PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
One way for money managers to avoid a bear market's many disasters, most notably in the tech sector, is sticking with outfits that pay a portion of their earnings to shareholders every quarter as dividends. Cliff Hoover Jr. follows this mantra by buying only dividend-paying concerns for the PIMCO Small Cap Value fund (PCVAX
).
Besides being a sign of overall operating health, Hoover thinks the discipline of paying regular dividends keeps companies from spending too much on plants and equipment, as Corporate America has in recent years. He also cites studies that show stocks paying a dividend perform better than those that don't (see BW Online, 10/10/02, "The Lure of Dividends").
Focusing on dividends has worked well for co-manager Hoover. He says it has kept the fund in steadily growing outfits in various sectors -- and out of technology. This year through Sept. 30, the fund was down roughly 2%, while the average small-cap value fund lost 16.4%. Last year, the fund rose 18.6%, vs. a 14.1% gain for its peers. Based on risk and return characteristics over the past three years, Standard & Poor's has assigned the fund the highest overall rank of 5 STARS. Bill Gerdes of Standard & Poor's Fund Advisor recently spoke with Hoover about his fund's investing strategy, top holdings, and portfolio moves. Edited excerpts from their conversation follow:
Q: What sets your portfolio apart from other small-cap value funds?
A: One fairly unique ingredient is that every holding must pay a dividend. Today, the fund's yield is about 3%, but we hold stocks with various yields, including utilities and REITs, whose average yields are about 7%. Another relatively unique factor is that we have a diversified portfolio -- about 100 stocks in some 50 industries.
Q: Why do you focus on dividend-paying companies?
A: Dividends instill discipline in corporate managements. We feel it's very important for a management team to return some cash back to shareholders. Maybe then companies won't buy a 10th factory as a result. Studies now show that many corporate reinvestments of cash in the last 10 years were poor uses of capital.
You can't simply trust managements to always reinvest money properly and then expect to see the results through stock appreciation. Maybe you will, and maybe you won't. We think the pendulum is swinging back to dividend-paying companies. Studies also show that dividend-paying stocks outperform non-dividend-paying stocks.
Q: What are your price-earnings (p-e) parameters for holdings?
A: We don't like to own a stock with a higher valuation than our universe, the Russell 2000, which has a p-e of 22. Even in industries where p-e's are typically higher, we wouldn't own a stock [whose p-e surpassed the Russell 2000]. We won't just gravitate to the low p-e industry. If one industry has a p-e of 6 and another industry has a p-e of 12, we won't just pick the 6 p-e industry. We'll assess the two industries and look at the industry structures. Then, we may decide that the 12 p-e industry is cheaper historically than the 6 p-e industry.
Q: Do you consider sector trends when picking stocks?
A: Our approach is primarily bottom-up, but we do consider some sector features. Some industries don't pay dividends, so we avoid them. We don't think you can compare price-earnings ratios across industries, so we try to identify value within industries. Our job is to find cheap stocks that don't deserve to be cheap, because you can get caught by value traps.
Q: Do some industries look attractive?
A: We think there are opportunities in the energy industry. Natural-gas supplies are tight, so all we need is a normal winter, and you'll see high gas prices. I also think we're in the early stages of a bull market in gold. There was a 20-year bear market in gold, so production has fallen below demand. The only thing keeping gold prices down is gold sales by European central banks. If you excluded these sales and looked at pure supply and demand, the true price of gold would probably be around $400. Today, it's selling at $324.
We own one gold stock -- Goldcorp (GG
), which is up about 90% this year. A Canadian company, it was the only one we could find with limited geopolitical risk.
Q: What are the fund's largest industries?
A: Financial services, the largest, is about 26% of the fund. Within finance, we have an 8% position in REITs, six little banks, two savings-and-loans, five insurance companies, and one little brokerage company -- SWS Group (SWS
) [formerly Southwest Securities]. We also have a 15% weighting in utilities and a 9% weighting in materials and processing.
Q: Have you made any stock purchases this year?
A: We've purchased Cooper Cos. (COO
), which makes contact lenses, Fresh Del Monte Produce (FDP
), and Lubrizol (LZ
), a specialty-chemical company. They're all from different industries. We didn't focus on any one sector.
Q: Why has the fund outperformed its peers in recent years?
A: It wasn't a top-down bet, but we didn't have any tech exposure in 2000 and 2001.
Q: What are your largest holdings?
A: As of June 30, they were Fresh Del Monte Produce and Brown Shoe (BWS
), each a 1.4% position.
Q: What are your outlooks for the market and the economy?
A: This market could be the bear of all bears. That's because we had the boom of all booms. It's not the time to be aggressive. We'll probably have a 5% annualized return for the market, so I think it will be great time for active stock-pickers.
But the $64,000 question is: How will the real economy recover? We think a double dip in the economy is fairly likely. The U.S. consumer is getting tired of holding up the economy by taking on more debt. I think the Federal Reserve will probably manufacture a slow recovery, but if there's too much debt in the economy along with anemic demand, we could have stagflation. It will be a very tough decade.
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
