- Fund manager Dave King rejects the idea of specializing in just one type of investment.
- King has outperformed 99% of his peers over 10 years at his Flexible Income Fund.
- King told Insider why he didn’t want to narrow his focus, and what he’s been buying.
If everyone who succeeds in investing has an edge, or a sense of what’s more valuable than people may think or what’s going to work better than they expect, then Dave King’s is surprising.
He refuses to specialize.
During a break in his career more than a decade ago, King says he found himself thinking about what kind of inefficiencies he wanted to exploit when he was running his next fund. He decided to start with a dual mandate of high-single digit price returns and strong dividend yields. From there, he would simply choose the securities that would get him to that goal, instead of picking only one type of stock or one type of bond.
“The real opportunity was to say, ‘Okay, let’s directly compare AT&T to the next junk bond deal that’s coming. And while we’re doing that, if there is a convertible deal that comes with a high coupon, let’s compare that, too, and let’s select the best security using research,'” he told Insider in an exclusive interview.
King tested that approach at Columbia Threadneedle’s Flexible Capital Income Fund, and just past his 10th anniversary, it looks like the facts have borne him out. Morningstar says King’s fund has returned 9.9% a year to investors for a decade, and has beaten 99% of its peers in the category of 30%-50% stock funds on its way to a five-star rating.
King says essentially everything he buys is publicly-traded, as the fund holds a combination of stocks, bonds, and convertible securities. But his goal of roughly 10% price returns and solid dividends is harder to achieve when bond yields are at rock-bottom lows.
So those convertible notes have become a very helpful source of income.
“Recently there’ve been a number of attractive utility convertible preferred with coupons in the five-plus to, in some cases, seven-plus range,” he said, “We’ve bought many of those and they’re substituting for bonds in our portfolio. … And all of those have very high coupons. They’re very safe.”
He’s also benefited from strong price appreciation and high yields from investments in Carnival’s rescue bond sale and from American Eagle Outfitters, and careful picks of what he calls “medium yield,” which are newly issued non-investment grade bonds.
Meanwhile he’s found it makes sense to fill the stock portion of his portfolio with “big boring equities,” meaning hefty dividend-payers that hold little appeal for many other investors.
“It’s very fortunate in this low interest rate environment that people have left stocks like American Telephone or Merck or Exxon or Chevron for dead,” he said. “We’re able to buy those stocks with, we think, very safe, meaningful yields, and some ability to grow over time.”
To King, that’s the virtue of the go-anywhere approach. Instead of being frustrated that bond yields are low or that stock prices are high, or reluctantly taking big risks or going to cash and waiting, he can assess alternatives across several asset classes.
“It sometimes seems to people that we’re very wild and undisciplined, because we do have this flexibility,” he said. “It’s actually quite the opposite. We have immense flexibility within very defined areas.”