The Dividend Cafe - What You Can Learn in a Week

Episode Date: October 8, 2021

The effort to meet face to face with leading money managers, hedge funds, macroeconomic analysts, and other such “life of the party” luminaries began in 2006. Of course, back then I was overseeing just $100 million of client assets and busily deciding if I was going to move my business at UBS to either Bear Stearns or to Morgan Stanley (yes, that was a real dilemma I once faced; I’d say the angels aided me in my decision). But I had very limited access, basically no clout, and asset management firms that were perplexed by an advisor’s desire to do such intense due diligence. “Your firm has told you these managers are good. Isn’t that good enough?” “Your firm likes our fund. Why do you need to meet the managers?” My stubborn insistence on actually creating my own process, on doing much deeper dives than the average advisor does, paid off in big ways for me. But I quickly found out that the “payoff” was not merely in how I was able to better vet products and solutions used on behalf of my clients. These meetings became a source of transformative learning for me in my career as an investment professional. This week’s Dividend Cafe is not about the trip down memory lane, unless by memory lane you mean the last five days. But Brian Szytel and Deiya Pernas have once again joined me for over a dozen face-to-face meetings with stellar investment professionals, and we do so in a time where great questions exist about the current market cycle. About geopolitics. About China. About the Fed. About risk asset valuations. About societal stability. So jump on into this week’s Dividend Cafe, and get a glimpse into what we learned this week. The results may or may not shock you, but they will not bore you. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to another week's Dividend Cafe. I am very pleased to be recording this podcast and video with basically the lion's share of what has been an absolute marathon of meetings now behind us. We were going to record today actually with the other guys in the investment committee. You know Brian Seitel, who is our deputy managing partner at the Bonson Group, and Dea Pernas, who is our COO, and both of them are longtime members of the investment committee and longtime participants in this weekly due diligence event here in New York City. But we are going to spend more time collectively regrouping, analyzing, and putting together

some things that we want to be able to present. So we will do a podcast and video all together in short order. But for now, I just thought I'd give a little quick replay of the week and some of the takeaways and allow you to think about some of the things that we're thinking about and hear what those perspectives may be. I'm in the same position in the Written Dividend Cafe where, on one hand, there's certain things that I'm writing and right now about to articulate that, you know, people have been clients of ours for 15 years and certainly even 10 years could

fall in the same boat, know a lot of the history of this trip, and maybe I've heard about it a lot, so it becomes somewhat redundant and I hope not annoying. But then there are, of course, clients that are newer and maybe would benefit from a little context as to what we're even talking about. As much as I'm capable of doing, I'm trying to keep that succinct so as to not bore you with the various trip down memory lane. But the intent here of what we were doing this last week was born out of a very, very embryonic version of the same. It was 2006. I was still a solo practitioner at UBS, had a $100 million size business I had built up and had begun to take very seriously the idea of spending time with the money managers

that we were placing some of our client monies with. Ironically, I was out in New York because I was meeting with Bear Stearns and Morgan Stanley and some other Wall Street firms that were recruiting me to maybe move my business to theirs at the time. Obviously, those who know the story know that four, five, six months later, I did end up moving to Morgan Stanley and not Bear Stearns. But regardless, I, on that trip, spent some time with some of the various managers that we had client money with. And it was just incredibly beneficial. And to be able to sit down and then talk to clients and say, look, we met with this manager and here's what they're saying. And here's why this happened and what we're doing, and so forth.

It was really just pragmatically beneficial to our business, and then I think useful for clients for that kind of added information. Well, shortly after joining Morgan Stanley, our business was growing a great deal. We had larger assets we were placing with more managers and more hedge funds and various sort of bespoke strategies. And I kind of leveraged the clout that I was building to get more access, but not just to analysts, not just to guys on the business development side of these asset management firms, but with the portfolio managers themselves. And in some cases, this might have happened a little bit later, but the actual kind of senior name brand guy, so to speak, behind some of the

main hedge funds, definitely we were punching above our weight in terms of leveraging for access. But it changed my life. It changed our business. I mean, it really changed, enhanced, and I think added a whole nother layer of value to what we were doing as portfolio managers. And then, of course, you go through the financial crisis. And at that point now, I may have been sitting down with a hedge fund to talk about their portfolio and what it meant to the five of our clients who owned it. But what I was there to do was get high-level intelligence and to understand the entire macro picture of what had gone on during the crisis,

where we were now, credit markets, the impact of Fed policy, the breakdown that had took place in risk management prior to the crisis. And it was the greatest education I could ever get. And I did it. Some years it was obnoxious. I didn't have an office or house in New York City at the time. So I was leaving home base of Newport Beach and sometimes coming for like 14 days and having 40 meetings in two weeks. I mean, it was packed. And meeting with clients and stuff at nighttime.

I mean, it was a lot. Did it for years, though. I mean, it was not like a one or two time thing. But over the years, then we're able to condense more logically, rationally, programmatically how we structure the trip. Brian Saitel began joining me when he joined the Bonson Group back at Morgan Stanley. Daya Parnas joined us the first time the year after we left Morgan Stanley and started our own firm. And Daya became a larger part of our investment process. And so, you know, I want to always be able to challenge the theses that we have, the viewpoint we have, hear competing points of view. We hear it all the time and most certainly want to do due diligence on those we

have money with and also those we're vetting for potentially placing money with in private equity and real estate and hedge funds and in various equity or fixed income asset classes. A lot of the managers are, you know, we run U.S. dividend equity directly at the Bonson Group. We are portfolio managers in the core dividend equity space in line with our philosophy of dividend growth. But then when you go into a very niche space, like we met this week with our midstream energy guys. They run an ETF that is entirely devoted, actively managed to the energy infrastructure, the midstream story. And that's a highly specialized field that we place that ETF into our core dividend portfolio. But we are heavily reliant upon their active management, decision making,

and we are able to influence a lot because we're the main investors into the strategy. And so those types of things enable us to spend hours together learning what they're thinking, understanding new perspective. Since I'm there right now, I'll go there. The midstream energy space might have had an 8%, 9% yield a few years ago and a 6% to 7% yield now. And yet we consider it far more attractive now based on the quality of that superlative yield now, even though it's relatively lower, is exponentially higher than the quality of the modestly higher yield of yesteryear. And those types of perspectives on where free cash flow yields are actually very high, where previously there were companies running such high operating expenditures that were, excuse me, CapEx that was so high that was

not necessarily being always factored into the way they were calculating distribution coverage, their cash flow ratios. And so we just got a really great under the hood look at the quality of what we own. There's a couple of very low yielding names in the midstream energy strategy. And we got to hear why, what their projection pro forma for not only price growth and market share and revenue opportunity is, but for what they intend to do with dividend growth into the future. These are things that are analysts from a global macro standpoint, not particularly engaged in a security selection or portfolio allocation, but providing broad high-level overview. You recall I had Louis Gov on a couple weeks ago. I often will quote in DC Today,

Rene Ananal from Corbu. These are people that we are able to sit with and just get a lot of information from perspective and challenge our thesis, which we did. And you guys are aware from other dividend cafes, we are the belief that there's a whole lot of China that is totally uninvestable, totally uninteresting to us, very high risk. There's an entire issue of China just in terms of geopolitical risk. We are utterly fascinated by the U.S.-China relationship that both against the opinions of people on the left

and the right, we do not think there's been much change at all in the prior administration's posture of China to the new administration. Some thought they were going to be much more effective and clever and diplomatic, and others thought they were going to be way too easy and accommodating. And really, neither of those things has proven to be true. In fact, the tariffs are all completely still on. things has proven to be true. In fact, the tariffs are all completely still on. There is the same posture around the potential onshoring. It's a fascinating dynamic right now. And I think that we got all the reinforcement we needed this week, that it is very squarely in China's strategic interest to not rally their currency higher.

We definitely had an emerging debt manager from Switzerland push back on that idea, but to stabilize the currency. Not huge moves higher, not huge moves lower. I mean, remember, this is still a very export dependent economy as much as they may like that to change. That's their bread and butter. sport dependent economy, as much as they may like that to change, that's their bread and butter. They're not going to go strengthen their currency substantially. But do they want a stable currency, which is what you really want as a bond position, and then at the same time have low volatility in their bond yields? And whether it be an equity or fixed income or currency or macroeconomic expert providing their take. Everybody is in agreement with that underlying thesis. So then now, of course, the issue becomes where's the

right mechanics and product to get your liquidity and your trading infrastructure right that you can get some exposure. But that's our intent to put a small position inside the boring bonds portfolio that is product-oriented, where there's funds and ETFs, and then across the board in the credit portfolio, a smaller position there once the right exact mechanism is secured. We definitely got a chance to look under the hood, by the way, of all of these relationships. In terms of their office culture, I've been to most of these offices many times. We know a lot of people there. We've been on the trading desk. We've been on the floor, the analysts.

Most of these people are back to work, and that means a lot to us. There's one particular firm that we're concerned about, and we'll get into the details now, but just feeling this sort of complacency around a ghost town culture bothers us. And we want, it was one thing a year ago, I didn't really like it a year ago, candidly, but you know, we were in a different world a year ago. At this point right now, not only do I feel strongly about the social responsibility the social responsibility of reengaging economic activity. But there's a various mentality that is indicative to me of a culture where we want to be invested. And so we have a decision to make there in one particular case.

What else do I want to share? I definitely feel that the inflation story was, I would imagine it came up in some form or another in every single meeting we had. Equity, bond, hedge fund, economic, political, everybody has a different take. And there's no consensus out there, which is, of course, no surprise. Some that are in my camp that there's absolutely price inflation taking place in certain targeted sectors that are most impacted by supply disruption, but that the Fed is somewhat impotent in being able to create the inflation that many fear. Others believe, no, the Fed is actually responsible with inflation. Others don't agree with that, but do agree with another part. So there's a lot of

different, this is something I've been harping on all year. There's a lot of nuances in that subject. And those nuances are evident when you have 20 something meetings. But our view around it, I think is very important. So, you know, readdividendcafe.com for even more fill in takeaways. There will be some modest portfolio changes coming. We're going to, for those clients that have the income enhancement sleeve we manage, we're going to be increasing some exposure to the emerging dividend strategy that we utilize there. We maintain a firm position and being bottom-up oriented investors from our small cap partners to our emerging equity partners, to our midstream, to, of course, what we do inside core dividend growth. We care about asset classes. We care about sectors. We care about global positioning. But fundamentally, we want investment decisions being made by bottom up. That means everyone has to work hard. That means everyone has to be research intensive.

And we are just absolutely as convinced as ever that there is incredible value in the due diligence that comes from a research intensive approach to portfolio management. We think that applies, by the way, in structured credit as well. It applies in high yield fixed income. All these areas where credit spreads are so tight and that means risk is higher. It means there's more fragility, more exposure to volatility. One of the great hedges, one of the great strategies one can utilize to deal with the nature of asset prices right now is bottom-up research orientation.

That's what we're committed to across the board. Finally, the theme I forgot to mention, but it's probably the number one theme that I would take away from this week is just enhanced. If I could triple down on illiquidity. Look, some people have a bandwidth for more illiquidity than others. Some people candidly don't have a bandwidth for any illiquidity. But what I mean is the investment opportunity exists in private debt, private equity, or real estate, or strategies that do not allow people access to money, that do not have the burdens of daily mark-to-market. We think there are behavioral and there are investment advantages where there is illiquidity as long as that illiquidity is found intelligently and the right vetting and procedural issues have been dealt with. That's our job. That's what we do.

But, of course, you lose leverage collateral for credit lines. You lose literally withdrawal capacity from a liquidity standpoint. So there's no free lunch. Yet we have a big theme from an investment caliber standpoint in the coming year of significantly intensifying illiquidity. It was something we wanted to do a lot more of in late 19 going into early 20 and then kind of got blindsided by COVID, but we really are going to continue harping on this theme. We did not talk to a manager this week, not one. It doesn't matter about asset class, who is not very much in the mindset right now of caution, of prudence, of humility. of humility. There's no complacency or apathy evident in anyone we talk to about tight credit spreads, about high multiples, market valuations. Everybody feels that there is reason for caution

and yet reason for opportunity. And that juxtaposition takes wisdom and it takes recognition that other than foolhardy timing, there is not a lot that can be done other than intense discipline and additional added work erring on the side of risk management. So that's our major takeaways. It's a wonderful week. Look forward to talking more about it in the days, weeks ahead, getting with my partners to present a group podcast as well. But in the meantime, reach out if you have any questions. Thank you so much for listening to the Dividend Cafe, watching our video, sharing the great message of hope that the Dividend Cafe represents with everyone, you know, and rating us, subscribing on your podcast player of choice. That's all, folks. Thanks for listening to Dividend Cafe represents with everyone you know, and rating us subscribing on your podcast player of choice. That's all folks. Thanks for listening to Dividend Cafe. Thank you. performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this

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