Dividend Select Commentary – 3Q16
It was a good third quarter for all US stock investors, and we are happy with the 3.2 % net return of Argent’s Dividend Select strategy. We are even more pleased that average annual returns over the past five years are 16.1%. While it is unreasonable to expect such high double digit average returns to continue, we feel very good about the portfolio and believe it is very well-positioned for these uncertain times. The goal of the Argent Dividend Select strategy is to provide consistent, well-diversified, risk adjusted returns and, most importantly, provide an alternative to fixed-income investments for those clients searching for yield.
Interest rates continue to hover near historically low levels and if predictions are correct, the Federal Reserve is expected to raise rates come December. While yield-seeking, our strategy is positioned to benefit regardless of the interest rate environment. Our process is designed to build a portfolio of companies possessing an income (yield) and undervalued growth potential.
During the quarter, we continued to experience the rotation or transition we have mentioned in prior commentaries. The current market environment, while stressful at times, is also exciting to us. As active stock pickers, we embrace periods of fluctuation to upgrade and position the portfolio for future success. This quarter, the anticipation of rising rates led to a selloff in defensive areas of the market, think utilities and telecom, as these areas are negatively affected by rising interest rates. Our Dividend Select strategy was less affected by this play for yield. Instead, we found success within the Information Technology sector and added Seagate Technology (STX), Marvell Technology Group Ltd. (MRVL) and Qualcomm Inc. (QCOM) to our portfolio.
All of these companies have a catalyst for positive change plus a healthy dividend. Catalysts can be any number of items which have the potential to cause acceleration of growth within a company. In this case, STX has recently restructured and an activist investor continues to gain presence at the company. An activist investor has also joined MRVL and has since replaced the management team. At Argent, we like activist investors as they propel transformation within a company and increase the odds of realizing change. QCOM does not have an activist investor but is positioned for growth by investing in emerging product cycles.
We do not have a crystal ball and unfortunately we cannot predict whether or not the Fed will make good on its promise to raise rates before the year ends. If the Fed does keep its promise, bond prices could be pressured. As yields increase, bond prices decrease, further solidifying the need for investors to diversify sources of yield within their portfolios. Amidst the noise, we will continue to apply our disciplined investment process to identify companies with strong growth potential and high yield. We believe given most scenarios, the risk / reward is still superior to any fixed income alternative.
As always, we appreciate your interest in Argent Capital Management. We have three very successful equity strategies – Large Cap U.S., Small Cap U.S. and Dividend Select. If you have questions on any of these please call us.
Scott Harrison, Portfolio Manager
Performance results are net of fees. This is supplied as supplemental information to the composite disclosures presented later in this document. Past performance is no guarantee of future results. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities were or will be profitable. A list of stocks recommended by Argent in the previous year is available upon request. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change.