Welcome to Inside Active, a podcast about active managers that goes beyond sound bites and headlines and looks deeper into the processes, challenges, and philosophies and security selection. I'm David Cohne, I lead mutual fund and active research at Bloomberg Intelligence. Today my co host is Michael Casper, us small cap and sector strategist at Bloomberg Intelligence. Mike, thanks for joining me today.
Thank you, David.
So, I know we're going to be talking about dividends today, but I did want to ask you about another type of shareholder benefit buybacks, specifically in the financial sector. Have there been a lot of repurchases in the sector and you know what could we expect going forward.
Yeah, there's been quite a bit, especially within the larger banks in the US or we're talking about the six biggest banks. There was quite a large buyback from a few of them in the past quarter, in the past year. They're really returning capital back to shareholders and it's part of the reason that or at least it's exuding confidence in the industry that is now leading our financials industry scorecard. By the way, so we do these industry rankings intrasector
for nine of the eleven GICK sectors. We kind of ignore real estate and utilities they're a little bit too small to do this kind of work on, but banks nonetheless rising to the top of our financials model. On the flip side, capital markets and insurance towards the bottom. Insurance obviously has some of those headwinds from the California fires and all the insurance payouts that they might have to make, especially amongst the P and C companies there.
But valuations, all note are the one thing that kind of everybody points out to me as being a little bit stretched within the financial sector. It is one of the more expensive sectors relative to its most recent five year average, along with tech. It's actually one of two trading one standard deviation above the norm on its preferred valuation metric, which, by the way, we use we use
price to book valuations for financials. But nonetheless, there's several significant fundamental tailwinds, and I think that the buybacks that we've seen in the sector are kind of exuding confidence in the sector. But pretty much everything clicking on, clicking on all cylinders outside of insurance fees looking great and interest income was looking pretty strong in the fourth quarter for banks, You've got M and A and IPO activity looking like it's going to pick up a little bit
in twenty twenty five. So kind of a broad based rally within financials and everything looking good there and buybacks kind of exuding that confidence as well from management.
Great. Well, I guess we'll segue into a different type of shareholder yield. So I'd like to welcome Christopher Bookbinder to Inside Active. Chris is a portfolio manager at Capital Group, including the Capital Group Dividend Value ETF tickers CGDV, a fun we'll actually be talking about today. So Chris, thank you so much for joining us today.
Thanks for having me.
So let's start with your career. How did you get into the investment business.
Well, I was lucky enough to join Capital in nineteen ninety five into something called the Associates Program or TAP, which is an absolutely amazing two year rotational program where we also take a series of business school classes that are arranged by Capital. When I came out of TAP, I started out as an analyst covering the telecom industry
in the late nineteen nineties. For those of you who may remember that period, that was the era of the TMT bubble, and so I got a front row seat to both the inflating and then the deflating of that bubble. And I will say I think there's some interesting parallels between the wave of investments we saw then and the wave of AI investments taking place now. My next industry, in addition to telecom, was the auto industry, and during the time I covered that industry, two of the three
largest companies went bankrupt. And then for my sins, I started out as a portfolio manager in two thousand and seven, and I actually started in the predecessor fund to CGDV in October two thousand and seven, which happened to be the exact month the market peak before the fifty percent plus decline into the GFC. So I guess I've become a little bit of an expert in investing in challenging environments during my tenure at Capital Great.
So if we focus in on CGDV, you know, we know it's a dividend fund, but what's the process for selecting stocks for the portfolio.
Yeah, it's a great question, David. So the core of the CGDV investment process is the capital system, and the capital system is a multiple portfolio Manager system and CGDV. We have five portfolio managers, each of whom manages their sleeve of the fund as if it were their own fund. This PM team draws on the work of our global analyst team that's out beating the bushes to find insights
and investment opportunities. We've got, you know, just under two hundred analysts around the world who are meeting with companies twenty one thousand meetings. I think last year alone, our pms in the fund averaged thirty two years of investment experience. And we've carefully selected the team to have complementary but different investment approaches. And what that means is that when one PM is zigging, the others will be zagging. That
provides a level of inherent diversification. And then, as lead PM for the fund, I oversee the team make sure that the funds in line with our broad guidelines, which are essentially ninety percent of the companies have to be investment grade, ninety percent of the companies have to pay dividends.
The aggregate portfolio needs to generate a yield that's thirty percent above the S and P five hundred that's before expenses and I'm also responsible for monitoring sort of overall risk and correlation within the fund.
Great, so you mentioned yield and dividends. Are there specific dividend metrics you know a company will need to have to be or at least be an option for the portfolio A lot specifically, and I'd say, coming back to the couple system, each PM brings a slightly different lens to the fund. At the PM level, each PM has to generate a yield that's thirty percent above the market, but they can get there in different ways. Some of the pms tend to have every company in their portfolio
is a dividend pair. Others might have up to ten percent of their portfolio and non dividend payers, but companies that we think might be dividend pairs in the future. If I think about my specific sleeve of the fund and my approach, I tend to be contrarian. I tend to focus on out of favor companies or industries with strong, strong underlying fundamentals but that are maybe obfuscated by the current environment. Again with a dividend paying lens around that
set of companies. So you know, examples of my investment approach are we've got large holdings in the fund. I've had had large holdings in aircraft engine manufacturers, for instance, or cruise lines, both of which are dividend paying companies now are dividend paying industries now, but maybe weren't when we invested in them originally, and that the original investments are typically made in those companies during the depth of the pandemic.
How do you identify stocks that might raise, cut or eliminate dividends? It does a cut automatically force you out of a position or do you reassess if you believe in the company's fundamentals.
Yeah, well, it all starts with the fundamental research process for us. So you know, our analysts have long tenures and their job is really to become sort of the world's greatest expert in their industries. And so the starting screen for us is what wreck companies are analysts recommending and why? And then within that universe, as we focus on the sort of dividend payers or companies that we think have the opportunity to pay dividends in the future.
Really what we're looking for are is sort of financial stability and intrinsic value. And intrinsic value might mean a low PE today, or it might mean a high PE, but you know, kind of tremendous return on invested capital, so that if you look three or forty years down the road, it actually does look quite an expensive within that set of companies. When when a company cuts their dividend.
First of all, we're trying not to in this fund generally invest in companies that we expect to cut their dividends, but it does happen occasionally. As long as we're meeting the overall target of thirty percent above the S and P five hundred from an overall yield perspective, we have flexibility to hold those securities for a longer period of time, and in some cases, if we think that the dividend
cuts are temporary, we will hold those companies. And you know, it's really about a view on the intrinsic value at that point.
So I wanted to go back to what you mentioned. How you're looking at you know, possibly out of favorite companies, and you know you just mentioned you know, intrinsic value and PE are there if you're looking at valuations, Are there any things specific that you're looking for?
Yeah, well, our approach to valuation is not one size fits all, So we acknowledge that in different industries and in different periods of time, there may be different approaches. You know, the topic of book value came up Earlierals tangible book values are really important metric that we pay attention to, but that's not so important in a number of other industries where intangible assets may be a much
more important part of the value. I'd also say with a capital system, each of those five portfolio managers may take a slightly different approach to value. I tend to be a little bit more oriented towards kind of tangible valuation metrics like price to free cash flow, price to gap earnings over a reasonable timeframe three or four years.
But again, when you get into certain periods of time where perhaps the company is making very large investments that are money losing and that causes the pe to be a rev very high. But those money losing investments, you can think of some of the large tech companies, for instance, that have big money losing divisions, those money losing investments might actually be creating a lot of value, and you
don't want to kind of write that off completely. And so we take a flexible approach to thinking about valuation, and it is focused, as I said earlier, sort of on intrinsic value rather than just sort of what has the lowest pe or price to book today.
And do you find any specific sectors really interesting within your style right now?
I do so. The biggest sector, the second biggest sector in the fund overall, is healthcare right now, and that in my sleeve of the fund is actually the largest sector. And that's one that I think is particularly interesting for a couple of reasons. One, it's been quite out of favor now for a couple of years, you know, post pandemic has been one of the worst sectors of the market.
And then after the election, I think, for a variety of reasons that I think are understandable in the moment but are probably likely to be poorly placed long term, the sectors sold off, you know, quite dramatically, even further. And some of that's been due to concern over the
Trump administration's policies or potential policies. Some of it's been due to concerns after the assassination of the executive from United Healthcare, a great tragedy, but as a result, you've got companies that are and businesses that are really resilient, some of which, like in the case of you know, the leading companies in the GLP one sector have great growth prospects that fit very well for this fund, their dividend paying they've got strong balance sheets that are on
sale and when on sale, and I'd say that's also attractive to me. What we tend to take a very long term perspective with our holdings. We do look at the environment and think about how well we are positioned, and it seems to me that we're going into a period of greater uncertainty, and healthcare traditionally is a very resilient sector during periods of uncertainty.
You know, I wanted to ask you about geographics in terms of international holdings. Are you seeing less dividend opportunities outside of Canada and Europe?
Well, so, CGDV is primarily a US fund. We're not allowed to have more than you know, kind of mandate, not more than ten percent of our holdings outside the US. So our international holdings tend to be global companies with substantial US businesses that just happen to be domiciled in another country. And so, you know, what are examples in the portfolio We've got an aerospace company, for instance, that happens to be domiciled in Europe, but it's a global business.
We've got a tobacco company that happens to be domiciled in England, but it's got a very large US business, And so those are examples of our non US holdings. So it's really focusing on kind of global leaders, dividend payers, strong balance sheets that just happened to be domicil elsewhere.
So we've seen some cash flush companies initiated dividend recently. What conditions do you think are necessary to spur some of these megacap companies, especially to returning from more capital to shareholders. Is it really a lack of investing opportunities down the road or something else.
Well, if you look at some of the megatap mega megacap tech companies, excuse me, they have really begun to ramp their investments quite significantly recently in AI specifically, and you know, the beauty of the business model for many of these companies is that they can both ramp their investments dramatically, which they're doing, and at the same time they can continue to pay dividends and in many cases
they're also buying backstock. So I think these are companies that do have the financial strength to do all three. I guess, you know. I think the big question in my mind is I think of that cohort is what will the returns on these investments in AI be over time? And I think that's you know, the jury's still out, but it is an area where I have some questions.
And you're obviously a dividend manager first and foremost, but do you look at other capital allocations like buybacks or reinvesting in R and D as kind of a precursor to more dividends coming down the pike.
Yeah, that's a good question, Michael. We think first about the fundamentals of the company, and so you know, we like to think about company is as if we were the owner of the entire company, although we obviously are not. And so if a company's got really attractive reinvestment opportunities or opportunities to earn high returns from R and D investment, we want them to make those investments. And once they make those investments, we're going to make a judgment about, Okay,
can they continue to pay dividend? Do they have the financial strength to pay dividends and make those investments, and generally we're kind of looking at looking for companies in this fund that can do both, but we would never ask companies to increase the dividend, for instance, at the expense of a really high return internal investment.
What do you see as the biggest macro risk right now to dividend investing?
Yeah, well, dividend paying companies tend to come from all industries and sectors, and they tend to be financially stable, particularly if you layer on the sort of investment grade requirement we have in CGDV. So I think the biggest macro risk to dividend investing is probably more of a
real relative performance risk. You know, if we get into environments where high multiple growth stocks that don't pay dividends dominate the market indices and have the best returns, it's it's really difficult for a fund like CGDV to you know, keep up in that environment. But other than that, we don't have a lot of macro concentration. You know, our largest sector is industrials, which is a quite diverse industry. Second is healthcare. We've already talked about that, and we
do have technology companies and communications services companies. But they're you know, they're they have a lower representation in our fund than they do typically in the broad indices.
And do higher for longer rates concern you.
At all, Well, they do concern me for the economy and the market overall. And I guess i'd layer in that there's an element of policy uncertainty that seems to be happening right now, and I think that does create risk. Now, Frankly, this is a this is a fund that's set up structurally to do well in those kind of scoff environments, at least from a relative perspective. But you know, from an absolute perspective, there is some risk.
But you're not concerned about the relative attractiveness of bonds versus the dividend asset cluss or anything like that, right.
I'm not. And for this fund in particular, we're not investing solely in the highest dividend payers. So we're really trying to invest in companies that we think offer attractive intrinsic value that are dividend payers. And so even as rates rise, we think that if we're making the right fundamental decisions investments in the companies, we can continue to do well even in higher rate environments.
And we kind of touched on some of the megacaps initiating dividend payouts with them kind of creeping into your universe. Are you worried about any kind of concentration risk building that's in there.
Well, it's a little bit hard for us to have too much concentration in that area, largely because we're we're targeting a yield that's thirty percent of the market. Typically, those sort of megacap tech companies that have introduced dividends have relatively small yields, relatively modest payouts, and so you know, structurally it's just challenging. It would be challenging for this fund to be overrepresented in that set of companies. So I wanted to go back to the process a little
bit because I wanted to talk about selling positions. How does that work with an approach, a team approach such as yours when you know different managers are managing different sleeves. Is it you know, your job as the lead manager to kind of make the final decisions or you know, or is kind of every manager have their own, you know, set of stocks and they make those decisions. So the answer is primarily the latter, in a little bit the former. So each manager manages their sleeve as if it is
its own portfolio, kind of its own fund. And I do provide oversight along with a couple of different oversighted bodies. But unless we hit sort of limits in terms of individual stock position size in the fund, or we're out of line with our you know, kind of investment grade targets or income objectives, the pms have great discretion to manage their portfolio as they see fit.
You know.
I do also keep track of, you know, things like the correlation between pms, and we want to make sure that we're not all invest we're kind of rowing in the same direction at the same time. But as I mentioned earlier, we sort of carefully selected the team so that that we don't expect that to happen, and generally that has not happened. But the cell decision is really largely up to each individual PM.
Okay, and so I actually have a follow up on that in terms of buying. If different managers are coming to I guess the same companies through different ways, how did how is that handled? Do you have a you know, you mentioned you know, a cap on certain positions.
Well, so it's it's a good question, and I come back to sort of one of the structural setups is we don't want everybody, all the pms to sort of think about the world the same So often we won't be coming to the same conclusion at the same time, but in some cases we do, and we then will
have larger positions in the fund. Now, you know, until those positions get to sort of outsize in our kind of risk framework, it really is not a problem and outsizees you know, we don't really let positions get above high single digits in this fund. That's kind of not consistent with the risk approach that we're taking. And if pms all reach the same conclusion, it probably means it's a really great investment opportunity.
No makes sense. So we have one last question before we wrap up. Is there any advice you would give your younger self when it comes to investing.
It's such a good question. I wish I could go back in a time machine and give give me this advice. Yes, absolutely so. One of my strengths as an investor is inventive, is investing in companies with good bones during periods of
uncertainty when everyone else is quite concerned. One of my weaknesses as an investor has been that sometimes when that period of weakness passes and the market revalues the company back to sort of a fair value, I have often in the past sold some of my winners at that time. And what I've learned is that if we do a good job identifying companies with good bones during periods of uncertainty and on average I actually have working with our analyst team, those companies often then go on to become
long term compounders. And by selling after the period of uncertainty, You're leaving a lot of opportunity on the table, as it were, for our investors. And so I've tried to be more disciplined about re underwriting companies after the periods of uncertainty of passed and really making sure I'm thinking expansively about what the opportunity set is for the on a longer term basis.
That's great, Chris, Thank you again. This is this is a great discussion.
I really appreciate you taking the time with me today, David, and thank you Michael.
Michael, thanks for joining me today as well.
Thanks again, David.
Until our next episode. This is David Cone with Inside Act