David Fingold, vice president and senior portfolio manager at Dynamic Funds and lead manager of the five-star rated Dynamic Global Dividend Fund has achieved impressive category-beating returns during both short and long periods in a surprising fashion.
Although he manages a “dividend fund,” he usually steers clear of traditional dividend-paying stocks such as utilities, telecommunications and Real Estate Investment Trusts, which he says are vulnerable to declining share prices in periods of rising interest rates. When interest rates are rising, the consistent dividends paid by these companies become relatively less attractive to competing investments such as bonds.
Instead, Fingold focuses on companies that can grow their dividends at a healthy pace or are about to launch dividend payments.
“Seeking existing high dividend stocks is the worst-performing strategy,” he says. “We look for low payout ratios, and we want dividend growth.”
While avoiding the typical companies that appeal to investors with a “thirst for dividends” he looks for strong balance sheets, consistent profitability and capital growth.
“We often anticipate the creation of the first dividend payment,” he says.
Stick with a strong currency
To maintain the fund’s low-risk, low-volatility mandate, he concentrates on large capitalization, liquid stocks, and sticks to those denominated in strong currencies. For example, he says the U.S. dollar, the yen and the Swiss Franc have historically done well during market corrections.
“We pack a parachute by being long in those currencies,” he says.
While he is a bottom-up investor who runs a concentrated portfolio of no more than 30 stocks, he is “not an ostrich” when it comes to macro-factors such as commodity prices, currencies and interest rates.
“We study the macro risk factors and if we think a company is vulnerable we won’t own it,” he says. “We want to buy high-quality businesses when they’re on sale. But for a business to be high quality it must be able to adapt to conditions such as currency movements or regulatory issues. If we see too much downside risk, we exit.”
There are times when he’ll buy at a point of maximum pessimism. For example, when oil prices fell to US$30 a barrel in 2008, that was an opportunity to take a “macro-bet.”
Currently, about 65% of fund’s global assets are in U.S. stocks, which Fingold views as the least volatile global equity market. He says economic growth in the U.S. is still healthy, and could accelerate slightly later this year if the fallout from trade disputes turns out to be less than expected.
“With gasoline prices low the risk of recession is virtually zero in the U.S.,” Fingold says. “When gas prices are high, it’s a commodity tax on consumers.”
Cash - and liquidity - is king
Part of his value-added strategy is to raise cash when markets look dangerous. His cash position fluctuates between 5% and 20% of assets. Currently, it’s around 5%, at the lower end of the range, but was closer to 20% last December when stock markets were falling.
To help facilitate liquidity in the fund, at least half the assets are invested in companies with a market cap of US$10 billion to US$20 billion.
A single company will typically make up no more than 5% or 6% of assets and no less than 2%. Fingold doesn’t set target prices at which to sell a stock.
“It’s hard to find great companies and we don’t sell something just because the price is going up,” he says. “We will keep owning it if the outlook continues to be positive, although we may trim partially and add back later.”
One stock the fund has owned for many years is McDonald’s Corp. (MCD). Among other things, Fingold likes the company’s ownership control over the real estate where its businesses are located, an attribute that appeals to him in other in other holdings such as Costco Wholesale Corp. (COST). He foresees growth for McDonald’s as it moves from a daytime business to a 24-hours, creating a “huge increase in sales with only a marginal increase in variable costs and no increase in fixed costs.”
McDonald’s is ahead of its competitors in client engagement and use of technology, adapting to smart phone communications and taking advantage of opportunities to up-sell and personalize orders, he says. It’s also good at customizing products for different regional preferences, eliminating pork in Muslim countries, for example.
Another promising top holding is animal health care company Zoetis Inc. (ZTS), the world’s largest producer of medicine and vaccines for pets and livestock. While human health care is a political issue, legislators don’t care about keeping the lid on the cost of cat skincare cream, Fingold says. Furthermore, companion animals are a growing trend, he says, and some drugs and products helpful to humans are being adapted to animals.
Recently, he’s added Northrup Grumman Corp. (NOC)back into the fund after owning it between 2015 and 2018. The American-based global aerospace and defense technology company is benefitting from growing defense spending, based partly on the U.S. desire to contain China, Fingold says. It is one of the world’s largest weapon manufacturers, specializing in aircraft, spacecraft, laser-systems and micro-electronics. It is developing the B-21 Raider, a long-range stealth strategic bomber that is a successor to the B-52 and B-2 Spirit bombers and will be capable of delivering conventional and thermonuclear weapons.
A recent sell has been Keysight Technologies Inc. (KEYS), a leading maker of electronic test equipment and software. It does a significant amount of business with the U.S. defense department. The company was added to the Standard & Poor’s 500 Index in late 2018, triggering an increase in analyst coverage and investor interest, and Fingold decided recently to sell and take profits.
