We believe: Smaller certain returns today are worth more than larger uncertain future returns
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
– John D. Rockefeller
“A stock dividend is something tangible — it’s not an earnings projection; it’s something solid, in hand. A stock dividend is a true return on the investment. Everything else is hope and speculation.”
– Richard Russell
Our view is that high and consistent distributions are important, though not only for the positive impact that they have on our clients’ transaction accounts. More importantly, a portfolio with higher than average yields will produce a more reliable return, will have reduced volatility, and will limit the impact of capital losses during market corrections.
After twenty years’ experience in the equity markets in Australia and North America we have observed numerous examples of management teams squandering retained capital. We feel it is often in investors’ interests to have this capital returned to them instead. We also regularly see management teams restating past earnings per share due to changes in accounting policy, but a company can never restate a past dividend payment.
Returning excess capital to investors as distributions rather than retaining it reduces the capacity for management teams – acting as investors’ agents – to expend capital in ways that might not be in the best interests of investors. Returning capital to investors limits the ability of management teams to expend – sometimes impulsively – investors’ capital on empire building acquisitions.
Where excess capital is returned to investors in the form of distributions, this excess capital sits in investors’ bank accounts rather than the company’s. If management want additional equity for an acquisition they are then required to make an investment case to their investors.
We pursue: Investment success through making fewer mistakes
At the heart of the investment process is a customised Quality Filter Model (QFM), which is used in conjunction with a series of valuation tools.
Rather than chasing property trusts with high returns and high risk, we see that superior performance and lower volatility of returns are best delivered by concentrating on avoiding mistakes or “performance torpedoes”.
The QFM for our property fund focuses on researching the four key factors that have previously resulted in the long term destruction of value in the Listed Property Sector. We measure the change in these factors on a regular basis. This enables us to avoid investing in property trusts that possess these characteristics. They are:
• High financial leverage
• Abnormal asset growth
• Corporate governance issues
• Earnings quality.
Whilst fund managers naturally want to impress investors by telling them that they owned a particular company that was the top performer in the index, our investment philosophy places greater emphasis on avoiding the poor performers or “torpedo stocks” as this leads to more consistent long term performance. Additionally our focus on high income delivered now reflects our observation that the market consistently overpays for blue sky potential and overlooks the value of more certain returns on offer today.
If you would like to learn more, then please see how to invest with Atlas Funds.