Thornburg Investment Income Builder Fund – 3rd Quarter Update 2024

Thornburg Investment Income Builder Fund – 3rd Quarter Update 2024

Adam Sparkman

Good afternoon and welcome to the Thornburg Investment Income Builder Quarterly Update Call. My name is Adam Sparkman and I am a client portfolio manager with Thornburg Investment Management. A few housekeeping items before we get started. At this time, all participants are in a listen only mode. However, you can ask questions at any time by submitting them through WebEx or emailing us at questions@thornburg.com

This webcast is being recorded and a replay will be available in a few days. You can access today’s presentation slides by going to www.thornburg.com/TIBIX-quarrterly, that’s Just to remind you, today’s presentation may contain forward looking statements based on management’s current expectations and are subject to uncertainty and changes in circumstances.

Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. For those in the call today who may be less familiar with Thornburg, we are an investment manager based in Santa Fe, New Mexico, overseeing approximately $47 billion of assets across a suite of actively managed equity, fixed income and multi-asset solutions.

I’d like to quickly introduce our speakers today. Brian McMahon, portfolio manager, vice chairman and chief investment strategist for Thornburg, along with portfolio managers Matt Burdett and Christian Hoffmann, our head of equities and fixed income. So, with that, let me turn it over to Brian McMahon, who will kick us off.

Brian McMahon

Okay. Thank you, Adam. And thanks to everyone on this call today.

Let’s dive in with the slides to guide the discussion. We have slides at www.thornburg.com. If you haven’t tuned into those yet and I’ll just start with slide number two, which is titled Key Macroeconomic Issues as of October of 2024. And I’ll just start at the end and work backwards. Optimism prevails in financial markets. Equity prices have increased over the last seven quarters, and analysts expect the S&P 500 index earnings to grow 9% this year, calendar 2024 and another 13 plus percent next year.

And most non-U.S. equity portfolio’s market portfolios are also expected to grow earnings above average both this year and next year. And in the bond market. We’ve seen spreads, credit spreads come in pretty sharply over the last year, which is indicative, I think, by bond market participants of decreasing fear of any recession materializing this year. And the bond market usually sniffs that out pretty, pretty early.

The U.S. Fed funds rate has dropped 50 basis points since our last call. So now at 483, down from 5003. And that’s on the back of inflationary pressures that have moderated. So U.S. core PC was two points, 7% in August and pretty similar to that run rate today. I’ll go to the next slide. Slide number three. Just a reminder that Thornburg Investment Income Builder is a solution that seeks to provide attractive income today and our trailing 12-month dividend is a dollar 20.

The Navy last night 2686. That is a yield of 4.46 which is attractive today continues to be at a premium to the ten year U.S. Treasury yield. As far as growing the dividend over time, we would expect that to lead to long term capital appreciation, which it has. I’ll just remind you that over the very long term, our dividend has grown from $0.53 a share in 2023 to a dollar 21 rate at the moment, and our net asset value has gone from $11.90 at inception to $26.65, so up 164%.

Matt, we’ll get into some some more specific numbers on that. We do this with a investable universe of dividend paying stocks from around the globe and also bonds and hybrid securities. And we continue to be focused on the ability and willingness of the firms that we own to do pay dividends. Good dividends today and hopefully growing over time.

Slide number four. The next slide gives an overview of our equity portfolio allocation shifts. And if you look at the second column from the right in this table, you’ll see the weightings as of September 30, 2024. And the far right column is the difference in allocation to specific sectors over the last year, we’ve highlighted four of these segments, specifically communications services, where we increase the allocation by 6.6% over the trailing 12 months and a little over half of that is due to adding AT&T on weakness around this time last year.

We also have increased industrials a bit, but that still is a relatively small way and we’ve paid for that fund for those two increases, primarily by cutting the allocations to energy segment and materials segment, as has shown there in that table. The next slide number five is portfolio characteristics. These haven’t really changed a great deal over the last quarter and frankly, over the last year.

Maybe one thing that I’ll point out you’ll see are our trailing one year PE 14.3 times. That’s relatively in line with the longer term averages a bit higher than it was a year ago. At this time, the gap between the trailing one year PE and the forward one year PE estimate would indicate and expectation and these are consensus analysts, consensus estimates, but that would indicate an expectation for very strong earnings growth on a dollar weighted basis for our portfolio securities over the next year.

I’m not sure that will get that. But if we get some reasonable proportion of that, that should be supportive of the valuations that we have today on top of our dividend. I’ll just point out that the PE, the forward one year estimate this time last year was 9.9 times. So we’ve had a little bit of appreciation in the portfolio, but I think we should probably be able to get more The NAV at the end of Q3 23 was 2245, so it’s up $4.20. So that’s 18% over that the period.

The next two slides have our top ten equity holdings as of September 30. And then the second 10-11 to 20 equity holdings. And maybe just a couple of remarks about that. If you look at those top 20 holdings, seven of them actually had negative share price developments in calendar 2023, and six of these have been six of the seven have been positive this year in 2024.

And if you look at Slide six, you’ll see on the on this slide, AT&T and then end group respectively were both down last year. That’s the middle column on the page and there are 31% and 26% year to date respectively. That’s the share price increase. So that’s the kind of thing that we like to take advantage of.

We’ve we obviously added our capital to both of those names when the prices were down. And if I look at our top 24 of them are negative year to date this year, three of them were pretty positive last year and we’ve added capital to three of those names so far this year. So that takes care of slides number six and seven.

Which brings us to slides 8 to 17, which gives you some detail on each of our top ten holdings. And I won’t go through I won’t go through all of these, but I will talk about a couple of them and specifically, and I’ll start with the first one, which is Orange, which is our largest holding, and orange is a bit of a plodder, as it says in the shaded box.

They are a multinational telecom services provider, 246 mobile customers as of June 30 and 21 million terrestrial broadband customers in 26 countries. That mobile customer accounts up 3% for mobile handsets over the trailing year, and the broadband customer base is up 4% over the trailing year. You’ll also see that the dividend yields 7.4%. They grew their dividend by 3% in calendar 2024 and we expect about 4% next year.

And that’s based on public disclosure by Orange is management. The other thing that I’ll mention is if you look up on the first text sentence, you see that the market cap is €26.8 billion. We expect free cash flow after CapEx this year to be €3.8 billion and 4 billion next year euros. So that that cash flow yield on 26.8 is very interesting.

Now kind of working its way up into the mid-teens, which is supportive of that ability to pay. And frankly, we’d like to see even more willingness to pay rising dividend in the in the future. But hopefully that gives you some color on what we see in that investment to support the mission of the one big investment income builder.

The next one that I’ll talk about is Broadcom. And this has obviously been a very, very strong performer for the income builder, as indicated by the fact that it was up 99.6% last year, the share price and up another 54% in the first nine months of this year. The dividend is now 1.2%. But that’s not our yield.

We bought Broadcom some years ago when it was considerably weaker. And so our yield on the capital that we had invested is is closer to 5% on up on Broadcom. And the other thing that I’ll point out, by the way, their business is doing just fine, as noted in the text, their consensus revenue and earnings estimates for this fiscal year have increased quite a bit, in part due to acquisitions.

But Broadcom at September 30, 2023, a year ago, was our fourth largest holding. Now it’s our second largest holding and that’s despite the fact that we sold down about 19% of the shares that we owned a year ago and have been able to redeploy that capital into into other high yield investments. So I think these two names are kind of indicative of of the mix that we’re looking for in the income builder portfolio, some maybe more exciting and some less exciting investments in the in the portfolio.

And I won’t go through that all ten of these stocks, but now I’ll stick to or skip to slide number 18, which shows the potential to grow the dividend distribution over time. One of the important things that we depend on is that most of our equities grow their dividends over time, and last year 73% of our equity portfolio by weight grew their dividends.

It should be equal to that or maybe higher this year. So we’ll we’ll see how that goes. We just got some good news today, literally from one of our top 20 holdings, which is Deutsche Telekom, which announced an increase in its dividend of 17% for 2025. So they won’t all increase like that, but that’s off to a good start and much stronger than it has been in recent years.

And with that, I’ll turn over to Matt.

Matt Burdett

Great. Thanks, Brian. Hello, everyone. Thanks for joining us. I’ll start on slide 19. So given the debate around where Fed funds is going to go, we thought it’d be interesting to just kind of highlight the performance of the investment income builder versus our blended benchmark and the MSCI World global portfolio at different levels of Fed funds rate.

And so what you can see in the table here is we’re showing environments where the Fed funds rate is 3% or higher. There were 19 quarters where that was the case and the investment income builder’s performance versus the blended benchmark was over 400 basis points. Annualized outperformance and 85%, 85 basis points annualized over the MSCI world.

And if you look at the one two, 3% range where there was 24 quarters of frequency, those respective outperformance annualized were 95 basis points and 75 basis points. And then when you’re in an environment of less than 1%, which is 44 quarters, so it’s about half of the life of the Investment Income Builder, We managed to eke out a 78 basis points annualized performance versus the blended bench, but an underperformance of 136 basis points versus the MSCI World.

Now if you go back to December 31st, 1982 to today, the average Fed funds rate was 3.75. Right. And a high of 11.6 and a low of course of zero. So if you if you think about an average of 3.75 and we can debate what it will be. But the point is, in an environment, money is not free and somewhat reckless investments can be made because the cost of capital is so low.

I think in a more normal environment we have we have performed much better. So we’ll see. We’ll see what comes with the rates market. But this is here just as a reference for everyone. Moving on to Slide 20, just to run through some selected performance of various portfolios around the world, everyone is pretty familiar with all of these markets.

So for the year to date, 2024 through September 30, the leader here is the Russell 3000 growth with about a 24% return. The S&P 500 has returned 22% year to date, and of that return, 50%, 50.5%. Contribution to that return is from the top ten stocks in the S&P 500. Our ten stocks were responsible for 50% of that return.

Now, that’s different from the last quarter when we talked about this, where it was almost 70% of the return came from ten stocks. So you are seeing a bit of broadening there. But still, we would argue a fairly concentrated return in the S&P 500. And you can see the other returns there generally speaking, pretty good returns all across the board there.

Turning to Slide 21, looking at the Investment Income Builder performance here, you can see all the numbers there on the tables. I guess what I would highlight is, is the since inception return of the iShares has been 9.5% per annum for about 21 years and the other one I would highlight is the one year return of 25% for the Investment Income Builder, which is pretty respectable given we own 0% of the Magnificent eight stocks.

Right? Because they’re not they’re not income producers. It wouldn’t be appropriate for us to want to buy those stocks. But we’ve managed to find ideas in other places, some of which Brian highlighted to help drive returns that still meet kind of our income mission. Moving to Slide 22, this is just showing you the quarterly returns time and we have completed the 87, 87 quarters of which 64.

We delivered a positive return. So, a 74% frequency of positive returns on a quarterly basis over time. So, 23 I think this is an important slide. We like to highlight this because it shows the, you know, our philosophy of having a dynamic asset allocation. I think it’s a pretty simple picture, but really it’s the it tells us tells you the philosophy that we have of, you know, we’re not afraid to be different for the right reasons.

Right. And what this slide is showing you in the dark, dark blue line, that is the fixed income and cash allocate and the Investment Income Builder and the two dashed lines are yield to worst blue being US high yield and orange being European High yield. And the picture shows look, we buy bonds when the yields are high and we don’t buy bonds when they yields are low.

Right. Because we’re looking for the best risk adjusted returns we can to provide to help us meet the income mission here. Advancing to slide 24, this is just showing the quarterly distributions. Brian touched on this a little bit earlier. Basically for the quarter and for the trailing 12 month period, the dividends are essentially flat. We’re working hard to grow our dividends over time, but as of as of the third quarter, we’re kind of tracking flat year on year.

Slide 25 highlights the yield of the Investment Income Builder in the in the gray bars and compares it to our blended index in the blue line versus the U.S. corporate bond index in orange and then CPI in the black, the black line. The simple take home here is throughout the 20 plus year period, the yield has always been north of 4%, well ahead of our blended and also ahead of CPI. Other than in 2022 when we had the surge in CPI come in, coming out of the pandemic.

Now on to Slide 26, this is the first report card slide that will I’ll run through here. Many of you, if you’ve listened to this call before, you’ve seen this. So we just updated every quarter. And this first instance, this is a hypothetical $100,000 investment.

This person has used the Investment Income Builder for cash needs. So they bought it at the inception back it at the end of 2002. And over that period of time, they collected the income. They received a $181,706 of dividends over that time off of their initial $100,000 investment. While the capital appreciated to $238,510. Right? And the trailing 12 month dividend was $10,150.

So if you’re to do a yield on original cost, which Brian hinted at with the Broadcom example, you of course have a north of 10% yield on your original cost for this for this person who basically, you know, grew their capital base and collected almost two X the initial capital they put in in dividends.

Slide 27 is the same hypothetical investment over the same timeframe, except this is a, you know, perhaps one of your clients who doesn’t need the money and would rather build for wealth here. So they’ve reinvested all of the dividends over time. And the results of doing that are that the total cumulative dividends received are $328,200, which means your shares original shares of 8375 have tripled to 25,256 shares. And over that time the capital appreciated to $345,386. So it’s pretty powerful here you can see letting the dividends do the work for you.

And now let’s assume that this person decides, you know what, I want to turn on the income now. So they have their two over 25,000 shares. You multiply that by the dollar 20 dividend that was mentioned earlier on a daily basis. And you’ve got over $30,000, $30,408 or a yield on original cost of 30%. There are not a whole lot of investments out there that do this kind of magic, really.

And it’s really just being patient, investing in companies that have that ability and willingness to pay dividends over time. And it ends up generating, you know, what we think is a pretty a pretty compelling return. And the total account value at the end of this period is $673,586. So, so pretty, pretty useful.

Slide 28 Last slide for me, just a reminder to everyone about dividends and the fact that they do matter, although there are periods in time when it feels like they don’t.

So this table here is showing you the S&P 500 going all the way back to 1871. And what we’ve done here is we’ve segmented out by decade the average price appreciation, the average income component, the sum of the twos, the total return. And then in the far right column, it’s income as a percentage of total return. Right. And what you see two big takeaways or one on average over this long time series, dividends are about half of your total return, right?

So about half of it. However, as can be seen in the far right column, that percentage varies wildly over different periods. And for example, in the build up of in the dot com era, 1991 to 2000, you had a average price appreciation of almost 15% per annum with a total return of 17 and a half percent per annum, and dividends were only less than 15% of that total return over time.

Right. But the following decade, the price return was on average -50 basis points per annum. Right. And dividends ended up being 136% of your return. So the point here is don’t forget about how dividends can matter to your total return. And the question people should be asking themselves is where are my total returns going to come from? Now?

Right in the future? We’ve started off, you know, the next decade and in the current decade that we’re in with pretty strong price returns of 11.6% for the for what I call the great QE era decade and then 12% for the decade that we’re currently in. So as a reminder, 50% of your return, at least in the S&P 500, has been from dividends.

And we think that they matter going forward. So with that, I’ll pass it off to Adam.

Adam Sparkman

All right. Well, thanks, Matt and Brian for the great color on the quarter. We’ve got some time for Q&A here and there. Several questions that have come in from the audience. Feel free to continue posting if you have something you’d like us to hit on in particular, but I think we’ll kick off first with a question about the fixed income portion of the portfolio.

So I’ll throw this to Christian. Christian. The question is, with the bond portion of the portfolio currently having a duration of roughly four years and a yield to worse of about 8%, and as Bryan highlighted, equities getting a bit more expensive over the past year, although this portfolio remains, we think, very attractively priced now that we are in the cutting phase of the cycle. What are your thoughts on adding duration to the fixed income sleeve?

Christian Hoffmann

Thanks, Adam. Certainly we’re not opposed to adding duration and certainly a more compelling idea relative to the decade plus where we lived in a zero interest rate world. But for folks newer to the portfolio, I think it is worth pointing out that while this is multi asset and has stocks and bonds, it’s certainly not the S&P 500 plus the AG or, you know, a very boring portfolio of, you know, interest rate sensitive bonds.

You know, as we’ve said many times, the equities tend to be more bond like and B, the bonds tend to be more equity like that is a bit more higher octane, total return focused. So with that in mind, I’d also highlight the fact that high yield spreads today are to 90, which is incredibly low. I think the last 24 months maybe we hit to 80, but in bad times you blew out to 500, 600,000 spread.

So the upside downside, taking credit risk right now is pretty finely tuned where you have just very little room for error and very, very little room for outperformance besides just clipping your coupon. So it’s something we can consider. But again, we’re not looking to take a ton of credit risk and certainly not a two kind of credit risk with duration attached to it.

But those are all those are all things on the table.

Adam Sparkman

All right, Thanks, Christian. Brian, we’ve got a I think a good question here about the dividend growth of the portfolio. Somebody pointed out from our our top 20 slides the question is four of the top 25 companies in the portfolio have negative five year local currency dividend growth rates with another two at less than 1% growth including orange, our top holding in the portfolio sorry, I’m trying to make sure I can read it here.

Are you seeking a certain dividend growth rate within the portfolio over the five years? And despite the negative or low growth rates of some of these holdings, are these companies being held more for capital appreciation opportunities or is there something that you see as a catalyst to growth in a lot of these names over the next five years?

Brian McMahon

Yeah. Okay. That’s a good question. And thank you for being sharp eyed and reading that and frankly, for asking the question as well. It’s true that that four of the top 20 do have a negative trailing five year dividend growth. Two of them are telcos that have had significant spin offs and significant reductions that in our mind improve the overall business.

So if you look at AT&T, which everybody knows about, they spun off Warner and they spun off DirectTV, which improves the overall business. And basically they’re investing now in connectivity and specifically upgrading their fiber footprint. So while they while they do show negative trailing five year dividend growth as a result of spinning off those significant businesses, we do think that their focus on connectivity going forward and reducing debt, which they’ve gotten almost all the way to their debt target of two and a half times net debt to Avatar and they the debt that they that they will retain has an average maturity of about 16 years and weighted average cost of a little under 4%. So we don’t even want them to pay that back. We’d just like them to shrink their share base and start to grow the dividend again. So we’re forward looking and forward looking with with Vodafone. But and the other one that’s in that group and Dessa, which is a Iberian electric utility, paid a big special dividend back in 2019.

And so while they have been growing their ordinary dividend, if we just if we do a simple numbers look back to 2019, they paid a special dividend there and then maybe we’ll get another special dividend that will come up every five or six years because their business is going pretty well. The last one that had a negative five year dividend growth is Glencore, which also paid a special dividend.

That’s a diversified miner. And mining business is kind of notoriously volatile. But we do want to have a bit of a claim on some on the economics of some metals and particularly copper, but also some commodities trading that Glencore has been pretty good at. So I think the exciting and the last comments that you specifically mentioned or aren’t, we think they’re going to do a lot better than 2.6% for a year.

I mentioned that next year we’re expecting a dividend to be up 4%. But importantly, what around did the last five years and really longer than the last five years was to to put fiber of optical fiber footprint to cover approximately 80% of the residences in France, which is their largest single country, but also have put down a lot of optical fiber in Spain and in Poland.

And they’re pretty much done with that at this point. And so now instead of spending a lot of capital out of your operating earnings and operating cash flow, they’re going to get to harvest some of that seed that they put in the ground. And so we expect on a revenue base of about €40 billion, we expect the CapEx as a percent of revenue to come down by two, three, maybe 4%, maybe even 5% over the next five years.

And each of those percents is €400 million. And if you look at that cash flow statistic that I put on the or on slide, you can see 3.8 billion cash flow after CapEx that we expect this year. And if you start adding 400 million to that as a percent of CapEx to revenue coming down, that gives the potential for some very interesting dividend increases.

Looking forward as they kind of harvest the business potential of fiber that should last for decades should have useful life of a half decade. So I hope that explains kind of how we’re looking at things. It’s more than just a doing a thought on numbers we do pay attention to the underlying condition of the business in a number of paying customers they have and how management and the boards of these businesses are allocating capital and how they plan to allocate it and how much is left over for us as shareholders and for our customers.

So I hope that answers the question.

Adam Sparkman

Yeah, that’s great, Brian. Thanks for all the detail there. We have another question here highlighting the Morning Star report for Income Builder. Maybe Matt or I’ll kick this one off to you two to take. You know, we had a bit of turnover here recently, a promotion for you to head of equities as well as Christian who’s taken on more responsibility being promoted to head of fixed income changes that we’re excited about with the team.

But with that we have had a little bit of manager turnover as well. Can you just talk about kind of the status of the team right now, how you guys feel, any changes in lieu of what’s happened over the past few months?

Matt Burdett

Yeah. I’ll start and then others can chime in. Yeah, but firstly with respect to, to kind of the Morningstar report, I guess I guess I would say, you know, we’re, we’re in the world allocation category, sorry.

And I think the analysts there has often viewed, you know, the Investment Income Builder is a bit more on the riskier spectrum because of the high equity allocation. And you know, it’s a fair a fair argument to make when you’re looking at comparing it, you know, income builder to a bunch of 60, 40 portfolios. Right. We have a we have an income mandate.

Right. Which is not what that allocation, that category is. So I think that’s the main driver of why the I think that report is phrased the way it’s phrased now with respect to the turnover. Yes, we’ve had some recent turnover. I would I would say that, you know, there were no stocks that had to be transferred for coverage as a result of that turnover because, you know, those there weren’t any stocks covered by the departing person from Thornburg on the strategy.

So you know look we have we have a great team here. We have a great culture. We have a mission that we really believe in of providing thoughtful, active management. As I mentioned in my comments, you know, being different can be can feel bad sometimes. But when you’re being different for the right reasons to meet the mission of your goal, then then, you know, we’re doing we’re doing the right thing and that’s how we operate.

So overall, you know, I think the team, we have had some turnover over the years that happens in this industry. And you know, look, not all turnover is bad, right? And I think the results that we’ve been delivering not only in the investment income builder but other strategies, kind of highlights that, you know, we’ve got a pretty deep and broad bench here, so I’ll stop there.

Adam Sparkman

All right. Thanks. Thanks for that Matt.

Brian McMahon

I haven’t turned over.

Adam Sparkman

Yeah. Brian?

Brian McMahon

Yeah, Brian is still here since we since we started planning the first prospectus for this fund. So. And I’m still here and I can,

I can advocate that Brian is in the office pretty much all day and open, and we’re excited about the future moving forward.

Adam Sparkman

Christian, maybe to come back to you with the question on the fixed income side. We got a CPI reading just today. How much do you think that the Fed should be looking to cut from here kind of given the the most recent data print?

Christian Hoffmann

Thanks. Item four For an institution that has spent so much time talking about data dependency, you know, they’ve really built a shrine to data dependency and probably the two most important figures that we’re going to have, you know, the jobs number and the CPI this morning, both to me really call into question if we should cut it all at the next meeting.

We got the Fed minutes yesterday, You know, when we had the decision to cut 50, we had one one dissenter by a governor. It’s been fairly impressive and it in the modern era. But to me, that suggested that there was probably a lot of debate between 25 and 50 that was confirmed in the minutes that we saw yesterday.

Again, historically, this has been an institution that really liked to build consensus. But there was a lot of folks who I think would have been more comfortable with 25. That was evident in the minutes. So you had perhaps a big move that was in maybe in part a consideration that, you know, maybe should have done 25 previous meetings.

We could have done 25 today. But let’s continue to monitor the data. The data continues to come out high. There’s been a lot of talk about an hour more focused on the labor market, you know, as opposed to inflation. But the labor market still feels pretty good and inflation does not feel nearly as good as I think we want it to be. The other tricky thing here, besides a big election coming down the pike, is that we have we have hurricanes, we have strikes, we have a lot of things that’s going to make upcoming data because we still have about a month between now and the next, the Fed decision. So the data is going to get sloppier from here.

And the data that we probably want to use to make the decision is not really going our way. So we went from a debate in the market between 25 and 50 basis points at the next meeting to some uncertainty. Overall, I think markets are pricing in roughly an 85% chance of a 25% cut at this next meeting. To me, that’s actually too high.

I think it’s probably a coin flip at best, especially considering the data is going to get money from here. So I think, you know, we’ll see that. We’ll see that play out in. It’s actually reminds me of the previous question about, you know, why don’t we have more duration? Interest rates continue to be incredibly volatile. That’s actually paired with a complete lack of volatility in credit spreads or taking risk in credit.

There’s a slide we’ve been working on which I think is going to come out in our next observations in fixed income, which showed that relationship over time. So you flip from a low interest rate environment with, you know, volatile credit to a low credit volatility environment with, you know, tons of interest rate volatility. So as we also think about, you know, adding duration to the portfolio, you know, that is adding a lot of volatility in the current environment.

And while total return and growing the and sustaining the dividend, you know, are of chief importance, we’re also focused on the ride, right? So, you know, whenever you add volatility to a portfolio, there’s an implicit cost in that. So that is another consideration actually, you know, ties in with the previous question that I wanted to touch on.

Adam Sparkman

Thanks, Christian. Brian, maybe one more here for you. Now that we have entered the easing phase of the rate cycle and we’ll see where we go from here, but are there any particular segments of the market, maybe sectors or industries that the team is finding more or less compelling?

Brian McMahon

Well, I think if you look back at the slide that we had on sector allocation, what you see is communication services.

We had a big increase and that wasn’t specifically because of the Fed at all. It was because of something that I spoke to earlier, which is the amount of capital spending that all of these communication services companies have been doing to put in 5G wireless networks to acquire spectrum, which is kind of digital real estate and to put in fiber optic cable.

And that’s been going on for the last decade or more. And what we have now is kind of an upcoming harvest period that we expect to have lower, lower Fed funds and lower money market yields should frankly be make all dividend paying stocks look more attractive. But maybe some of the higher dividend paying stocks, the ones with yields above three or 4%, might look especially attractive if it’s harder to get a positive real yield on your cash.

So we’re going to we’re going to make our sector allocations based on yeah, we want a diversified portfolio. But we just keep going back to ability to pay a willingness to pay a good dividend today and a growing dividend. A Hopefully tomorrow more than trying to out guess the Fed or interest rates, but, but lower rates should maybe be good for higher multiples on the stocks that we own over time.

And we’d be happy to see that the trading multiples on the stocks we own go up and and get a little more in NAV appreciation. So I hope for that.

Adam Sparkman

All right. Thanks, Brian. I think we’ve got time for one more question before we wrap up. Matt I’ll come to you on this one. The recent stimulus measures have driven Chinese stocks higher.

It’s been a pretty volatile market. I think there’s still remains a lot of uncertainty regarding the Chinese economy overall. China is obviously a major trading partner for Europe in particular. How do you think about a slowdown in China and any potential impact on this portfolio?

Matt Burdett

Yeah, no, it’s a good question. Look, China has been slowing and has been slow for some time really coming out of the pandemic was a bit of a dud in terms of economic momentum.

And certainly the animal spirits in China are pretty caged up right now. So you’ve seen in the last few weeks or month or so, you know, some communication around trying to get those animal spirits out right. And so there’s been various stimulus measures. So Chinese stocks have moved a lot. I think, from a global perspective, you know, what really matters is to get is to get the economy moving, because that would benefit a lot of the multinational companies, some of which we own, but also just a demand driver.

Right. This is a huge you know, it’s the second largest economy in the world, huge commodity demand from China. So it could have big implications across inflation, commodity prices and just overall growth. So there will be a meeting this Saturday. I believe it’s the Ministry of Finance is going to come out with some policies. So that will be closely watched.

You know, look, like Brian mentioned, we’re not making these macro calls. We’re aware of all these moving pieces. And it’s really more, you know, we we use those moving pieces to help us form the mosaic around individual businesses that have the ability and willingness to pay dividends. Right. And we want to be able to buy those businesses with a comfortable margin of safety and a credible path to success where we have outperformance in the stock.

So as one variable, the whole China dynamic, but we’ll be watching that. And, you know, look, I hope they’re successful in having some program that brings that brings consumption back and just overall demand higher because that will benefit really the world.

Adam Sparkman

All right. Well, thanks, Matt, and appreciate Brian and Christian, you being here as well. We’ll wrap it up here, but I’d like to thank everybody for joining us on the call today.

We appreciate the great questions and making it an interactive discussion. As always, please feel free to reach out with that out to us with any follow up questions. We’re happy to make ourselves available. Hop on the phone and continue the conversation about the portfolio. Thank you.