Beating the Market With Buy and Hold

A SunAmerica dividend fund sticks with its picks for at least a year | “I would chalk the results up more to luck than anything else”

Charles Stein

SunAmerica’s Current Holdings

The recent turmoil in equities and bonds didn’t trigger any buying or selling at the $4.5 billion SunAmerica Focused Dividend Strategy Portfolio. The fund chooses its 30 stocks once a year and sticks with them no matter what. So far the strategy is working; from March 2009, when the stock market rally began, through June 24, the fund has a higher total return than all but two of 222 large funds that buy U.S. stocks. It also has less volatility than 84percent of them. That combination gave it the best risk-adjusted return in the group, according to Bloomberg’s Riskless Return ranking. “The beauty of our model is its simplicity and discipline,” says Timothy Pettee, chief investment officer for SunAmerica Asset Management. “We are not sitting here saying, ‘Gee, do we like this stock? Or do we want to overweight this industry?’ ”

The system has been in place since Brendan Voege became manager in September 2006. Voege holds the 10 highest-yielding stocks in the Dow Jones industrial average—the so-called Dogs of the Dow. He draws the next 20 from the Russell 1000 Value Index, based on a formula that ranks companies by dividends, profitability, and valuation. All must have a dividend yield higher than the median for dividend-paying stocks in the Standard & Poor’s 500-stock index, currently 2.15 percent. The fund has a dividend yield of 3.72 percent, according to data compiled by Bloomberg.

So far this year, 9 of the fund’s top 10 holdings have beaten the S&P 500. The fund is also the best performer in its peer group since May 21, the day before Federal Reserve Chairman Ben Bernanke indicated the central bank may scale back asset purchases, triggering a global selloff. Voege has chosen winners such as Hewlett-Packard, up 69 percent this year including dividends, and DuPont, which has more than tripled since the market hit a 12-year low in March 2009.

Not everyone is a fan of the approach. Francis Kinniry, a principal at Vanguard Group, says the SunAmerica fund should be thought of as a form of rules-based investment. Rules-based funds will go through periods when they “shine” and others when they lag behind market benchmarks, he says. “It is a little naive to think you can just write down some rules and do better over time.” Vanguard, which competes with SunAmerica, is known for its low-cost index funds. “I would chalk the results up more to luck than anything else,” says Steven Rogé, a portfolio manager with R.W. Rogé. “I’m not sure it will do that well during the next downturn.”

Under Voege’s direction, the fund returned 80 percent from 2007 through June 21 of this year, vs. 29 percent for the S&P 500. Investors have noticed, depositing $1.5 billion in the fund during 2012 and an additional $1 billion in the first five months of 2013, according to data from Morningstar. That brought its total assets to $4.5 billion. Insurer American International Group owns Sun America.

Dividend-paying stocks have appealed to investors in the past few years because of the income they’ve generated in an environment with historically low interest rates. “These bond-equivalent stocks that have been wildly popular while rates have been at rock bottom will be less attractive in the future if their true fixed-income counterparts start yielding 3 to 4 percent again,” Adam Longenecker, an analyst with EPFR Global, a firm that tracks the flow of money into funds, wrote in an e-mail. That prospect doesn’t trouble SunAmerica’s Pettee. “This is not just a dividend fund,” he says. “We will do just fine, I think, if and when dividends don’t get the attention they have been getting.”

The bottom line Holding 30 high-dividend stocks for at least a year, a SunAmerica fund has returned 80 percent since 2007.


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