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Diamond Hill High Yield Inv

Bill Zox joined Diamond Hill in 2001 as an equity analyst. He was named a portfolio manager on Diamond Hill Corporate Credit DHSTX in April 2006 before taking over lead management in 2008. John McClain joined the firm in June 2014 as a credit analyst and was also named comanager of Diamond Hill Corporate Credit in February 2015.

The strategy’s investment approach stands out relative to its high-yield bond Morningstar Category peers’. The team focuses on relatively small issues and tends to make sizable bets on its best ideas (up to 10% per issuer), thereby increasing idiosyncratic and liquidity risk. The portfolio has on average about 30% of assets concentrated in its top 10 positions. That said, the team offsets those risks somewhat by treading lightly in the market’s lowest-quality names and limiting how much it will own of an individual issue. This process combines an intrinsic value-driven and contrarian approach to build a high current income portfolio with the opportunity for capital appreciation targeting a high-yield Morningstar Category best-quartile return over rolling five-year periods. While the portfolio’s concentration and idiosyncratic risks are material, the managers’ analytical rigor and responsible balancing of its risks provides comfort.

A distinctive and disciplined investment process

This process combines an intrinsic value-driven and contrarian approach to build a high current income portfolio with the opportunity for capital appreciation targeting a category best-quartile return over rolling five-year periods and a 150 basis points gross excess return over the ICE BofA U.S. High Yield Index benchmark.

Comanagers Bill Zox and John McClain execute a disciplined value approach: They buy issues when their market prices are lower than the team’s estimate of intrinsic business value and sell them when their initial thesis has played out or when there are better opportunities in the market. When valuations get rich and opportunities get scarce, the managers may run a larger-thanpeers allocation to investment-grade bonds to reduce the portfolio’s market risk

The team focuses on relatively small issues and tends to make sizable bets on its best ideas (up to 10% per issuer), thereby increasing idiosyncratic and liquidity risk. The portfolio has on average about 30% of assets concentrated in the top 10 positions. That said, the team offsets those risks somewhat by treading lightly in the market’s lowest-quality names and limiting how much it will own of an individual issue

An opportunistically managed portfolio driven by valuations

In response to the 2019 credit rally, the team raised its investment-grade bond exposure up to 20% at the end of that year, its highest level since the strategy’s January 2015 inception, leaving the strategy in a relatively good position to face the coronavirus-driven sell-off that started at the end of February 2020. As the market plunged, the team rotated capital and pushed the portfolio’s credit quality profile even higher as it found numerous investment-grade opportunities in names that included Nvidia, TJX, and Sysco. At the end of 2020’s first quarter, bonds rated BBB or higher represented close to 34% of assets.

After riding the Fed’s wave of purchases and betting on the economy reopening through the second half of 2020, the managers shifted gears. As valuations got rich, they rotated the portfolio out of some higher-rated longer-duration fare into shorter-maturity higher-yielding securities. At the end of March 2021, investmentgrade bonds represented less than 5% of the strategy’s assets, and its allocation to BB-rated bonds went down to 35% from almost 42% at the end of 2020 while bonds rated B moved the other way to 48% from 41% over the same period.

A category leader with a best-in-class long-term volatility-adjusted record

The team’s attention to valuations together with strong credit selection have helped the strategy hold up better than most rivals during high-yield sell-offs. For instance, despite the energy-led sell-off that started in June 2015, an investment in McDermott International MDR was the largest contributor that year, and the portfolio’s energy stake was the largest relative contributor to the strategy’s 0.3% return, which bested 90% of its category peers. Likewise, the strategy outperformed its typical peer by 184 basis points in the last quarter of 2018 and ended that year ahead of 97% of competitors.

(Source: Morning star)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Qube Holdings Ltd– Weathering the Storm

However, Qube’s strategy to consolidate a fragmented industry should deliver above-market rates of growth and scale benefits. Qube is developing the Moorebank intermodal terminal and warehouses, located on the Southern Sydney Freight Line, to help alleviate congestion at Port Botany and drive efficiencies in the distribution supply chain. Moorebank, on full completion and ramp-up, should materially contribute to group earnings and deliver a strong competitive advantage for the group’s logistics operations.

Key Investment Consideration

  • Logistics and bulk operations are cyclical and highly dependent on container and bulk volumes. Operating conditions are challenging, with COVID-19 and tough competition pressuring margins and volumes.
  • Our forecasts assume mid single-digit revenue growth in the medium term for Qube, supported by organic growth, scale benefits, investment in new projects, and acquisitions.
  • The development of Moorebank as an intermodal precinct should significantly improve the economics and efficiency of managing container volumes to and from Port Botany over rail.
  • Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains.
  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration.
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving
  • strong returns for Qube.
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders.
  • A corporate structure of associate companies, acquired businesses, and newly purchased assets limits transparency. Meanwhile, a strategy focused on acquisitions adds integration risk. OWhile Qube’s long-term prospects are attractive, its businesses are cyclical and cash flow may be affected by a deterioration in economic conditions.
  • There are still risks surrounding the development of Moorebank and other projects. Currently trading on a high P/E ratio, any disappointments could hit the share price hard.
  • A key positive is the firm’s strengthening financial health, which will get a major boost if the Moorebank Logistics Park, or MLP, is sold. Net debt/EBITDA was a relatively aggressive 3.8 times in fiscal 2020, and could fall below 1 times if Moorebank sells, which we consider conservative.
  • The sale of MLP is progressing well. After receiving nonbinding indicative offers from a range of potential suitors, Qube has entered exclusive negotiation with LOGOS Property Group, an Asia Pacific property investor. There is no guarantee an attractive offer will be made but values for good-quality industrial property are holding up well, as seen in Goodman Group’s security price. The coronavirus hasn’t hurt–online shopping, which requires investment in logistics and industrial property, is booming and interest rates have reduced.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Shares Small Cap

Federated Hermes MDT Small Cap Growth

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

He is responsible for the model and research and draws on seven managers/analysts. Frederick Konopka also became a manager in 2008 and handles portfolio construction and trading for the team. MDT looks to group companies into different baskets producing various streams of alpha potential using valuation, growth, momentum, and quality indicators.

By using classification and regression tree analysis, the team can test thousands of potential combinations of factors based on 30-plus years of U.S. stock data to find the best mixtures of alpha using a three-month investment horizon. Still, such a short investment horizon can be difficult to implement. It leads to annual portfolio turnover that can be lofty and varies greatly. Over the past five years, turnover ranged from 188% to 227%, well above the 59%-66% range for the typical small-growth. The portfolio’s holdings have varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless they’re spread out across more holdings.

Since Mahr became lead manager in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 lagged the small growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. The fund has performed better since the team’s 2013 process switch to multiple decision trees, but the fund’s high volatility has kept its risk-adjusted results in line with the index.

Quantitative approach with short focus

MDT groups companies into different baskets of alpha potential. The team forecasts three month returns using valuation factors based on structural earnings, tangible book value, and forward earnings estimates; growth factors like analyst conviction and long-term earnings growth; quality factors measuring free cash flow, leverage, and reliance on external capital; and momentum factors like relative stock price trend. The team uses classification and regression tree analysis to test thousands of potential combinations based on 30-plus years of U.S. stock data.

Prior to 2013, the team used one large decision tree to forecast alpha, but that approach was subject to overfitting issues. Switching to regression analysis using multiple decision trees resulted in combinations of subsets of the factors with the best alpha potential. This leads to the fund holding stocks with different avenues to produce alpha, potentially leading to more opportunities to outperform. The MDT team continues to refine its model, usually updating the model twice a year. These revisions are typically on the margin, though. In 2020, for example, they adjusted their structural earnings indicator by using an industry relative basis.

Diversified, but high turnover

The strategy’s short-term approach has led to higher turnover than most smallgrowth peers. Its annual portfolio turnover range of 118%-227% the past five years is much higher than the median range of 59%-66%. The fund might struggle to maintain its fast-trading ways if assets hit the team’s $8 billion-$10 billion estimate of its small-cap capacity, which includes this strategy, Federated MDT Small Cap Core QISCX, and Federated MDT Small Cap Value. So far, the team is not near that limit, with around $2 billion across its small-cap charges. However, the portfolio’s number of holdings has varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless their potential alpha is spread out across more holdings. This could become more pronounced as the asset base grows

Performance – Volatile

The fund’s absolute and risk-adjusted returns lag the Russell 2000 Growth Index during lead manager Dan Mahr’s tenure. Since Mahr took over in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 trailed the small-growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. It has done so with more volatility than the benchmark, resulting in subpar riskadjusted performance measures, like the Sharpe ratio. Most of the fund’s underperformance has come during market turbulence. Mahr’s Aug. 31, 2008,start date means he took over amid the credit crisis, and the fund barely edged the benchmark through that period’s March 9, 2009, bottom. The fund lagged the bogy’s ensuing trough-to-peak (April 23, 2010) performance by 26.6 percentage points, annualized.

(Source: Morning star)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

QBE Insurance – Investment outlook

Management has made good progress improving operational efficiency and strengthening the balance sheet, consolidating the group into a more focused and profitable business after a multidecade acquisition binge. Geographic diversification does little to help margins and returns when large insured events occur without warning and are largely out of management’s control. We expect higher interest rates to benefit in the medium-term, but the competitive landscape mean some of this upside is eroded through competition via premium rates.

  • QBE has failed to demonstrate the underwriting discipline and cost advantages needed to warrant an economic moat.
  • Leveraging scale, brand, and geographic reach, QBE enjoys solid market positions in the U.S., Europe, Australia, and New Zealand. Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but competitors have shown these are not insurmountable barriers.
  • We expect further recovery and an exit from poor performing regions or product lines to benefit the bottom line, but do not believe QBE is gaining the scale necessary to improve its competitive position.
  • Rising competition should erode market share from incumbents, such as QBE, regardless of the impact on short term profits and returns.
  • A higher incidence of large claims events from major catastrophes could reduce profitability such that
  • dividend cuts and potentially dilutive capital raisings are needed.
  • Changes to capital requirements or/and poor profitability could weaken the balance sheet, requiring dilutive capital raisings.
  • Lower investment returns due to very low interest rates may continue for longer than we expect.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

DWS Global High-Income Inst

Gary Russell has led this strategy since August 2006 and previously ran DWS’ high-yield team in Europe. Thomas Bouchard and Lonnie Fox have comanaged the strategy since 2016 and 2018, respectively, after joining as credit analysts in 2006 and 2008. The trio is supported by European counterpart Per Wehrmann and 14 analysts split between the United States and Europe. The support team is sizable, but with 19 departures since 2016, turnover has been an issue.

The managers leverage the firm’s macro-outlook to shape risk budgeting and industry allocation. Analysts assign a recovery value and probability of default to each bond and loan and look at standard fundamental metrics to assess attractiveness relative to the constituents of the strategy’s BofAML Non-Financial Developed Markets High Yield Index benchmark. High-conviction names are typically sized up to 3%, while names perceived as riskier are scaled down accordingly.

The strategy’s higher-quality and global approach sets it apart from peers. The allocation to riskier bonds rated CCC and below stood at 5% as of March 31, 2021, well under the high-yield bond Morningstar Category’s 13% median. The managers pursue opportunities across the globe, and while allocation to the U.S. represents the bulk of assets (60% as of March 31), the portfolio includes sizable exposures to Europe (19%) and Canada (7%). Low-single-digit stakes in emerging markets round out the portfolio.

Over Russell’s tenure from Aug. 1, 2006, through April 31, 2021, the 6.5% annualized gain of the strategy’s institutional share class slightly edged out the category median (comparing distinct funds) peer, landing it in the top half of the category, while the strategy’s volatility-adjusted performance beat over two thirds of rivals.

The Bond Fund’s Approach

The strategy’s disciplined and conservative credit-driven process has demonstrated its value through time, but the analyst churn casts a shadow on its execution and puts a lid on our confidence level, supporting an Average Process Pillar rating. The team takes a conservative and straightforward approach to credit investing. Lead manager Gary Russell and six other high-yield managers focus on portfolio construction, translating the firm’s macro view into investment decisions. Analysts assign each company a recovery value and probability of default, which helps the managers appropriately size positions. All positions are typically capped at 3% and riskier names are scaled down, resulting in a portfolio that usually counts over 350 holdings, ensuring proper diversification, especially on the portfolio’s riskier sleeves.

The strategy’s global mandate has historically resulted in about 60% of assets invested in U.S. high-yield bonds, with most of the balance split between Canadian and European issues, but non-U.S. currency exposure is hedged back to the U.S. dollar. In terms of credit profile, the portfolio tends to skew higher-quality than its high-yield bond category peers, with a relatively large BB stake and limited allocations to issues rated CCC or below.

The Bond Fund’s Portfolio

The team has expressed its conservatism by favouring higher-quality segments of the high-yield market. For example, issues rated BB represented 57% of this strategy’s portfolio as of March 31, 2021, versus 41% for its typical high-yield bond category peer. On the other hand, issues rated CCC and below totalled just 5% of assets or 8 percentage points less than the strategy’s typical peer. The strategy uses its global team to offer a distinct geographic footprint that separates it from many of its peers. Indeed, its non-U.S. exposure stood at 30% as of March 2021, or almost 3 times its typical peer’s. Developed European corporates accounted for 19% of assets and Canadian positions for 7%. Smaller allocations to Asia, Latin America, Africa, and the Middle East stood in the low single digits.

The strategy has had a sluggish start to 2021 owing to its higher-quality tilt and minimal use of bank loans. Rising rates for much of 2021 has prompted many peers to favour higher-yielding and lower-quality assets and bank loans to offset this. As of March 2021, the 41% in B and below was on the aggressive end for this strategy, but its typical peer had over 50% here, including 13% in CCC and below. At the same time, the strategy held less than 1% in bank loans, while a fifth of its peers held about 10% here.

The Bond Fund’s Performance

| Owing to its conservative credit profile and good security selection, this strategy has produced solid returns under lead manager Gary Russell’s watch. Since Russell took over in August 2006 through April 2021, its institutional shares returned 6.5% annualized, landing it in the top half of its high-yield bond category peers. Impressively, the team was able to keep volatility at bay for most of this period, and the strategy’s volatility-adjusted performance–as measured by Sharpe ratio–beat 66% of rivals. During the energy-led credit sell-off from June 2015 to February 2016, a lower exposure to bonds rated CCC or below helped the strategy hold up better than most rivals. Over the period, its 5.9% loss outperformed the category median by 2.3 percentage points, landing ahead of 70% of its distinct peers.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Shares

United Malt Group Ltd – Result as a Public Company Offers Optimism

Nonetheless, the company is the fourth-largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast-growing craft producers. Although management expects United to face higher near-term costs related to its recent public listing, we think this will be offset by longer-term savings. But despite some attractive aspects of the business, we don’t think United has carved an economic moat. It is a commodity processor, with a high degree of fixed costs and limited ability to substantially differentiate its product.

Key Considerations

  • Although we anticipate craft beer consumption–a key driver for malt demand–will rise as a proportion of overall beer in United’s primary markets, the rate of growth is likely to slow, owing to the already high amount of craft brewers globally and flat overall beer volume trends.
  • Long-term client contracts, and the ability to pass through costs in periods of high barley prices help underpin a stable earnings stream and a manageable dividend policy.
  • We expect slowing end-market demand and limited barriers to supply additions driving returns on invested capital about equal to the company’s weighted average cost of capital.
  • Underlying earnings are stable, supported by longterm client contracts and its ability to pass through costs during periods of high barley prices.
  • United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
  • Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.
  • The commodity products that United Malt provide are readily available from competitors, and the company has little pricing power over the products it buys and sells, making for slim margins.
  • Barley acreage has declined in favour of other adjunct grains like corn or soybean in recent years, which could lead to periods of short supply and higher short-term costs.
  • The loss of key brewing customers, especially if they become self-sufficient for malt, could materially threaten its earnings stream.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.