Total Return Approach to Dividend Stocks www.onwallstreet.com/news/investment_insights/fund-manager-profile-bob-zenouzi-delaware-dividend-income-fund-2689043-1.html?zkPrintable=truec
Total Return Approach to Dividend Stocks
by: Joseph Lisanti
Advisors face this problem every day: Fixed-income rates are low, but aging clients need to generate income. “People are looking for yield,” says Bob Zenouzi, lead manager of the Delaware Dividend Income Fund.
Despite the name of his fund, Zenouzi prefers to offer his investors total return these days. He believes that it is the best way to approach the mismatch between current yields and investors’ income needs.
Zenouzi contends that many traditional income bastions — including utilities, master limited partnerships, mortgage REITs and health care REITs — have become “bond surrogates” and are therefore too pricey in today’s market. “When you look at the highest quintile dividend yield, the P/Es of those companies are trading at a 20% premium to the S&P 500 P/E; and historically they traded at a 20% discount,” he says.
“We own some, but we’re just really underweight,” he explains. “So we’ve lowered the yield in our fund — which, frankly, hasn’t been too popular with many advisors and investors, but we think it’s the right thing to do.”
Instead of focusing on the juiciest yields, Zenouzi’s team buys issues that it believes are likely to increase dividend payments. “To me the risk isn’t so much in buying good equities with competitive dividend yields that can grow; the risk is chasing the highest yields,” Zenouzi says. He sees danger in overvalued, high-yielding equities as interest rates inevitably rise. “When they get to these expensive levels, they become much more correlated to the 10-year Treasury,” he explains.
The fund’s 30-day SEC yield was recently 1.92%, though the 12-month trailing yield was slightly higher at 2.25%. Competitors who stuck to higher-yielding stocks underperformed last year, Zenouzi says. His fund delivered a total return of 19.7% in 2013, vs. 16.48% for the moderate allocation category, according to Morningstar.
As is often the case, Morningstar compares Delaware Dividend Income in multiple categories. Against the Morningstar moderate target risk category, the fund does even better. Moderate target risk funds returned 14.31% last year on average, so Zenouzi’s portfolio outpaced them by more than five percentage points.
This year through March 31, DDIAX ranks 13th out of 920 funds in the moderate target risk category, according to Morningstar; over five years it ranks third among 666 funds in the category. Morningstar awards the load-waived version of the fund, available through advisors, an overall ranking of four stars out of five, observing that it delivers above-average returns but also carries above-average risk.
The research firm measures the fund’s beta at 0.65 vs. the Russell 1000 Value total return index, which Morningstar calls the “best fit” benchmark.
One reason for the lower volatility is that Delaware Dividend Income isn’t limited to common stocks. Although the fund may have up to 45% of assets in junk bonds, the entire bond portion of the portfolio was recently a little more than 18% of the fund, and fixed-income investments are concentrated in high-yield debt and convertible securities.
Zenouzi notes that these securities provide a little extra safety because they sit higher in a corporation’s capital structure than common stocks. The fund may also buy investment-grade bonds, but it doesn’t currently hold these issues because, Zenouzi says, they are more interest-rate sensitive.
REAL ESTATE HOLDINGS
Zenouzi, who helped create Delaware Dividend Income in 1996 and who has been lead manager since 2006, heads a team of 35 managers and analysts who work on the fund. He monitors the overall asset allocation and makes the final decision on it. Because he also serves as chief investment officer and lead manager for Delaware’s real estate securities and income solutions group, he is deeply involved in managing the realty sleeve of the portfolio, recently about 8.5% of holdings.
Currently, Zenouzi favors mall, apartment and shopping center REITs. But not all real estate can pass muster. One factor he considers is average lease length. “We want shorter-duration leases within the REIT,” he says, noting that a shorter lock-in of rents primes the properties better for economic growth. Recent REIT holdings included Simon Property Group, General Growth Properties and AvalonBay Communities.
The fund has underweighted financials, especially banks. “Given Dodd-Frank and Basel III and capital ratio rules, they are less levered and they’ll have less earnings growth going forward,” Zenouzi says. “We think that, over time, they’re going to act more like utilities.”
Although DDIAX can invest up to 30% of its assets in stocks and bonds outside the United States, the vast majority of its holdings are U.S.-based. Emerging market issues are almost invisible in the current asset lineup. Zenouzi explains that, about four years ago, the fund’s managers concluded that slowing growth in China would cause emerging market investments to fall out of favor. “I contend that the U.S. will continue to outperform the emerging markets for the next couple of years,” he says.
For a fund that values dividend growth, Delaware Dividend Income appears to have fairly rapid portfolio turnover at roughly 50% annually. But initial appearances can be deceptive. Most of the turnover is in the high-yield bond sleeve, Zenouzi says. In large-cap value equities, which constitute about 45% of assets, the managers have very low turnover of about 8% annually.
“They haven’t put a new name in the fund in probably a year and a half,” Zenouzi explains.
EQUITY APPROACH
In addition to real estate, the fund also favors energy, health care and communications services stocks. Among the fund’s recent top equity holdings are Halliburton (HAL), first bought in 2012, Merck (MRK), first purchased in 2009, and Verizon Communications (VZ), held since 2005.
The fund’s top 10 stock positions account for 14.5% of assets. The weighted average market cap of DDIAX’s holdings is $66.6 billion.
In evaluating the large-cap value stocks that make up the largest portion of Delaware Dividend Income’s equity holdings, Zenouzi’s team considers price-to-earnings, price-to-sales, price-to-cash-flow and price-to-book ratios. Those metrics are compared with both the sector the company is in and the universe of stocks available. “Valuation should always be the primary factor for investors, because that’s how you protect your downside,” Zenouzi says. “That’s your margin of safety.”
Current conditions are far from ideal for managing an income portfolio: The Fed is tapering asset purchases, yields remain low and unemployment is still stubbornly high.
“It is challenging,” admits Zenouzi, who contends that his team’s policy of steering clear of equities with the richest yields will continue to be the best course for now. He believes that the Fed’s tapering will create some “yield opportunities” down the road, but for now investors seeking higher yields will face headwinds.
Zenouzi worries that some older baby boomers may still believe that they will be able to sell their stocks, buy bonds and just clip their coupons. “You can’t do that anymore,” he says. “You can’t live on yield alone. You need to grow your capital or you will run out of money.”
Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor’s weekly investment advisory newsletter, The Outlook.
The often neglected energy source
Invest With An Edge ... Market Leadership Strategy ... 04/28/2014 update Hi Old_Skeet,
That's a very interesting approach. It sounds like rather than a pure 50/50 allocation to the two trending areas, you overweight them. How do you decide the extent to which you overweight the trending categories? And if you're using mutual funds do you ever run into difficulty with short-term redemption fees?
Thanks, LLJB
Dr. Doom From the article: "Earlier this month, Bank of America Merrill Lynch warned that we’ll see a 10% to 15% correction this autumn."
Glad to know this "prediction" is from the Merrill group and not B of A's accounting group. :)
Does B of A's "prediction mean they will position their client accounts properly, prior to autumn???
Okay........gotta run; and finished with the tough question.
The Closing Bell: Stocks Close Broadly Lower Friday, Down For Week @Old_SkeetHowdy,
I took a quick look at one of the short term bond funds, ITAAX, in your list. I am not familiar with this fund or its prospectus, as to what methods are available to the managers; but find that the most current report (12-31-13) indicates about 3
5% of the bond holdings are long term, with duration between 10 and 30 years. I note this, as apparently the manager(s) have some amount of wiggle room. I would consider ITAAX a flexible short term bond based upon the holdings.
Of course, not unlike many active managed bond funds, the wiggle room allowed, may be of value, if the managers get things right about the direction of interest rates.
As an example, Fidelity's FSHBX, per the current report, is indeed a short term bond fund.
FSHBX internal composition viewYou asked: " My question. Would you swap the short duration funds into something else perhaps believeing that interest rates are headed upward sometime in the future and deal with it when this happens or would you just sit tight with the way it currently is configured? And, if you were to swap the short duration for longer duration funds how far out would you go?"
>>>We seldom use short term bond funds; and when used, we consider these as "cash" accounts for use to park monies from something that has been sold. 'Course, the consideration (an example) is that if we sell an equity fund that is beginning to move, too far, in the wrong direction; the monies "could" go into a short term fund to park the money for a future purchase, of whatever.
In this example, I suppose
the main thought is why one chooses to use a short term bond fund. More often than not, when we sell an equity position(s), the monies would more likely move into a multi-sector bond fund, versus short term dedicated.
As to interest rates. Well, we surely don't know; but until I believe there is more strength in the economy(s) that would put pressure on rates moving upward, our house is comfortable with multi-sector bond funds, in particular; and let the managers make the choices. Our current largest holdings are: LSBDX, PIMIX, FRIFX (about 1/2 bonds), OPBYX, DGCIX, FAGIX and
5 other high yield bond funds. Begining around Feb. 24 we reduced our equity percentage to about 1
5%, with the remainder in bond funds....no money market/cash holdings. Our current equity holdings are: PRHSX, VSCPX, GPROX and some equity inside of FAGIX, LSBDX and FRIFX.
Lastly, per your question: "And, if you were to swap the short duration for longer duration funds how far out would you go?"
>>>I would personally prefer a multi-sector bond fund to let the managers decide about duration, and the type of bonds used in the mix. We have held funds in the past dedicated to the long end of bonds (20+ years). We are not as comfortable with such a position today.
A kinda summary for our actions since the end of February, is that the large 2013 equity run needed to have a break and that some bond sectors were oversold in 2013. I also feel that pension funds (lotta monies) have and may still be restocking their holdings of bonds.
If equity runs higher again, in the near term; we likely will be caught with our investment pants down !!!
Time to get back to the house remodel project.
Take care down there, and hoping the nasty spring weather is not causing problems for you and yours.
Regards,
Catch
How to get an almost free etf portfolio
How to get an almost free etf portfolio
Wasatch Frontier Emerging Small Countries Fund (WAFMX) will close to new investors Effective at the end of market trading (4:00 p.m. EST) on May 9, 2014, the Wasatch Frontier Emerging Small Countries Fund (WAFMX) will close to new investors. The Fund will remain open to existing Fund shareholders, as well as current and future clients of financial advisors and retirement plans with an established position in the Fund.
The Fund will also remain open to new and existing shareholders who purchase shares directly from Wasatch Funds.
Wasatch takes fund capacity very seriously. We monitor assets in each of our funds carefully and commit to shareholders to close funds before asset levels rise to a point that would alter our intended investment strategy. At this time we believe it is appropriate to begin limiting future access to the Frontier Emerging Small Countries Fund.
If you have any questions, please don't hesitate to call us at 800.551.1700.
Regards,
Gene Podsiadlo
Director of Mutual Funds
Wasatch Funds
with BAC down - 6.3% I expected FAIRX to be down quite a bit. FAIRX only went down -0.02%. AIG (+1%) didn't help that much even though it was featured in Barron's this weekend. Weird.
It works out when you take each stock's weighting and each stock's 4/28 performance.
Use a Microsoft Excel Spreadsheet:
AIG: .47 (weighting) X .97 (today's performance) = .4
559
BAC: .147 X -6.27% = -.92169
SHLD: .1028 weighting X 4.04% today's performance= .41
5312
JOE: .0467 X .17% today's performance= .007939
LUK: .0399 X -1.24% today's performance= .04948
FNMAS: .0417 X .19 = .007923
FMCCG, etc..........
add it up, and you get something very close to the -.02 return of FAIRX for today
Invest With An Edge ... Market Leadership Strategy ... 04/28/2014 update The Market Leadership Strategy always has two holdings with nominal weighting of
50% each. Based on the rankings, one of the positions can be a money market fund. This strategy will buy the top two (2) ranked funds and hold them as long as they are ranked as a top-
5 fund. If a holding drops below #
5, the strategy will sell it and purchase the highest ranked style not already owned. Additional information on interpreting and following this strategy can be found below. - See more at:
http://investwithanedge.com/leadership-strategy#sthash.c88qMSRA.dpuf
Commodities (Funds) Showing Signs of Breaking Out Part 2:
That put commodity investors in a strong position, and many rushed to take advantage. Investors had less than $1.8 billion in mutual funds and ETFs that focus on commodities at the end of 2003, but that amount had swelled to more than $182 billion at the peak in August 2011, according to Chicago-based investment-research firm Morningstar.
Now, the situation is different. China's economy is growing more slowly, and ramped-up production of many materials is helping to keep a lid on prices. While many commodity markets are rising, some are falling.
For example, coffee has shot up 94% this year through Thursday, due to a drought in top exporter Brazil, while a virus that has killed millions of pigs has pushed the price of lean-hog futures up 48%. But copper—widely used in appliances, homes and elsewhere—is down 8.2% due to concerns about Chinese growth, while lumber has lost 9.5%.
"When China was growing at 13%, it was almost a no-brainer because China consumes 40% of global commodities," says Shelley Goldberg, an independent commodity strategist who advises institutional clients on investing in sustainable resources. "Today, it's not such a simple story."
Yet there are signs that at least some ordinary investors still hope to ride a hot market.
Between August 2011 and the end of last year—a period when commodity prices were in a funk—investors pulled more than $23.3 billion out of commodity mutual funds and ETFs, according to Morningstar. After pulling out more money in January, investors put $400 million back into the funds in February and March, as commodity markets rebounded.
A Proliferation of Funds
Investors considering following suit have an often-bewildering array of funds to choose from, most of which have relatively short track records by which to judge performance.
The funds fall into two broad categories—those that invest in a wide variety of raw materials across the various commodity subsectors, such as energy, agriculture and precious metals, and those that focus more narrowly on a single sector or even a single material, such as gold, copper or corn.
Broad-based funds are the better choice for an investor who wants general commodity exposure and lacks expertise or conviction about what will happen to prices for a particular type of material.
The broad funds typically track an index of materials, though some follow their index more closely than others.
For example, the iPath Dow Jones-UBS Commodity Index Total Return exchange-traded note closely tracks the Dow Jones-UBS Commodity Index. The fund charges 0.75% in annual fees, or $75 for every $10,000 invested, according to Morningstar.
The largest commodity mutual fund by assets, the $14.1 billion Pimco CommodityRealReturn Strategy Fund, also follows the index to a great degree, but fund managers have some leeway to tweak exposure by, for example, increasing or decreasing holdings of a specific commodity relative to the index or buying futures contracts that won't come due until months later, if they think prices for a certain material are more likely to rise further down the road. The fund charges annual fees of 1.19%.
The funds also have different ways of handling a quirk of the commodities markets. When commodity contracts mature each month, fund managers typically buy the next month's contracts to replace them.
But if prices for the new contracts are higher—a phenomenon known as "contango"—the additional cost can significantly erode the fund's returns. Contango can occur when, for example, there is sufficient supply in the near-term but either a shortage of supply or a surge in demand looms.
Plain-vanilla commodity index funds often don't try to mitigate that risk, which also can work in an investor's favor if the new monthly contracts are less expensive, which is known as "backwardation."
Other funds, such as the PowerShares DB Commodity Index Tracking Fund ETF—the largest broad-based commodity ETF by assets, at $5.7 billion as of Thursday—pick monthly contracts that will come due months down the line in some cases, to limit the damage from contango or maximize the benefit of backwardation. The fund charges 0.85% in annual fees.
Commodity funds can carry other risks that might catch investors off-guard. Purchasing a commodity futures contract typically only requires that an investor or a fund put up a small percentage of the contract's face value, so funds have to decide what to do with the remainder of their assets.
The Pimco fund, for example, has less than a quarter of the fund's capital tied up in commodity contracts, and it tries to give returns a boost by investing most of the remainder in Treasury inflation-protected securities and other Treasurys.
Morningstar noted last August that the fund's declines for the year to that point were largely because bond prices fell as investors began to anticipate a reduction in the Federal Reserve's efforts to stimulate the economy by buying bonds. The fund is up 11% year to date.
Funds that focus on a single type of commodity tend to be smaller. One exception: popular funds backed by gold or other precious metals, which often have lower fees because the cost of actually storing the materials is relatively low.
For investors with strong views on the future prices of particular commodities, there is an array of funds available that track, for example, corn, natural gas or crude oil. But the funds can be risky and sometimes carry high fees.
Hard and Smart
Experts say there are smart ways to hold hard assets, including understanding what purpose they are meant to serve and finding low-cost ways to achieve that aim.
"When we're constructing a portfolio for high-net-worth clients, one of the objectives is to protect real spending and quality of life," says Jeffrey Heisler, investment strategist at TwinFocus Capital Partners, a Boston firm with about $2 billion under management.
"People are natural consumers of food and energy," he says. "Commodities hedge out and diversify and balance that risk we all naturally hold."
The firm's clients collectively held about $3.4 million in a broad basket of commodities through the PowerShares fund as of Thursday, and another $23.3 million in SPDR Gold Trust, an ETF backed by gold bullion. The SPDR fund is the largest retail commodity fund of any kind, with $32.9 billion in assets, and charges 0.40% in annual fees.
Some investors prefer a similar fund also backed by bullion, iShares Gold Trust, which charges 0.25% in annual fees. Individual shares also cost less, because a single share represents 1/100th of an ounce of gold, rather than 1/10th of an ounce for the SPDR fund. The iShares fund has $6.8 billion in assets.
Perhaps most important, investors need to have realistic expectations. Throughout history, commodities markets have gone through periods of boom and bust, and investors who were fortunate enough to hold commodities during the run-up last decade saw what a boom looks like.
But investors also risk a bet going bust. Researchers have found that spot prices for raw materials are flat over time, once inflation is accounted for. In other words, they offer no positive return in the long run.
"An ounce of gold bought a good men's suit or a toga 2,000 years ago, and it buys a good men's suit today as well," says William Bernstein, author of "The Investor's Manifesto" and a co-principal of portfolio manager Efficient Frontier Advisors, based in Eastford, Conn.
"The relative value hasn't changed
.
WSJ In-Depth
Commodities (Funds) Showing Signs of Breaking Out @Bee, Hank & Others:
Regards,
Ted
Commodities: To Buy Or Not To Buy ? 4/2
5/14: Christian Benthelsen WSJ
Part 1
Commodity prices are on the rise, as gold, corn and other basic materials climb back from steep declines—and outpace U.S. stocks.
The rebound may stir hopes that a longer-term boom has resumed after three rough years for natural resources, and a measured bet could pay off.
But for ordinary investors, commodities often are a raw deal. They should take a hard look before loading up.
First, weigh whether you need the exposure. Perhaps the main reason investors hold commodities is to hedge against inflation. But inflation remains muted in the U.S. Moreover, many investors in broad-market index funds already hold shares in companies that could make more money if crude oil, nickel or some other material gets more expensive—and those companies can often turn a profit even if prices stagnate. Companies in the energy, utilities and basic-materials sectors represent about 17% of the market value of the S&P
500, for example.
Then consider the drawbacks. Commodities can provide diversification from stocks and bonds, but they generate no income in the form of dividends or interest payments. They also are vulnerable to prolonged declines, such as the three-year tailspin that culminated in 2013, when a 9.
5% drop in the Dow Jones- UBS UBSN.VX +0.
50% Commodity Index made commodities the worst-performing major U.S. asset class—including stocks, bonds and real estate—based on total return to investors. By contrast, the S&P gained 32%, including dividends.
"To invest in commodities, you would have to take away from something else in the portfolio. You're taking from equities, with higher returns and the same volatility, or you're taking from bonds that have the same return and less volatility," says Mark Keating, a partner at Willow Creek Wealth Management in Sebastopol, Calif., which oversees $700 million.
Associated Press
The Dow Jones-UBS index has generated a 9.9% return for investors this year through Thursday, compared with a 2.3% return on the S&P
500, according to FactSet.
Even advisers who think commodities can be useful often recommend only small doses, perhaps 3% to
5% of a portfolio. An investor who is particularly concerned about the risk that the U.S. dollar will lose much of its value might hold some gold, which can act as a store of value at times, though it also can behave like a risky asset.
In addition, investors need to carefully study the many mutual funds and exchange-traded funds that have cropped up over the past decade or so to offer exposure to commodities, experts say. The funds often carry steep fees and hidden risks that could eat into returns, so investors should understand how they work.
Here is what investors need to know about what drives commodity prices and how to place a smart wager.
China's Voracious Appetite
From the start of 2000 through the end of 2010, the Dow Jones-UBS Commodity Index, which follows future contracts for 22 commodities from aluminum to zinc, more than doubled. Copper gained 417%, and cotton 184%. The single biggest reason for the rally was that China was growing rapidly.
Still, that only addresses the demand side of the equation. Supplies of many raw materials also were constrained in the years leading up to that decade, because tepid sales and prices had led commodity producers to limit outlays needed to boost output.
How The SEC Could Save Target-Data Funds Referencing a previous thread here:
5 Ways To Protect Your Retirement IncomeThis was kinda my point regarding target date funds. They often get you "to" retirement. When you step off into retirement a target dated fund may not be designed to get a retiree "through" retirement.
Cman's comment (condensed paraphrased version):
Someone ought to do a target dated fund with a strategy of moving from indexed funds to all managed funds that have a good record of balancing performance with downside protection. Interpolate smoothly between them. It is not that difficult to do on your own either.For me, the search is on to create this type of portfolio...Help welcome.
Minimizing "Fund Family Risk" -- what is the most you allocate to one fund family (excluding indexes I've never thought about this at the fund family level but I think its something that deserves specific decision making rather than backing into whatever happens. My key focus is on big picture allocation, and I want to be overweight small cap and emerging/frontier markets and underweight large cap and developed international markets generally. At the end of last year I rotated away from small caps a bit because I thought the valuations were extended and into emerging markets because of last year's poor showing. I've picked a couple of funds in each of my categories, which are U.S., foreign developed markets and emerging/frontier markets, then large cap and small/mid-cap within those, plus bonds and "other", that I think can outperform their categories over time. Luckily, I didn't end up investing in multiple funds with more than a couple fund families. As I thought about this more, I would also include newsletters along with mutual funds families. I found that I have a bit less than 18% allocated to one newsletter and just over 10% at Wasatch.
I think I'd prefer to limit my exposure to one strategy or "culture" to 15%, maybe 20% in special cases, and that means I'll be slightly reducing the size of my positions as I follow the newsletter so I rotate back towards 15%.
Thanks to all for the thoughts and especially Shostakovich for starting the discussion.
