Dividend Stocks Could Be Dangerous in 2015, Ketterer Says

At a time when U.S. stocks are beating the rest of the world, Sarah Ketterer mostly invests overseas. And at a time when index funds and exchange-traded funds (ETFs) are ascendant, she invests the old-fashioned way: She scouts for well-run companies and buys them when they look cheap.

So far that approach is paying off for the 54-year-old chief executive officer and fund manager at Causeway Capital Management. Ketterer's largest fund, the $6.3-billion Causeway International Value Fund (CIVIX), beat its peers by an annualized 3 percent over the last three and five years, according to Morningstar.

Ketterer spoke with Bloomberg.com about what the kinds of stocks she’s buying, what she’s avoiding and the value that an active stock manager brings when the world's stock markets are looking "pricey."

Q: Energy stocks have been hurt by the plunge in oil prices. Are you buying?

Very incrementally. As demand continues to be steady and supply wanes, oil prices will reach a floor and are likely to rise again at some point. That could be early next year, it could be mid-next year. We have no idea when this cycle will turn.

[But just because] it’s not going to happen immediately doesn’t necessarily make buying the stocks now a bad idea. Equity markets are clever and they invariably price in the future – often quite quickly.

Q: What kind of energy stocks are you buying?

The key is to upgrade -- to take advantage of what may be some indiscriminate selling, and put higher and higher quality companies in the portfolio.

We go for the stocks that we always wanted to own, but that were formerly too expensive. We get companies with tremendous financial strength, that can continue to pay their dividends and pay shareholders to be patient.

The better companies [have] the ability to take advantage of the rout. In U.S. shale, the smart managers will take their balance sheet strength and buy assets cheaply when others are having to sell under duress.

Q: Outside of energy and a few other areas, how do you deal with the fact that so many stocks around the world seem expensive?

Where you don’t want to be is passive. There’s a massive amount of money moving into [exchange-traded funds]. But just buying the S&P 500 or a world index in an ETF? It’s not a good time for that, because markets are fully priced. And the stocks that make up the largest weights in the benchmark are the ones that are most fully priced. Whereas you could have bought anything in early 2009 – you could have thrown darts and made a fortune.

Q: You're saying that in an index fund, especially one where stocks are weighted by market capitalization, investors end up concentrated in the most overvalued stocks?

You’ve just bought what went up. You get a fully valued or overvalued basket of stocks.

So, sure, in active management we get some fees. But we ought to get paid if we can identify the stocks that have been left behind, [and those] that are not going to blow up the portfolio. That’s our job.

Q: Is Russia a place that’s been left behind? Or is that just too risky?

We have some in Russia. But we’re not sticking our necks out there. The lower oil prices go, the more pressure on the Russian budget and the entire economy.

Somewhat mitigating that problem is the collapse of the ruble. At least costs are now lower, in a global context, for Russian producers. But assuming crude oil stays at the price it is today, or even slightly higher, we’re going to see some further economic strains in Russia over the next several quarters.

Q: While Russia’s cheap, the U.S. is pretty expensive. In your funds that invest all around the world, are you investing in the U.S.?

Our global portfolios have about 45 percent in U.S.-listed stocks. The U.S. market represents almost 60 percent of the global index, so we’re quite underweight the U.S.

But it’s not like it’s zero. The U.S. market is so vast and so deep. There’s almost always something interesting to buy. I wouldn’t say [the U.S.] is a cornucupia of undervaluations. Not at all. But there are still many opportunities.

Technology is a very prominent part of the S&P 500, but [outside the U.S.], there’s not much tech at all. Managed care doesn’t even exist abroad. Some of the best-managed [oil and gas] companies are U.S.-domiciled. In contrast, some of the best opportunities in the financials are overseas.

Q: Is there any part of the market you think is particularly overhyped now?

For the last couple years, investors have flocked to consumer staples, utilities and health care globally. They’ve wanted [those] consistent earnings and dividend yields. It’s going to be hard for those stocks to meet expectations.

[There’s] this idea that investors will pay anything for stability. [But] eventually valuations do matter. You can’t have one portion of the market levitate irrespective of the rest. Those stocks are likely to, best case, stagnate, or maybe even decline.

Q: What do you buy instead?

There are wonderful gems out there. Nobody wants [them]. There are quite a number of industrial stocks in Europe whose share prices have come down because of concerns about growth in China and Europe. The concerns may be legitimate. But ultimately these companies will end up outlasting their competitors, taking market share and becoming even more efficient.

This is the part investors seem to sometimes misunderstand: If businesses are doing their job, they are constantly evolving. Even in a stagnant environment, they can succeed.

Q: Speaking of investors and what they don’t know, what’s a mistake they often make?

Short-term-ism is the worst. In the mutual fund world, investors get impatient. If they aren’t pleased with short-term results, they have a habit of shooting themselves in the foot by selling at just the wrong time.


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