Q:  What is the history of the fund and how has it evolved? A : The fund was launched in 2003 with two objectives; one to achieve a high level of current income and second to generate capital appreciation through investing in companies with strong growth prospects. The fund lost its footing in 2008 during the financial crisis and went through an extended period of time where performance was not up to our standards. We analyzed what went wrong and we learned a number of lessons. One was that our dividend yield was so high that it significantly limited our flexibility to adapt to the market environment. We optimized the yield to give us flexibility to be selective in the dividends we invest in, while still offering a very competitive yield relative to our peers. The second change was that we shifted to a more team-based approach that taps into our sector expertise and harnesses the research effort in a more collaborative way. The third change was in risk management. We significantly tightened our risk controls and now have a much more systematic process. Q:  Does the word “dynamic” in your fund name signify anything? A : We strive to offer a unique blend of relatively high income and strong capital appreciation and in order to meet those two objectives we must utilize a very dynamic investment process.  We are constantly searching for those companies that can consistently grow earnings and free cash flow by tapping into secular growth opportunities while at the same time rewarding shareholders by increasing their dividends.  We are also actively looking for special dividend opportunities from both core holdings and shorter term investments.  So the word “dynamic” captures our investment process in a nutshell.  Q:  What makes dividend-paying stocks such an attractive asset class? A : We believe dividend-paying stocks are an attractive asset class for three reasons. The first is that we are in a historically low yield environment with the U.S. 10-year Treasury yield below 2%, and the German 10-year bond yield below 1.5%. There are numerous high-quality stocks with yields well above that. The second is that these stocks have great risk-reward relative to alternatives. They offer the opportunity for downside protection, potentially outperforming non-dividend paying stocks in sluggish or declining markets, while also allowing for capital appreciation in healthier markets. The third is that while bonds offer fixed rates, therefore tending to do poorly in inflationary environments, dividends have historically grown at a faster rate than inflation. In the U.S. dividends have grown at a rate of about 1 to 1.5 percent above inflation over time. What do you look for in a dividend-paying stock? In terms of what we look for specifically in stocks, a company can fund a dividend internally through free cash flow, or externally through debt, or equity issuance. But to consistently grow that dividend in a sustainable way the company needs to grow its internally generated free cash flow. We look for companies with a culture of increasing dividends and the free cash flow generation to support that growth. To give you a sense for the opportunity in the U.S., the average payout of the S&P 500 index, which has a 2.2% average dividend yield, is about 30%. This is near historical lows. If we get back to the historical average payout of the eighties and early-nineties of about 50%, the dividend yield would increase from 2.2% to 3.6%. An example of the importance of payout ratios is Swiss pharmaceutical company Roche Holding AG, which has a 3% yield. The company has a strong pipeline of new products and favorable patent protection on their existing product portfolio. Roche has grown their free cash flow over the past ten years at a 10% compounded rate. More impressively, due to a steadily rising payout ratio, the company has increased its dividend at a compounded growth rate of 18% over this time period. We are always looking for similar opportunities, with rising free cash flow and rising payout ratios. Q:  Can you give us an overview of the investment process? A : We have a team-based approach that incorporates both top-down and bottom-up stock picking to manage the fund. We have an investment committee that meets regularly to determine sector and regional weightings. They analyze what our implicit bets are relative to the benchmark and decide whether we want to tweak any of our exposures. We have sector teams, such as consumer and technology, and utilities and infrastructure, which generate individual stock picks and help in managing the composition of their own sector portfolios. New stock ideas are introduced with a brief investment pitch in front of the whole team. We then come to a consensus on whether we want to invest and on potential position sizing. To meet our dividend objective, we look to generate about half of our targeted yield through our core positions. The other half of the dividend income is derived from stocks with shorter holding periods where we will selectively rotate part of the portfolio from one dividend event to the next, including one-time special dividends. Q:  What is your investible universe and investment process? A : Our investment universe consists of dividend paying stocks across the world with a minimum liquidity of a few million dollars per day in trading volume, which adds up to about 6,000 stocks. From that universe we rely on our sector teams to come up with the best mix of companies with strong balance sheets, good cash generation, and solid management teams. If they do not have those qualities then we look for companies where a new management team has come in to turn around a struggling business. Collectively, we are actively monitoring about 500 companies across the world at any one time that fit all these criteria. In terms of the research process, we do our own internal proprietary research where our sector specialists interview management, tour facilities on site, or go to trade shows. We also leverage third party independent and Wall Street analysts, strategists, and economists for idea generation and alternative viewpoints. We meet daily in small groups to discuss our current or prospective holdings. We meet weekly to discuss more macro-oriented themes with the broader investment team. We do not have any specific quantitative criteria that we use to screen out ideas because every situation is different. We are generally looking for sustainable and growing free cash flow generation. We think cash flow is much more difficult to manipulate than earnings. It is also where the fund’s dividends come from, not from earnings. Q:  Could you give us a couple of examples? A : We like the U.S. refining industry, particularly HollyFrontier Corp. We think they have one of the best management teams in the industry and they benefit from a very low cost position with respect to crude oil slates. With the strong production growth of oil in North America and persistent delays in the start-up pipeline projects, we believe refining margins will remain high for significantly longer than the consensus believes. Holly is trading at a nearly 6% yield. We think the generous dividends are sustainable for some time as they have a net cash position and we believe they are likely to continue generating free cash flow well in excess of the dividend. This is a company that had not been as generous in the past in its dividend policy and that started to change over the last couple of years. We had been negative on the refining business in the past as rising crude oil prices, declining product demand and constantly changing regulations had led to weak margins for the refiners. But in the past couple years, production of oil in North America started to accelerate and overwhelm the infrastructure to transport the oil to refineries. And with rising demand for refined products globally, the US has recently become a net exporter for the first time. So we’re in a sweet spot for refining, with a growing surplus of crude oil resulting in low input costs while growing demand for gasoline, jet fuel, diesel and other refined products globally are resulting in higher selling prices. We think this will remain fertile ground for the refiners for another year or so due to the long lead time required to build pipelines to alleviate the surplus of oil in North America. Q:  Other example that highlight your investment style? A : Another example is hospital chain operator, HCA Holdings Inc. We analyzed the impacts of the Affordable Care Act and determined that the hospitals with heavy exposure to uninsured populations would be significant beneficiaries of the Medicaid expansion that will result from this reform. HCA Holdings is one of the biggest hospital operators in the US and it was not a new name to us as we participated in a number of special dividends it paid last year ahead of the tax law changes. While the company has signaled that they will likely use most of their cash this year to do accretive bolt-on acquisitions of hospitals rather than pay dividends, we think the opportunity for both volume and margin expansion for the company over the next couple years is so significant, and under-appreciated in the market that we’re willing to invest in the stock even without a firm commitment to pay a dividend this year. Finally we are long term bulls on natural gas. We think that as we begin to export gas out of the U.S. in the form of LNG (Liquefied Natural Gas), the discount of natural gas to alternative energy sources like Brent Crude will narrow. Instead of buying a “pure play” natural gas exploration and production company with un-hedged exposure to natural gas prices and all the volatility that comes with it, we are investing in a pipeline company called The Williams Company, which has more of a toll booth-like, fee-based business model that benefits from the growth and the throughput of natural gas, and the build-out of related infrastructure without the commodity pricing risk. Williams has a nearly 4% yield and has nearly tripled its dividend rate over the past couple years. Q:  Once you identify these opportunities, how do you initiate the position? What is the buy discipline? A : We start with an investment pitch by the sector specialists who came up with the idea, which consists of a one-to-two page presentation of the investment idea with a target price, risks, and catalysts. We then discuss it with the broader group to try to come up with a consensus on the merit of the idea. In terms of position sizing, we work with the sector teams to decide the appropriate weighting of the stock within the sector and within the overall portfolio. Our typical position sizes are roughly 1% with a maximum of 2.5% and we tend to initiate in increments of half a percent and build as we go. Q:  When do you decide to sell a stock? Do you establish price targets? A : To achieve sell discipline we monitor price movements of all of our individual stocks relative to our benchmark. If a stock falls 15% relative to the benchmark in a three-month period, the stock will be flagged and we will discuss it in a small group, to either sell it or add to it. If a stock rises up to our target price, again the stock will be flagged and we will discuss whether to take action or not. However, we are flexible with our target prices. We use them primarily as a risk management tool, not as a guiding principle to the way we invest. As stocks rise up to within shooting distance of our internal target price, we reassess and our analysts may, at that point, decide that they need to increase their price target based on a number of factors, or not. It depends on the situation. Q:  What is your benchmark? A : It is difficult to find a benchmark for a diversified global equity fund with a high yield. The truth is there is no perfect benchmark for our strategy, but we do recognize that the pool we swim in is large. Given the global nature of the funds, and our bias towards high-quality, well-capitalized companies, we feel that the benchmark that correlates best to our fund is the MSCI All Country World Index. We like to think of ourselves as benchmark agnostic, but also benchmark aware. We also monitor a number of dividend-oriented benchmarks, but have found that each one has drawbacks. For example, some are U.S. only and some are heavily concentrated in a few sectors like utilities, which is not very representative of the broader market. We have an investment committee that meets at least once a month to analyze our regional and sector weightings relative to our benchmark. We are constantly monitoring those exposures and discussing whether it makes sense to be overweight or underweight in a certain region or sector, depending on our top-down view. We are first managing against sectors, and secondarily managing against regions. We are a bottom-up research-driven investment house and at the same time we are looking to mitigate the risk of being under- or over-exposed to a given sector or region. Q:  How do you define risk? A : We have a fairly systematic approach towards risk management. We specifically focus on three areas; tracking error, sell discipline, and investment style. When we think about tracking error, we are not trying to hug the benchmark, we are simply trying to manage our exposures to sectors or regions and balance those exposures with our convictions. We incorporate the volatility of a given sector to determine our comfort zone with respect to under or over weights. For a sector like utilities, we will have a wider comfort zone than for a high-beta sector, like materials.