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Even amid the coronavirus pandemic, the argument between growth and value strategies persists.
There is no question that growth has beaten value for a long time as large, rapidly growing technology companies have dominated the broad indexes.
Still, a value strategy may be a prudent way to diversify away from indexes that are heavily weighted to a handful of stocks. That’s because growth stocks typically don’t perform well during recessions. Add uncertainty over the effects of the coronavirus, strained U.S.-China trade relations and social unrest, and undervalued equities look more attractive.
An investment for such a strategy is the Pacific Global U.S. Equity Income ETF, which holds hundreds of value stocks.
The ETF US:USDY is actively managed, holds 398 value stocks and has a dividend yield of 3.74%, nearly double that of the large-cap benchmark, the S&P 500 Index US:SPX, which has a yield of 1.87%, according to FactSet.
The Pacific Global U.S. Equity Income ETF was established in February 2019. It is managed by Cadence Capital Management, a subsidiary of Pacific Life Insurance Co. in Boston, with about $2 billion in assets under management. Michael Skillman, the CEO of Cadence Capital Management, described the ETF during an interview for this article.
Here’s a comparison of average annual returns (with dividends reinvested) for the Russell 1000 Growth Index US:RLG, the Russell 1000 Value Index US:RLV and the S&P 500 through June 1:
| Avg. return – 3 years | Avg. return – 5 years | Avg. return – 10 years | Avg. return – 15 years | Avg. return – 20 years | |
| Russell 1000 Growth Index | 17.1% | 14.5% | 16.3% | 10.9% | 5.5% |
| Russell 1000 Value Index | 2.5% | 4.4% | 10.2% | 6.3% | 6.1% |
| S&P 500 Index | 10.1% | 9.9% | 13.4% | 8.7% | 5.9% |
| Source: FactSet | |||||
For all the periods shown, going back 15 years, the Russell 1000 Value Index has underperformed the others by wide margins. The market-cap weighting has played a significant role in this, as the top five holdings of the Russell 1000 Growth Index — Microsoft Corp. US:MSFT, Apple Inc. US:AAPL, Amazon.com Inc. US:AMZN, Facebook Inc. US:FB and Google Inc. US:GOOG US:GOOGL — make up a combined 34.4% of the index. They make up 21.6% of the S&P 500.
Skillman said growth strategies with a heavy weighting toward rapidly growing tech giants “is great when it is working, but when it turns, it can work against you.”
He and his team rebalance the portfolio of the Pacific Global U.S. Equity Income ETF quarterly. They start with the Russell 1000 Value Index, which has 768 stocks, and narrow the group to those with dividend yields that are at least slightly higher than average. Then they place greater weighting on companies that have increased dividends for at least five straight years, with even greater weighting for those that have increased for 10 straight years, and so on. They also screen for companies with sufficient liquidity and weed out those in financial distress. US:USDY
“If you bucket by quintile, the highest-yielding stocks are not the best performers. The second quintile is,” he said. “So we eliminate low equity and excessively high dividends.”
Michael Skillman, CEO of Cadence Capital Management.
Cadence Capital Management
When the portfolio is rebalanced, no stock makes up more than 1.25% of the portfolio. Skillman and his team will sell shares of any company that has cut dividends.
When asked about taking losses every time he sells shares of a company that has lowered its dividend, he said: “If you take those losses, while buying higher-yielding stocks, you are winning over the long term.” The diversification of the fund will also limit those losses.
Select holdings
Keeping in mind that the fund is diversified, Skillman pointed out companies he believes are well-positioned for the difficult economic environment springing from the COVID-19 outbreak.
Among “front-line beneficiaries,” he likes Gilead Sciences Inc. US:GILD “on the heels of remdesivir,” with a dividend yield of 3.62%, along with Johnson & Johnson US:JNJ, whose dividend yield is 2.76%, and AbbVie Inc. US:ABBV, with a dividend yield of 5.2%.
Skillman’s second bucket, which he called “steady” performers, includes Clorox Co. US:CLX, which has seen its dividend yield decline to 2.17%. The company has increased its payout for 42 years, making it “a poster child for a Steady Eddy.” This bucket also includes Procter & Gamble Co. US:PG, with a yield of 2.70% and Colgate-Palmolive Co. US:CL, which yields 2.42%.
The third bucket is cyclical stocks, which Skillman called “the most controversial, but maybe greatest opportunity,” including J.P. Morgan Chase & Co. US:JPM, with a dividend yield of 3.65%, MetLife Inc. US:MET, with a yield of 5.06%, and Travelers Cos. US:TRV, which yields 3.11%.
Longer-term performance
The Pacific Global U.S. Equity Income ETF was established in February 2019, but Skillman and his team have been running the same strategy for separate accounts since Aug. 31, 2013. Over the 12 months through June 1, the fund is down 3.2% (with reinvested dividends), compared with a return of minus 1.1% for its benchmark, the Russell 1000 Value Index. The ETF return is after annual expenses, which are 0.29% of assets under management.
Cadence Capital Management provided annualized average returns (after expenses) for longer periods, through March 31:
| Avg. return – 3 years through March 31 | Avg. return – 5 years through March 31 | Avg. annualized return – Aug. 31, 2013, through March 31 | |
| Cadence U.S. Equity Income Strategy | -2.0% | 2.9% | 6.1% |
| Russell 1000 Value Index | -2.2% | 1.9% | 5.2% |
| Source: Cadence Capital Management | |||
Don’t miss:This unusual income fund has a dividend yield of 6.5% and has beaten the S&P 500
