Marc Rappaport - Alpine Funds, Head of Sales
Jill Evans - Portfolio Manager, Alpine Total Dynamic Dividend Fund (AOD)
Kevin Shacknofsky - Portfolio Manager, Alpine Global Dynamic Dividend Fund (AGD)
Alpine Global Dynamic Dividend Fund (AGD) Alpine Total Dynamic Dividend Fund and Alpine Global Dynamic Dividend Update Call March 21, 2012 4:15 PM ET
Greetings and welcome to the Alpine Funds Update Alpine Total Dynamic Dividend Fund and Alpine Global Dynamic Dividend Fund webcast. At this time all participants are in a listen-only mode. (Operator Instructions).
This is now my pleasure to introduce your host, Marc Rappaport Alpine Funds, Head of Sales. Thank you Mr. Rappaport, you may now begin.
Thank you and good afternoon everyone. Thanks for joining us for this Alpine closed-end fund webcast. I am Marc Rappaport and today we will be discussing both, the Alpine Total Dynamic Dividend Fund, AOD and the Alpine Global Dynamic Dividend Fund AGD with portfolio managers Jill Evans and Kevin Shacknofsky. This is a regular webcast and we intend to host it twice a year to take a look at the portfolio managers’ views and updates for financial advisors and shareholders. The Board of Directors of both funds today announced the next three months of distributions at the regular rate of $0.055 per share for AOD and $0.06 per share for AGD.
Details of the regular three-month of distributions as far ex-date, record date and payable date are available for view on Alpinecef.com. Slide two summarizes Alpine's Total Dynamic Dividend Fund cumulative dividends paid since inception at $7.90 through February.
That does not include this month’s distribution payable March 30th, as well as the performance over standardized time periods on a market price and NAV basis. Slide three does the same for AGD. The Alpine Global Dynamic Dividend Fund with cumulative dividend funds of $8.40 since inception again through February not including the March 30th pay date. The portfolio managers will review portfolio strategy and then conclude with Q&A that we welcome you to ask via the web’s Q&A interface. Without any further adieu I would like to ask co-manager since inception Jill Evans to start today's discussion. Jill?
Great, thank you very much Marc. First I wanted to say thank you to everyone for being on the call today and that we really do appreciate your interest in our funds. Let me start out by saying the goal of this call is to give you an overview of our investment process so that you can better understand how we manage the portfolio for an objective of high dividend income and total returns.
We are also going to give you an update on the drivers of our performance and our outlook for the markets. So turning the page four, before we get into the investment processes, why don't we take a step back and highlight what we see is the three key reasons to invest in AOD and AGD. The number one reason is that our funds can provide investors with high dividend income in a low yield world. The current trailing 12 month dividend yield for AOD is 13.7% and for AGD is 11.6%. Now as you know these are very competitive relative to yields available on other equity income or fixed-income investments right now. And this is a reminder we do not use managed distribution or covered call writing to generate our income. It's 100% earned dividend income generated from our equity holdings.
The second key reason that we see to own our funds is that we provide our investors with a global portfolio and access to dividend paying stocks around the world. We ended 2011 with investments at approximately 13 different countries and this really gives our investors a chance to tap into some of the higher growth that we are saying globally and outside of not only the developed markets, but the emerging markets.
The third key reason is that our funds offer equity exposure and sector diversification. And what we mean by that is that we invest in all ten S&P sectors, we are not just in Utilities and Telecom which some equity income funds focus on those sectors alone. But we are surely an equity income fund which you know can be good or bad depending on the markets, but we just want your investors to know that we do provide access to the potential growth over the long term in equities in addition to providing that dividend income.
To the next question we always get is how do we do it? How do we manage the portfolio for high income and total return? And the answer is that we take the balanced approach in our attempt to optimize both dividend income and capital appreciation by running one portfolio with three dynamic sub-strategies and on page 5 we illustrate how we do this.
The slide shows our three different sub-strategies, those being dividend capture and special dividends, value restructuring and growth and income. Our first strategy is our dividend capture and special dividends. Our goal with this strategy is to maximize our dividend income by capturing annual, semiannual, quarterly and special dividends. Now how do we do that, we do that by tracking to the best of our ability every dividend that's paid over the globe, really to the best of our ability and then we look to put the stocks in the portfolio that best meet our investment criteria.
Now for AGD, I want to point out that we do have a qualified dividend mandate which means that we have restrictions such as the 61-day holding period in order for the dividend to meet the reduced dividend tax rates. We do not have a QDI mandate for AOD. So just to take a second to step back, the basic idea of dividend capture is that instead of holding a stock for say one year and getting four quarterly dividends or one annual dividend payment, we can hold the stock for a period of time around the dividend ex-date with our goal of actually being able to capture the dividend in addition to having the stock recover to the pre-dividend price level. But by rotating our capital used to generate dividends around the globe and throughout the year, we can actually achieve a much higher income level than a buy and hold strategy.
Now Kevin is going to discuss our special dividend strategy in a bit more detail in a minute. But I just wanted you to kind of get the idea of how our dividend capture strategy works.
As you can imagine, this strategy does have a higher turnover rate, but what we do is we strive to balance that portfolio with our other two strategies that are lower turnover and our focus on capital appreciation and total return and those are our value restructuring and our growth and income strategies. Now we consider these other two strategies our core holdings, where we take a longer-term fundamental view on seeking out our dividend equities that have the potential for capital appreciation and in order to support NAV growth.
So to give you an idea of the value restructuring strategy, we look for companies which may have depressed earnings, but are catalyst for a turnaround or companies that are restructuring or transforming where we see discounts to historical valuations and we expect a catalyst for repricing of that equity. In our last strategy, growth and income we often find companies with lower dividend yields, but strong earnings growth and capital appreciation potential. We also are looking for companies that are growing their dividend year after year or companies that are reinstating dividends as we move further away from that financial crisis and we are seeing a lot of that happening as companies are starting to get back with dividend growth to where they were prior to the crisis in 2008 and 2009.
So then once we identify these types of stocks, we work with our team of analysts and we construct what we believe is the best combination of income and growth for our investors at that time.
Jill let me interrupt for one second. I'm noticing many of the questions that are coming are about that very first strategy you mentioned here on slide five, dividend capture, special dividend strategy. The questions look like this, how much of the portfolio is being used toward dividend rotation and does this strategy in your opinion and observation detract from or add value to the overall portfolio?
You know, that's a great question Marc. I want everyone to understand that the amount of our assets that are dedicated to dividend capture and rotation varies throughout the year. We could be as well as 0% at the end of the year once we’ve captured all of our dividends to a high of probably just under about 40% of our assets at the peak of our dividend capture season which is actually in early May. So right now we are gearing up for our dividend capture exposure. Again just so you understand the nature of annual and semi-annual dividend payments, that many special dividend payments globally, we normally capture the majority of that dividend income in the first half of the year. So where we are sitting right now we actually feel very good about the amount of income that we have been able to capture year to date and we are on track to meet our dividend obligation in 2012.
And then the second part of the question about does it detract on price [appreciation]. You know as I mentioned, the amount of dividend captures can range from 0 to 40% of assets. So I think it's very important for everybody to understand that the vast majority of our holdings are dedicated to our longer-term holdings and growth and income and value. So that these stocks are actually a bigger driver of our NAV performance over the course of the year and it was actually many of these core holdings that pulled off during the crisis in 2010 and 2011, despite what we saw as positive company fundamentals and it’s many of these same stocks that are seeing positive performance in 2012. So again you know our dividend capture portion varies throughout the year between 0% and just under 40%, but it really is the core holdings that we believe drive the NAV performance. Thanks Marc, okay you know at this point I'm going to turn it over to Kevin to talk about our special dividends.
Thank you, Jill. Thank you everyone for joining us here today. Our special dividend strategy is one of our unique methods and we are using dividend yield. We focus on companies with strong balance sheets and cash flow produced by great operating performance which combines with high inside ownership and willingness to return cash, create special dividends. Sometimes these companies become serial special dividend payers and may pay special dividend year after year. Some good examples of this include [Wind] Resorts and (inaudible).
We also get special dividends from restructuring situations as well. From the chart below in slide six, you can see that the number of special dividends we trade has been robust from year to year with the only exception being the great recession of 2009.
On the next slide, you can see why AGD and AOD invest globally with international markets yielding dramatically more than that of the US. Generally we produce around 80% of our income outside the US.
On slide eight, you can see our year-end country exposure. As a result of the global volatility last year we structured the portfolio to mitigate the global risk. Our largest exposure outside the US is the UK. This market is very similar to the US, as the Bank of England is running a very similar monetary policy to the US and the market is dominated by multinationals who have diversified global exposure with attractive dividend yields.
Growth invested in Switzerland and the Scandinavian countries, whose financial system are more robust than the EU denominated Euro. For the most part we've avoided the physically challenged areas of Europe such as Italy and Spain, even though you can get attractive yield there.
You also noticed that AGD has a higher [yield] component than AOD especially in volatile times you focus your holdings in liquid names and due to the much larger size of the AOD portfolio this limits the options that we can invest in emerging markets.
On slide 9 you can see our effective exposure. We have large exposure in the consumer space especially in the names exposed to the emerging market consumer. Many emerging market countries have hit an inflection point with GDP per capita rising to a point where large portions of their population are now moving from subsistent consumption to discretionary consumption. We are investing in many multinationals and companies in those markets who have exposure to this theme.
We also have a historically high exposure to tech as there has been a revolution last year that many tech companies are starting to pay dividends. For the first time in recent years, companies such as Oracle and Cisco initiated dividends for the first half. The next example of this of course is Apple. We still though have nearly half the exposure to tech relative to the S&P500.
On the next slide you will see an example of our top 10 holdings. You will find it’s dominated by large cap companies. We think in this global risk environment we like these companies as they have diversified geographic exposure and many need diversified business lines and products with strong brand names. So they provide good risk management. They also are paying very attractive dividend yields, which obviously fits right in our target.
An example of our growth and income strategy is ITC. They are a mid-west transmission company operating under a very favorable regulation regime. This enables them to grow 10% to 20% every year no matter what the economy does and this robust growth generally translates into dividend growth as well.
Vodafone is an example of value with the catalyst strategy, as last year they were able to extract value from their Verizon wireless investment through a special dividend for the first half. This they were able to pass onto their own shareholders by boosting the dividend yields by 40%. I want to take an example of the dividend-capture trade that we bought in Q4 of last year in AGD and we were able to captured 1% to 4.5% annual dividend in early 2012.
Novartis is a global healthcare company with a diversified product line. We believe it’s got very strong cash flow and a strong balance sheet and strong prospects for future years.
So, I hope this would have given you very good flavor of our investing philosophy and how it translates into actual investments.
And with that I would like to pass the call back to Jill.
Thanks Kevin. Turning to slide 11, we wanted to just touch on risk management, which is a very important topic. As you are all aware we've experienced tremendous volatility in the global equity market over the past few years and we have attempted to respond to that at Alpine with even more structure and enhanced effort to manage our risk and how we were doing that.
We have regular portfolio and fundamental reviews with the entire dividend team as well as our chief investment officers. Our goal at these meetings is to look for the best buy and sell opportunities and where we can eliminate risk in the portfolio. So this disciplined focuses on a couple of things, I mean a bunch of things. For example one is evaluation. Has the stock price reached our valuation objective? Another core discipline is we look for situations where, if this story has changed or has the catalyst dissipated?
What we mean my that is, its important to understand what the investment future sales is for each holding and to make sure that the pieces are on track and has not been altered.
And the third thing that we do to mitigate risk is to we are really constantly rebalancing the portfolio and we talk about our in the right countries, with the right factors, the right industries and we have too much or too little exposure in each of those areas. And all of this work is really enhanced by our internal risk metrics and ranking systems that we have created to look across factors such as fundamentals and volatility.
We have also structure that seeks to look for sell candidates based on price action. This we enhance following the abrupt sell-off of several of our international names during the macro crisis and we look to watch for some fundamental review based on priced action and volatility.
So when the stocks show up on our alert system, we come up to sell a portion of the entire holding based on the price action or we can do the work on buyer weakness. I will give you an example of holders of Oracle who surprised the market in December with the earnings that trip the stock down pretty abruptly.
The team got together, we’ve got a big team out here in Alpine to work together on the name, we gave this a number of review and we actually decided that we have an opportunity and we are able to get in and actually lower our cost basis back in December. We brought this stock on weakness and today the company reported solid earnings and the stock has really recovered nicely since December.
So that's our goal to just continually monitor the risks that are out in the market and try to mitigate that as fast as best as we can.
The last slide, on slide 12 is getting back to performance and a recap of the drivers that have driven the NAV over the past year and nearly into 2012. In 2011 as I am sure you are aware it was a very challenging year. It was challenging for our funds primarily due to our international exposure. 2011 was the year where international markets really significantly underperformed the US and that hurt our performance relative to S&P 500 Index.
What happened? I am sure you are all aware the macro events brought out the volatility in the market and that really resulted in a flight of quality to the US and out of the international markets.
How did we respond to that?, To mitigate our risks and the concerns primarily in the Euro zone we moved our international holdings to Asia or Brazil and an amount of our exposure to Asia and Brazil where we felt the company's fundamentals were strong and also there was less of a currency risk for example the Hong Kong dollar is [hedged] to the US dollar.
So we did the work to look at the company's fundamentals. We thought they were strong. We thought it would mitigate our risks moving away from the Euro zone area but what happened was the macro concerns, it really affected those regions and in addition to the middle of the year some inflation fears were fueled, which resulted also in those emerging markets seeing money leave them fairly abruptly.
This all resulted in again the international market underperforming, and we just have a couple of the results here on slide 12 where the S&P, as you know, actually was up a couple of percent last year versus the Hong Kong Index down 17% and the Brazil Index down 27%. So a really huge diversion for the international markets.
With that said the many factors that hurt us in 2011 have actually been helping us in 2012.
So what we are seeing in 2012? The macro events that we are seeing have actually been reducing risk and volatility. We continue to hold to stocks in Asia and Brazil and a lot of the stocks have actually revamped in performance as the inflation of the year have gone away and there has been more of a flight to risk and instead of away from risk and as we have seen through the beginning of this year, the market correlations are declining and also the volatility has declined and as you can see from the bottom, you can see some of worst performing market this year are now outperforming the US and we have been able to be beneficiaries of that.
So with that, I would like to turn the call over to Mark to talk about some Q&A.
Well, thank you and thank you everyone who is been sending in questions here. We have been compiling them, Jill.
I will say that the first two questions are the very most common. First of growth. What do you see as far as the prospects for growth for the portfolios?
Okay. Great question and I appreciate that. Thank you for biting that end. I really just want to reiterate that in addition to maintaining our dividend, our top priority and focus has been growing and earn a day. And that was because we want total return for our investors, so that we can raise, potentially raise our dividend in the future if we are able to grow our asset base overtime.
So where are we today and how we are looking at the growth? We've seen a tremendous rally in the market from the October load. We’ve executed of about 30% from the load and we definitely been able to participate in that rally. So you can see a bit of pause here or correction in the short-term, which should actually be considered healthy.
But with that said, a go markets always climbed [worldwide] and we believe the market could continue to move higher and that equities look attractive here for our longer term investors and why do we feel that way. Although long-term the tax rate on fundamentals which were driven by really three key factors, the earning, cash flow and dividends and multiples that investors are willing to pay for that future cash stream.
So if we could just take a second and go through each of those at the earnings, we all know that earnings, corporate earnings are at an all time high by now. Even if growth moderates in some of the developed countries in the near-term there are still many exciting areas of growth internationally or companies that are experiencing secular growth or innovative growth.
So that’s where we are doing our fundamental research, where we are looking through identify those opportunities for continued strong earnings growth and in effecting cash flows, quarter balance sheets are in great shape, debt has been restructured to take advantage of low interest rates and in addition we are seeing record profit margin.
So we have very strong cash flow coming out of companies and what’s been the result of this? We have a record cash on hand at many companies and the payout ratios are all time lows. So we believe there is ample room for companies to raise their dividends and even initiate dividend like Apple. We want to just plenty of cash to support shareholders through buybacks and acquisitions.
Lastly on multiples. We know that many multiples are worldwide relative to historical levels and that with interest rates projected to stay low we can see money start to flow, maybe add fixed incomes into equities as confidence and stability returns. And this could support a rise in equity multiples. I am sure you are all aware of big move in bond yields this week. Our yields have moved up as bonds are sold off. We've knocked on the fundamentals of that, its right that some of those assets are coming out of bond this week will find a way into the equity market.
So overall we think it’s a long-term investor who is positive on the growth outlook and it is our job, Kevin and my job and a team to position the portfolio, to take advantage of what we see as those are positive growth drivers in the long-term.
Thank you, Jill. The next question that’s very common, dividend; how would you describe the current dividend environment?
Marc, today we are operating in a very attractive dividend environment. The company is a cash sub; strong balance sheets and then very strong margins generating strong cash flow. Due to low interest rate environment companies with attractive dividend yields are rewarded with superior valuations; and many companies are, as a result boosting their dividends. We are comfortable because it’s a very positive environment. We have very strong visibility in the entire dividend for the rest of the year.
Well, I was sure you tweaked, thank you. Next question I am seeing, what are the main differences between AOD and AGD. Jill, you want to take that?
Sure, a very good question. And actually, since we get this question often, I do believe we have a slide that we could put up for the webinar. Here we laid out what we think are the key differences for investors to understand and let me reiterate the investment process that we go through is the same for both funds.
The distinction of the criteria that with stock in the portfolio is based on some of these key differences, so the process is the same, how the portfolio is constructed, it’s a bit different based on these major differences. I mean the number one as I already touched on is the qualified dividend mandate. AOD does not have a TDI objective what AGD does by perspective for targeting at least 50% of income to be qualified dividend income.
The second key distinction is just the size of the fund and the assets that are in the fund. AOD is about $1.1 billion fund; AGD about $145 million to $146 million. So what does this mean? That leads to the next point that the market cap that we could invest in are different and the key distinction here is that we can go smaller cap on AGD because of the size of the fund versus AOD is mid-to-large.
And just to derive some numbers from year-end 2011, we’ve looked at the small, mid, large cap distinctions as defined by S&P. And to give you an idea at the year end, AOD had about 82% of it’s assets in stocks that were considered large cap and less than 1% in small cap; versus AGD, we had about 53% of assets in large cap and 25% in small cap.
And that is really a big distinction and describes the difference in the performance this year as AGD has been able to outperform AOD and that has been because small cap has had a stronger year than the large cap. So both funds are up. AGD has been able to get a little bit more from its small cap portfolio.
The next distinction again really by perspective is that AOD can actually go even 100% international versus AGD is defined as global which means we need to keep at least 20% in the US, 80% international. And then that leads to emerging markets exposure, AGD is allowed to have a little bit more emerging market exposure, and again that’s where we get a lot of our small cap names as well.
And then lastly is leverage; AOD by perspective is able to take on leverage; AGD is just really short-term leverage, not the leverage that we can take on with AOD. And just to say that, right now we are in middle of dividend capture season, so we have taken out a little bit leverage in AOD nowhere near 33%. We are actually below 10% and so leverage just to peep on it; is not a part of our daily management of the portfolio. We really use this during dividend capture time or times when we feel we can get through dividend and just want to take advantage of that with a little bit of leverage.
Speaking of dividend, another question coming in, Jill, why don’t you take this one; how much of the dividend is earned?
That’s a very easy answer; that’s 100% is earned are equity holdings.
Okay. We have another question, after dividend rotation, what happens to the cash?
Yes, pooled with the whole portfolio, so you know the portfolio run as one singular pool, usually, there is always a gap between a dividend goes X and when you actually receive the dividend and as you all know we have a monthly dividend policy, payout policy. So certainly, by the time we receive the dividend, we are already paying it out to you guys. I think that answer the question.
Thank you Kevin, I don’t know who want to take this, but may be you Jill, what is your outlook for 2012?
Okay great. We actually did put together a slide on that as well and just to be able to layout what we see the key factors for the outlook for 2012.
So certainly have some positives as I think I already addressed a little bit in the growth question and of course there is always risk. So what do we kind of see as the key factors that are supportive of the equity markets?
Number one is actually global liquidity in central banks are really entering 2012 and entering the wage cuts and expanding the balance sheet; we saw a significant 75 basis point cut at the Bank of Brazil. We are starting to see some reserve requirement for clients in China. The UCB is out there maybe thinking about cutting wage and expanding the balance sheet. So we have low rates in the US for an extended period. So the global liquidity remains and global liquidity is really the fuel for equity markets, so that’s the positive.
And two is emerging markets inflation subsiding and rebounding economic growth. We really see both Brazil and China and some of the emerging markets as having the opportunity to have reaccelerating economic growth through the year as they have been able to take down that inflation and rates.
And the third point is that the European situation at least appears to have stabilized in the short-term; it’s amazing that March 20th came and went yesterday and that was the day that the Greece had to make its bond payment and it went with not even a hitch and it wasn’t even given on the news. So we’ve gotten through some major events here in the first quarter of the year and at least that can eliminate some of the risks say at least into the short-term. By no way is Europe solved.
Actually, we are keeping an eye on Portugal which might be the next shoot-to-drop, but overall at least with the funding, the LTRO funding that came in, the risk of a widespread banking crisis we think has been mitigated at least in the short-term.
Fourth point is that the US economy is recovering and the key driver here really is housing and employment. It looks like housing has stabilized. We know that’s been a huge drag on the economy and we're seeing that the employment numbers are improving. So again, we are not looking for robust growth in the US, but two key negatives being housing and employment at least seems to be stabilizing or potentially improving.
And last thing as we've already talked about equities are certainly inexpensive relative to historical measures and certainly relative to bonds or the equity more close there. There's always risk; as I said the market loves to climb a wall of worry. There will never be a period without risks. But you know what's out there is inflation. We have to keep an eye on gas prices, hoping that they don’t go up further. We saw Saudi Arabia came in and that they are going to supply the market which would be positive on the top-line here. So we've got to keep an eye on inflation and gas prices, but we were hoping that they don't run away this summer and that they stay contained.
Our second part China hard landing; it’s been so interesting what's been going with China and the fact that they lowered their growth rate to about 7.5% that’s through the market the other day, but we have to remember, they outlined that in their five year plan is actually helping and China acknowledges they could not keep going at a 10% rate and they were going to take that rate down to 7% which is still dramatic and fantastic. But the market doesn’t want to kind of believe or feel it. So with China growing at 7.5% still creates a GDP the size of Greece every quarter. So the amount of growth coming out of China is still fantastic even if it’s a bit slower than where it’s been.
The third point is Europe, Europe and Australia; again this is something we haven’t even dealt yet. I mean the European economies are going to slowdown. We are going to start feeling it. What we are hoping and what we are hearing from a lot of companies is why the southern part of Europe is slowing down and the northern part is actually doing okay. So we are hoping that net, net I have kind of alluded to that, we are going to avoid the southern countries, but that the northern countries can continue to get at least small to moderate growth and that should be able to support them at the equities there. I really touched and of course that risks are still there. We are keeping an eye on that.
And lastly, I think we need to be aware that in the US we have a big Fiscal Cliff coming in 2013, but the one we hear at Washington is that whoever wins the election, post-election is going to be a move for some widespread tax reforms which both sides are talking about lowering the corporate and individual tax rates, but of course expanding the base. But the point they made that we could mitigate some of this risk with the Fiscal Cliff with some – find the ways to some significant tax reform out of the US which actually might turn into positive and federal risk.
So although I guess that’s always balances, but we really think the key drivers here are liquidity, valuation, some of the fear we have been involved in the past four years, sort of mitigate and it really is a good time for investors to look at equities.
Thank you Jill and thank you Kevin; I will summarize what we heard today with the following. First and foremost, the managers are very positive, “on the dividend operating environment” which is integral to this fund in particular or these funds I should say.
Two the managers have a positive outlook on the long-term growth fundamentals and the funds are positioned in countries with attractive absolute and relative GDP.
Three global yields are often higher than right here in the US and accordingly the funds are diversified with the majority of the active outside the US to take advantage of opportunities with the countries producing above average yields.
And four, the funds are diversified across various sectors which was evident on the fact card and on term of the prior slides.
All of what we discussed today would be available in the form of a replay or transcripts potentially in the future, if so we would be posting that on alpinecef.com. We would again anticipate twice a year updating everybody on these strategies and the managers’ views and as though we thank you very, very much for your time and attention to go over these strategies together. Thank you again operator.
Thank you. This does conclude today’s webcast. You may disconnect your lines at this time. Thank you for your participation.