Equity Dividend, New Ireland High Yield Equity Fund Gross, and Zurich Life Dividend Growth G.}