The past month’s rout in equities and bonds didn’t trigger any buying or selling at the $4.5 billion SunAmerica Focused Dividend Strategy Portfolio. The fund chooses its 30 stocks once a year based on a formula and sticks with them no matter what.
So far the system is working. The fund delivered the best risk-adjusted returns among large funds that buy U.S. equities since the stock market rally began in 2009, outpacing star managers such as Donald Yacktman and William Nygren, according to the BLOOMBERG RISKLESS RETURN RANKING. The SunAmerica Fund had a higher total return than all but two of 222 rivals and lower volatility than 84 percent of competing funds.
“The beauty of our model is its simplicity and discipline,” Timothy Pettee, chief investment officer for SunAmerica Asset Management Corp., said in a telephone interview. “We are not sitting here saying, ‘Gee do we like this stock or do we want to overweight this industry?’ ”
Brendan Voege, who has managed the fund since 2006, selects 30 high-dividend stocks every November based on a model he developed. In 2013, the fund’s top 10 holdings have all beaten the Standard & Poor’s 500 Index. It’s also the best performer since May 21, the day before Federal Reserve Chairman Ben Bernanke indicated the central bank may scale back its asset purchases, triggering a global selloff.
Dividend-paying stocks have appealed to investors in the past few years because of the income they have generated in a world of low interest rates, said Adam Longenecker, an analyst with EPFR Global, a Cambridge, Massachusetts-based firm that tracks the flow of money into funds worldwide.
“These bond-equivalent stocks that have been wildly popular while rates have been at rock bottom will be less attractive in the future if their true fixed-income counterparts start yielding 3 to 4 percent again,” he wrote in an e-mail.
SunAmerica Focused Dividend Strategy gained 15 percent, adjusted for volatility, from March 9, 2009, to June 24 of this year, the best result for domestic equity funds with at least $3 billion in assets.
The second- and third-ranked funds are both run by Donald Yacktman, president of Austin, Texas-based Yacktman Asset Management Co. The $9.8 billion Yacktman Focused Fund had a risk-adjusted return of 13.7 percent, just ahead of the 13.6 percent gain for the $11.3 billion Yacktman Fund. Both funds beat more than 90 percent of peers by total return and produced lower than average volatility.
Nygren’s $9.4 billion Oakmark Fund placed eighth with a gain, adjusted for price swings, of 10 percent.
The risk-adjusted return isn’t annualized. It’s calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Voege buys the 10 highest-yielding stocks in the Dow Jones Industrial Average. The next 20 stocks are drawn from the Russell 1000 Value Index, based on a formula the ranks companies by dividends, profitability and valuation. If a chosen stock has a dividend yield below the median yield of the dividend-paying securities in the Standard & Poor’s 500 Index, it is tossed out and replaced.
That process has turned up winners such as Hewlett-Packard Co., up 69 percent this year including dividends, and E.I. du Pont de Nemours & Co., which has more than tripled since stocks hit a 12-year low in March 2009.
The SunAmerica fund typically doesn’t hold many financial stocks or utilities, sectors that historically pay high dividends, because otherwise the fund would be dominated by those industries, Pettee said. The fund has a dividend yield of 3.72 percent, according to data compiled by Bloomberg. The S&P 500 has a dividend yield of 2.15 percent.
SunAmerica is owned by New York-based insurer American International Group Inc.
Francis Kinniry, a principal at Vanguard Group Inc. in Valley Forge, Pennsylvania, said the SunAmerica fund should be thought of as a form of rules-based investing. Rules-based funds will go through periods when they “shine” and others when they will lag behind market benchmarks, he said.
“Traditional active management, which is dynamic, has had a hard time beating the indexes,” Kinniry, whose firm competes with SunAmerica and is known for its low-cost, passive funds, said in a telephone interview. “It is a little naïve to think you can just write down some rules and do better over time.”
This year the fund has benefited by owning two distressed technology firms, Hewlett-Packard and Dell Inc., which both reached multiyear lows in November 2012 as customers shifted away from personal computers toward tablets and smartphones.
Hewlett-Packard, based in Palo Alto, California, rebounded after Chief Executive Officer Meg Whitman cut costs and moved to halt seven straight quarters of declining sales and profit. Round Rock, Texas-based Dell, up 33 percent this year with dividends, gained as a result of founder Michael Dell’s offer to take the firm private.
Hewlett-Packard was the fund’s largest holding as of March 31; Dell was the third-largest position.
“I would chalk the results up more to luck than anything else,” said Steven Roge, a portfolio manager with Bohemia, New York-based R.W. Roge & Co., which oversees $200 million. “I’m not sure it will do that well during the next downturn.”
So far, the fund has held up well. On June 20, when the S&P 500 index fell the most since November 2011, the SunAmerica fund lost 1.8 percent compared with a decline of 2.5 percent for the benchmark index, according to data compiled by Bloomberg.
The SunAmerica fund has also had some longer-term holdings that have outperformed, including tobacco stocks, which at times have accounted for as much as 14 percent of total assets, regulatory filings show.
Reynolds American Inc., based in Winston-Salem, North Carolina; Altria Group Inc. of Richmond, Virginia; and New York-based Philip Morris International Inc. have all beaten the S&P 500 Index since the market lows of March 2009, data compiled by Bloomberg show. All three stocks have higher dividends yields than the benchmark index.
“The tobacco stocks have been steady, stalwart performers with attractive valuations,” said Pettee.
Investors have noticed the success. The SunAmerica fund attracted $1.5 billion in deposits in 2012 and an additional $1 billion in the first five months of 2013, according to data from Chicago-based Morningstar Inc.
Pettee said he isn’t worried about the fund’s prospects after interest rates climbed last week following Bernanke’s comments.
“This is not just a dividend fund,” he said. “We will do just fine, I think, if and when dividends don’t get the attention they have been getting.”
SunAmerica created an international version of the dividend fund last year, said Pettee, who conceded it has not done as well as its U.S. counterpart. The $100 million SunAmerica International Dividend Strategy Fund lost 11.5 percent this year through June 24, compared with a gain of 1.9 percent for the MSCI EAFE Index.