The fund’s two recent top holdings—Broadcom Inc., a maker of semiconductor and infrastructure software products, and DTE Energy, a diversified energy company—embody its flexible approach to securities selection. Both companies are covered by Columbia’s equity analysts, but the fund’s portfolio managers approach them differently.
“Broadcom has been a great stock that’s been a cheap, fairly unloved tech company that does acquisitions,” King says. “They did a software acquisition that people hated, but the stock is now about 300 points higher since then, and now people don’t hate it as much. Broadcom’s dividend growth has been excellent, and the yield is still superior. But we’ve sold some shares to keep the weighting contained.”
King notes that the fund holds DTE’s convertible preferred securities rather than its equity because the former offers more income. Elsewhere, he and his team have spotted a couple of interesting yield trends they believe have fallen through the cracks.
That includes convertible securities in the utilities sector that offer high yields. “They’re bond-like but they’re very safe,” King says, pointing to the substantial coupons offered by UGI Corp., a natural gas and electric power distributor, and South Jersey Industries, an energy services holding company.
The other yield trend King highlights is at companies offering a special dividend on top of their base dividend. This includes fund portfolio holdings such as hydrocarbon exploration company Pioneer Natural Resources, personal installment loan provider OneMain Financial and farm machinery maker Agco Corp.
“The concept of special dividends has been frowned on by Wall Street because a lot of this involved weak companies that were doing this to attract investors as a gimmick,” King explains. “But when a company like Pioneer with a strong investment-grade balance sheet does it, and where it’s a very cyclical business and we think the cycle is improving in energy, we look forward to achieving yields as high as 8% per annum from that common stock depending on its stock price. But it would be less if the stock goes up, which would still be good.”
All Of That Jazz
King has played guitar in rock and jazz bands for four decades, and for the past 15 years has played in a regular standing jazz band. “In an emotional intelligence sense, the process of playing jazz is just like running a portfolio, at least the way I do it,” he says, adding that playing a jazz number and running a portfolio both require some improvisation when it comes time to make small, midcourse corrections.
“The other people I deal with aren’t left-handed jazz musicians, so sometimes I have to readjust my brain and realize I’ve missed some important things that smart liner people know,” he says. “And other times I just know things that other people don’t know, and people ask how I know that but I can’t always say why.”
King says he and his team don’t worry about how much they should own in a particular sector; if they see something they like, they buy it. “It’s driven by the supply of things we can get that we like; it’s not driven by our view of the Fed or any sort of macro thinking,” King says. “It’s more of, ‘What’s out there and what can we do?’”
When the team discovers a big sector overweight in the portfolio, they’ll reduce it by selling some of each security in that sector. “We don’t decrease our overweight by selling [outright] something we like,” he explains. “We adjust our weightings within a sector.”
The Columbia fund’s seemingly free-form approach has delivered the performance goods, but Morningstar noted the fund’s credit risk profile is relatively high for its peer category. In addition, its Sharpe ratio is higher—and its standard deviation is higher—than the category average. Sharpe ratio measures reward-to-risk efficiency, and a higher value is better. Standard deviation gauges volatility by measuring dispersion around an average, and a lower value is better.
“There’s no question that we have a higher standard deviation than the category,” King acknowledges. “If you buy the average fund in this space, you get very low volatility and very mediocre returns. We’re OK with people getting a little more volatility, but we’re not talking about hair-raising risk. There’s standard deviation, but then there’s 10 years of history where you see a really bad year for us is like a mid-single-digit loss, while some of the good years have been north of 20% in total return.”
Since the fund launched in July 2011, it twice suffered annual losses in the 6% area. Its best year was 2019, when it posted a total return of 22.6%.
“This is my largest single asset holding,” King says. “The fund is designed for people like me who are later in their working career or retired and with a 15-year or more life expectancy. The point of the fund is there’s definitely some meaningful income, but it’s not intentionally at the expense of your capital, which we expect to grow.”