Manning and Napier Disciplined Value (formerly Dividend Focus), (MNDFX), November 2011

By Editor

Objective

The fund seeks returns which are competitive with the broad market, while at the same time providing some capital protection during “sustained” bear markets. Stocks are selected from a broad universe of mid- to large-cap stocks — including international and emerging markets — based on high free cash flow, high dividend yields, and low likelihood of, well, bankruptcy. This is a quant fund which rebalances only once each year, although the managers reserve the right to add or drop individual holdings at any time.  Their target audience is investors “[s]eeking a fundamentals-based alternative to indexing.”

Adviser

Manning & Napier Advisors, LLC.  Manning & Napier was founded in 1970, and they manage about $43 billion in assets for a wide spectrum of clients from endowments and state pension plans to individual investors. About $17 billion of that amount is in their mutual funds. The firm is entirely employee-owned and their 22 funds are entirely team-managed. The firm’s investment team currently consists of more than 50 analysts and economists. The senior analysts have an average tenure of nearly 22 years.  The firm reorganized on October 1, 2011.  That reorganization reflected succession planning, as the firm’s owner – William Manning – entered his mid-70s.  Under the reorganization, the other employees own more of the fund and outside investors own a bit of it.

Manager

Managed by a team of ten. They actually mean “the team does it.” Manning & Napier is so committed to the concept that they don’t even have a CEO; that’s handled by another team, the Executive Group. In any case, the Gang of Many is the same crew that manages all their other funds.

Management’s Stake in the Fund

Only one team member has an investment in this fund, as of 3/31/11.  All of the managers have over $100,000 invested in Manning & Napier funds, and three of the eight have over $500,000.

Opening date

November 7, 2008

Minimum investment

$2,000, which is waived for accounts established with an automatic investment plan (AIP).

Expense ratio

0.60% after a 500 bp waiver, on $72 million in assets (as of 9/30/11). Update – $102 million in assets, as of 12/31/2012

Comments

Dividend Focus invests in a diversified portfolio of large- and mega-cap stocks.  The managers select stocks based on three criteria:

  • “High free cash flow (i.e., cash generated by a company that is available to equity holders). Minimum free cash flow yield must exceed the yield of high quality corporate bonds.
  • Dividend yield equal to or exceeding the dividend yield of the broad equity market.
  • Not having a high probability of experiencing financial distress. This estimate is based on a credit scoring model that incorporates measures of corporate health such as liquidity, profitability, leverage, and solvency to assess the likelihood of a bankruptcy in the next one to two years.”

The portfolio currently (9/31/11) holds 130 stocks, about a quarter international including a 3% emerging markets stake.

Why consider it?  There are three really good reasons.

First, it’s managed by the best team you’ve never heard of.

Manning & Napier launched at the outset of “the lost decade” of the 1970s when the stock market failed to beat either inflation or the returns on cash. The “strategies and disciplines” they designed to survive that tough market allowed them to flourish in the lost decade of the 2000s: every M&N fund with a ten-year record has significant, sustained positive returns across the decade. Results like that led Morningstar, not a group enamored with small fund firms, to name Manning & Napier as a finalist for the title, Fund Manager of the Decade. In announcing the designation, Karen Dolan of Morningstar wrote:

The Manning & Napier team is the real hidden gem on this list. The team brings a unique and attractive focus on absolute returns to research companies of all sizes around the globe. The results speak for themselves, not only in World Opportunities, but across Manning & Napier’s entire lineup. (The Fund Manager of the Decade Finalists, 11/19/09)

More recently, Morningstar profiled the tiny handful of funds that have beaten their category averages every single year for the past decade (“Here Come the Category Killers,” 10/23/11). One of only three domestic stock funds to make the list was Manning & Napier Pro-Blend Maximum (EXHAX), which they praised for its “team of extremely long-tenured portfolio managers oversee the fund, employing a strategy that overlays bottom-up security selection with macroeconomic research.” MNDFX is run by the same team.

Second, it’s the cheapest possible way of accessing that team’s skill.

Manning & Napier charges 0.60% for the fund, about half of what their other (larger, more famous) funds charge.  It’s even lower than what they typically charge for institutional shares.  It’s competitive with the 0.40 – 0.50% charged by most of the dividend-focused ETFs.

Third, the fund is doing well and achieving its goals.

Manning was attempting to generate a compelling alternative to index investing.  So far, they’ve done so.  The fund returned 9% through the first ten months of 2011, placing it in the top 2% of comparable funds.  The fund has outperformed the most popular dividend-focused index funds and exchange-traded funds since its launch.

 

Since inception

Q3, 2011

Vanguard Total Stock Market (VTSMX)

15,200

-15.3%

M&N Dividend Focus (MNDFX)

14,700

-8.9

Vanguard Dividend Appreciation Index (VDAIX)

14,600

-12.5

SPDR S&P Dividend ETF (SDY)

14,500

-9.4

First Trust Morningstar Div Leaders Index (FDL)

14,200

-3.7

iShares Dow Jones Select Dividend Index (DVY)

13,400

-8.1

PowerShares HighYield Dividend Achievers (PEY)

12,000

-5.9

The fund’s focus on blue-chip companies have held it back during frothy markets when smaller and less stable firms flourish, but it also holds up better in rough periods such as the third quarter of 2011.

The fund has also earned a mention in the company of some of the most distinguished actively-managed, five-star high dividend/high quality funds.

 

Since inception

Q3, 2011

M&N Dividend Focus (MNDFX)

14,700

-8.9

Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX)

14,600

-10.1

GMO Quality III (GQETX)

14,100

-5.4

In the long run, the evidence is unequivocal: a focus on high-quality, dividend-paying stocks are the closest thing the market offers to a free lunch. That is, you earn slightly higher-than-market returns with slightly lower-than-market risk. Dividends help in three ways:

  • They’ve always been an important contributor to a fund’s total returns (Eaton Vance and Standard & Poor’s separately calculated dividend’s long-term contribution at 33-50% of total returns);
  • The dividends provide an ongoing source of cash for reinvestment, especially during downturns when investors might otherwise be reluctant to add to their positions; and,
  • Dividends are often a useful signal of the underlying health of the company, and that helps investors decrease the prospect of having a position blow up.

Some cynics also observe that dividends, by taking money out of the hands of corporate executives and placing in investors’ hands, decreases the executives’ ability to engage in destructive empire-building acquisitions.

Bottom Line

After a virtually unprecedented period of junk outperforming quality, many commentators – from Jeremy Grantham to the Motley Fools – predict that high quality stocks will resume their historic role as the most attractive investments in the U.S. market, and quite possibly in the world. MNDFX offers investors their lowest-cost access to what is unquestionably one of the fund industry’s most disciplined and consistently successful management teams. Especially for taxable accounts, investors should seriously consider both Manning & Napier Tax-Managed (EXTAX) and Dividend Focus for core domestic exposure.

Fund website

Dividend Focus homepage

UpdateFund fact sheet

 

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].