David King bet on himself more than a decade ago to carve out a niche as an old-school fund manager, and that move is paying off handsomely this year once again. King runs the Columbia Flexible Capital Income Fund , a multi-asset class fund that just passed its 10-year mark and is dramatically outperforming its competitors this year. The fund has a five-star rating from Morningstar and a stellar performance track record. The fund has a total return of more than 12% so far this year, beating its category average by roughly 5.7 percentage points, and its 10-year average annual return of more than 10% places it in the top 2% of all funds in its category, according to Morningstar. King said he founded the fund based on the idea that "the ever increasing specialization of the buy side" had created an opening for success in the cross-asset space. "It had become completely agreed upon that people could do this kind of bonds and that kind of bonds, and then you needed three stock managers and convertibles manager and maybe a REIT manager — you need all these people now," King said. "Well, you're going to allocate assets, but you're going to miss the details." The fund has a flexible group of potential investments, avoiding mainly aggressive growth stocks, derivatives and cash, but all of the holdings generate income. King estimated that the long-term average would be one-third equities, one-third traditional fixed income and one-third mezzanine debt and convertibles. Equities made up 43% of the fund at the end of July. King says the key for his fund is to focus on securities that can present upside for both the invested capital and payouts and sell positions where there is little hope for capital appreciation. For stocks, that would mean a company whose share price can rise and have its dividend yield increase. "They're growing, but they're mature enough to have a solid dividend, which is also growing," he said of the typical candidate. Additionally, King said he makes no promise that his fund will never have a lower payout year to year, giving him the flexibility to add a potential growth asset even if it means exiting a position with a higher yield currently. "Our dividend is going to go up over time, but it's not going to go up in a straight line," he said. The current market environment is not one where income investors are expected to thrive. Stocks are at record highs, often lowering dividend yields, while interest rates remain near all-time lows. King admits that it is more difficult to find opportunities right now but said it is important to not lower quality standards. "It intensifies the weed search, but we're the experts at the weeds," he said. One recent buy that has paid off well for Columbia is Pfizer . The firm added the stock during the summer as the delta variant emerged as a threat, raising the prospects for future vaccine revenue, and then the stock surged — an unusually quick win for the fund, King said. ESG in the income investing arena Any list of high-dividend stocks would likely include many names that could run afoul of some environmental-focused investors, and the Columbia Threadneedle fund is no exception. The portfolio includes positions in tobacco giant Philip Morris and legacy oil names Chevron and Exxon . King said his fund tries to avoid the worst stocks based on ESG scores by individual sector but doesn't avoid an entire industry, like fossil fuels. Because stocks with ESG concerns are a potential target for activist investors, their dividends could be at heightened risk going forward. However, King pointed to Exxon to show that activist investors aren't necessarily bad news for dividend investors. "In the case of Exxon, they now have three or four people on their board that they didn't have a year ago and really didn't want, and it's courtesy of Engine One and also the D.E. Shaw people. … And really what that's led to is, 'Hey, it's a waste of too much money searching for traditional hydrocarbons. For the moment, back off on that please,' he said. "And they have, and the balance sheet has strengthened and now it looks like the dividend is safe." Finding the next buy King credits the large team at Columbia Threadneedle for helping to make his fund a success. He said he will often field a stock pitch from analysts at the firm, and then can bounce them off the analyst that covers the fixed income side as well. Sometimes, King said, he has used an equity pitch as the start of a bottom-up process that led to buying a company's debt instead. That flexibility and comfort with comparing yields from different asset classes is what has led his fund to beat its competitors, King said. "The belief was, well, the reason you don't compare AT & T to the next junk bond deal is equity analysis is very different from bond analysis. But, I think in our part of the world that's actually not true, when you're looking at cash flows," King said.
The Wall St. sign is seen near the New York Stock Exchange (NYSE) in New York City, May 4, 2021.
Brendan McDermid | Reuters
David King bet on himself more than a decade ago to carve out a niche as an old-school fund manager, and that move is paying off handsomely this year once again.