MILWAUKEE, WI--(Marketwired - October 01, 2013) -
In a soon to be published study,* international small- and mid-cap companies that paid a dividend were found to significantly outperform their non-dividend paying peers. The study will be released in November and was sponsored by Heartland Advisors, investment advisor to the Heartland International Value Fund (HINVX), which marked the three-year anniversary of its launch on October 1 and invests in small- and mid-cap dividend-paying companies.
The Heartland International Value Fund is Heartland's first dedicated international offering, employing the same value investing principles used in Heartland's other strategies. In the following Q&A, co-portfolio managers Bill Nasgovitz and Robert Sharpe discuss the study and the philosophy behind the Fund.
Q. Describe the upcoming study and its significance.
Sharpe: The study uncovered that the average of the top two quintiles of dividend yielding stocks in the international small-cap universe generated returns over twice the universe as a whole. Working with University of Wisconsin-Milwaukee professor Dr. G. Kevin Spellman, we looked at rolling average 12-month returns from 1993 to 2013** for the universe of equity securities outside the U.S. with market caps between $100 million and $5 billion. The study separates the stocks into quintiles based on dividend yield, with quintile one representing the highest-yielding dividend payers and quintile five representing the lowest. The initial results are quite compelling. While the average return for the entire universe over the rolling 12-month periods was 6.05%, the return for the quintile of highest-yielding stocks was 16.31%, beating the average return by more than 10 percentage points**. The results reinforce our belief that in the small and mid-cap international space, dividends matter.
Q. The study looks at payout ratios too. Why does that matter?
Sharpe: The study also shows returns improve if the combination of other fundamental metrics with dividend yield are considered. In one example, if you marry low payout ratios with higher yields, the results improve significantly. Companies with low payouts retain earnings and can plow them back into additional investments that can lead to future dividends. From a portfolio management perspective, if we identify three similarly attractive companies, we'll likely select the low payout ratio company. We screen our universe using valuation and fundamental metrics to identify a smaller, more manageable subset of companies to apply our 10 Principles of Value Investing™ and knowledge gained from studies like the one we co-sponsored with Dr. G. Kevin Spellman.
Q. Why did Heartland launch an international fund focused on small- and mid-cap dividend payers?
Nasgovitz: We've invested in international stocks in the Heartland Value Fund for 30 years. In our experience, international markets represent opportunity for the value investor, driven by strong economic growth, attractive valuations, and robust dividends. We also believe that international small-cap value, as an asset class, adds diversification as these stocks have lower correlation to larger U.S. equities. Plus, we believe the dividend component tends to mitigate volatility.
Q. A snapshot of your sector allocations shows the fund is overweight Consumer Discretionary and Staples, Health Care, Industrials, and Materials. Why these sectors?
Sharpe: These are the sectors where the application of our 10 Principles of Value Investing™ has led us to a disproportionate number of attractive companies. One example is Health Care. The rest of the developed world faces an aging population which is demanding more Health Care. Developing countries also have a growing consumer class that can now afford health care.
Another out-of-favor position we hold is in gold mining companies, which we believe are attractive relative to the metal and the market. Many are carrying out investments in new mines and should see better free cash flow once complete.
While we are sector aware, we do not hug an index and continue to build the portfolio based on individual company valuations.
Q. How do you explain the Fund's significant overweight to Japan?
Nasgovitz: With an over 25% weighting, this has been a lonely position. However, we think valuations look attractive and macro catalysts exist that will lead to higher price multiples and compelling risk/reward profiles. Japan's central bank has been sitting on the sidelines as others eased, but now is aggressively easing. In addition, the domestic credit cycle has turned with outstanding loan growth now above 2%1 (year-over-year). Unemployment has dropped below 4%2 and there are finally positive inflationary expectations.
Q. Can you give us some examples of stocks you like?
Sharpe: Nippon Seiki Ltd. (NSEIF), purchased in 2011, manufactures instrument panels for cars, motorcycles, boats, and tractors. The company benefits from the growing consumer class and the increasing demand for autos across Asia and from a weaker yen. It is also poised to move to the first section of the Tokyo Stock Exchange which historically has increased investor awareness.
We also like Bombardier, Inc., (BDRBF), the third largest civilian aircraft manufacturer in the world and a global leader in the rail equipment industry. The company has a record backlog and potential free cash flow due to the end of its significant investment in the new CSeries plane which is 20%3 more fuel efficient. The CSeries is an important catalyst that should help double aerospace revenues over the next several years. The stock also has an attractive yield and a low payout ratio.
Established in 1983, Heartland Advisors, Inc. is an independently owned equity value investment manager based in Milwaukee, Wisconsin. As of September 30, 2013, the Firm managed approximately $5.9 billion. The Heartland family of value-driven, actively managed portfolios includes distinct U.S. and international strategies, offered through five separately managed account portfolios and four mutual funds: Heartland Value Fund (Investor: HRTVX), Heartland Value Plus Fund (Investor: HRVIX), Heartland Select Value Fund (Investor: HRSVX), and Heartland International Value Fund (HINVX). Learn more at heartlandadvisors.com.
* Dr. G. Kevin Spellman, The Tortoise Beats the Hare, 2013
1 Bloomberg, as of 7/31/2013
2 Bloomberg, as of 7/31/2013
3 Bombardier, Inc., press release, 6/26/2013
An investor should consider the Funds' investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the Funds' prospectuses. To obtain a prospectus, please call 800-432-7856 or visit www.heartlandfunds.com. Please read the prospectuses carefully before investing.
Past performance does not guarantee future results.
The Fund invests primarily in small foreign companies selected on a value basis. Such securities generally are more volatile and less liquid than those of larger companies. Foreign securities have additional risk, including but not limited to, exchange rate changes, political and economic upheaval, and relatively low market liquidity. These risks are magnified in emerging markets. There can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Board of Directors may determine to liquidate the Fund. Value Investments are subject to the risk that their intrinsic values may not be recognized by the broad market.
Portfolio holdings and manager views are subject to change without notice, and discussions of portfolio holdings are intended as illustrations of investment strategy, not as recommendations to buy or sell. As of September 30, 2013, Nippon Seiki Ltd. and Bombardier, Inc. represented 4.41% and 3.98%, respectively, of the Fund's net assets.
Data sourced from Dr. G. Kevin Spellman's study, The Tortoise Beats the Hare, August 2013, is calculated over the period of 12/31/1993-6/28/2013 using average rolling 12-month returns. Universe consists of equity securities outside the US with greater than or equal to $100 million market capitalization but less than or equal to $5 billion in market capitalization; securities with dividend yields above 100% were excluded. The five dividend paying portfolios are constructed using quintiles of the dividend yield, with quintile 1 representing the highest yielding dividend payers and quintile 5 representing the lowest dividend payers. Portfolios were formed and rebalanced every three months using equal-weighted returns.
There is no assurance that dividend-paying stocks will mitigate volatility.
The inception date of the Heartland International Value Fund is 10/1/2010. The Heartland Funds are distributed by ALPS Distributors, Inc. Bill Nasgovitz is a registered representative of ALPS Distributors, Inc. Separately managed accounts and related investment advisory services are provided by Heartland Advisors, Inc., a federally registered investment advisor. ALPS Distributors, Inc. is not affiliated with Heartland Advisors, Inc. Heartland Advisors considers large-cap companies to be larger than $10 billion in market cap, mid-cap companies to be between $2 billion and $10 billion, small-cap companies to be between $300 million and $2 billion, and micro-cap companies to be less than $300 million. The above breakdown does not include short-term investments.
Free cash flow is the amount of cash a company has after expenses, debt service, capital expenditures, and dividends. The higher the free cash flow, the stronger the company's balance sheet. Dividend payout ratio
is the percentage of dividend earnings paid to shareholders. It is calculated by dividing yearly dividend per share by earnings per share.
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