Value investor Heartland Advisors also sees opportunity in dividend-paying companies. Heartland’s Value Plus Fund focuses on small-cap dividend payers, and Heartland’s Select Value Fund is also largely comprised of dividend-paying stocks, in this case ranging from small-cap to large-cap. Adam Peck, co-portfolio manager of the Value Plus Fund says, “If you invest in dividends, you can break the rules of finance.” He notes that dividend-paying small caps have outperformed non-payers over the last 20 years by 1.5% per year. One of the reasons Peck cites for outperformance by dividend payers is an “allowance” effect: when management is committed to a dividend, they are confined to a set allowance. They will rank their projects, but can only spend so much and it’s the least-beneficial projects that get scrapped, thus protecting investors from pet projects/worst opportunities.

Recently Heartland released a white paper with some very interesting data focused on the power of dividends in a long-term portfolio:

• High-dividend yield companies outperform in the long run … but it’s the second-to-top quintile that does best. The highest dividend payers end up too stretched — and become yield traps. The paper uses 20-year holding periods over an 83-year sample to show this result.
• Dividend-paying companies have historically provided higher cumulative returns AND lower levels of volatility (lower standard deviation) over 20-year holding period.
• Dividend-paying companies provide some protection during market corrections. They lag non-payers only in post-correction market advances (when non-payers are likely to rise fastest).

Heartland’s research suggests that attention to dividends can benefit investors in any market. And if Bill Gross’s assessment of the outlook for U.S. markets is correct, dividends will be more important than ever as a component of overall total return.

— Benjamin Bishop

Our clients at Baird Advisors have also been underweight Treasuries given their high price/low yield due to government QE1 and QE2 purchases over the last two years.  Their “core of the core” bond approach differs markedly from Gross’s as they stay invested in the U.S. only and buy high-quality investment grade bonds (not derivatives).  Unlike Gross, Baird’s Mary Ellen Stanek notes in a recent Morningstar Q&A that she does not think investors should write off bonds:
http://news.morningstar.com/articlenet/article.aspx?id=381807

The Baird team suggests that there is selected value in non-agency mortgages and investment-grade corporate bonds.  The Baird Funds also seek to benefit from “roll down,” which is the added coupon yield as bonds approach maturity.  Roll down can add additional income for conservative bond investors not willing to take the risks associated with venturing abroad.

- Jody Lowe

Both leaders independently addressed very similar messages about their culture and their success:

1. A positive culture – including people treating each other well – is important. Purcell, a direct, smart individual with a keen sense of humor and an engaging warmth, jokes about his firm’s “No ***hole rule.” He said, “We have to care about our clients and care about each other.” In fact, Baird recently created an executive-level position to serve as “culture czar” and help assure Baird’s client-oriented culture is ingrained at all levels and with every new employee. Schlifske, a bright and earnest business leader who rose through the ranks of the firm’s investment department, spent several moments discussing the importance of a positive culture. He said, “Some cultures are ‘maverick cultures’ or ‘go for broke cultures’ or ‘damn the torpedoes cultures.’ Northwestern Mutual’s culture revolves around the golden rule.” Profit or growth is not the heart of Northwestern Mutual’s culture. Instead, the culture is grounded in doing what is best.
2. Independence and employee ownership have helped both firms make good decisions and focus on the long term. In 20044, Purcell’s team bought the bulk of Northwestern Mutual’s ownership interest in Baird and spread that ownership broadly among Baird employees. More than 50% of Baird’s staff own stock in the company. In his speech to employees, Purcell cited employee ownership as one of their greatest strengths. Northwestern Mutual is mutual-owned by the company’s policy owners. Schlifske discussed how they never have to cut corners or make bad decisions in order to make quarterly numbers.
3. Financial strength is important to both companies. Purcell discussed how Baird was able to invest in hiring good people during the downturn, — expanding employment more than 15% from 2007 to 2010. Schlifske said, “Financial strength gives you the ability to not be afraid of making bad decisions. You can learn from your mistakes. It also gives you the ability to have zero tolerance for bad behavior and to terminate your best salespeople if they break the rules. We never have to worry about cutting corners.”

Purcell and Schlifske lead different firms with different business models. Yet they each stressed some of the same principles and attribute their success to strong culture, independence, and financial strength.  No surprise that both firms have emerged stronger relative to their competition post-financial crisis.

– Jody Lowe

The article’s theme is that market fundamentals—not macroeconomic risk factors—are returning as main drivers of equity and commodity markets.  From the article by reporter Mark Gongloff (“Markets Rediscover the Fundamentals,” January 24, 2011):

In recent weeks…moves in stocks and the U.S. dollar have had little connection—a breakdown of the trend during much of 2010, when they were virtual mirror images of each other. Stocks were considered risky and would rise when investors were feeling confident, while the dollar was a haven, benefiting when investors were worried.

Commodities, too, have broken away from rising and falling with risk perceptions. Now more old-fashioned concerns, like the weather, are having an impact. …

That could be a relief to investors frustrated by what they see as a market often detached from fundamental concerns, thwarting efforts to make long-term trades.

The economic crisis has meant external communications by mutual funds and other companies facing investors has been primarily reactive to the difficult economy.  Perhaps now, investment results may be more influenced by company fundamentals like product advantages, growth potential, and sales initiatives.  That is good news for quality companies with a clear message to share.

Here are three specific recommendations we offer to communicators in this changing environment:

• Articulate how you have continued to serve customers in good times and bad. Many good companies continued to invest in their products and services despite the down-turn because they understand that product quality will help to differentiate a company from its competitors.
• As we return to a more normal economy, work harder on articulating your comparative advantage. Investments in improving your products will only enhance brand perceptions if you can effectively communicate what you’ve done to make your product even better.
• Mutual fund managers whose results have been skewed by the rough economy need to articulate how their core approach still makes sense in the long run. While the economy goes up and down, the best investors over time stick to a disciplined investment style despite the economic cycle.  Clearly communicate this investment approach and how it has worked over a variety of market cycles, despite the blips of the economic cycle.

Take advantage of investors’ increasing readiness to hear about fundamentals.  When investors are making decisions rationally and for the long-term, it creates opportunities to deliver a clear message about your product.

—Jody Lowe and Ben Bishop

CEOs and executives should ponder the following rules when managing communications under a rapidly changing crisis scenario:

• Sometimes less is more. You control what you say or don’t say. Don’t ad lib. Prepare your response in advance and stick with it. If you are unable to comment further, say so.
• Don’t hide. A lack of information will create a vacuum that will be filled by anyone willing to comment.
• Centralize communications. Identify a spokesperson who can remain calm and disciplined with the appropriate gravitas. This is often the CEO, but not always.
• Just the facts, please. You may not know the answers to every question in a quickly changing crisis. Truthfully present only the facts as you know them today. Don’t minimize the problem or speculate. No one can predict the future. Stick with what you know today. Nothing more.
• Provide reassurance. Great leaders shine in times of crisis. Make it clear that you are doing everything you can to rectify the problem, investigate any mishap, and do what is right by your customers, employees, or the community.
• Do what is right. Just as a physician must first do no harm, great companies emerge from crises by doing what is right regardless of the cost.

– Jody Lowe