Investment Styles, Dividend Policies

I attended a talk by Dr. Andreas Gruner from University of St. Gallen 2 days ago. The topic of the talk was "Successful future investments - Portfolio Management after the financial crisis".

He introduced major categories of investment styles and different type of asset class which generate extra returns during different market cycles.

In general, major investment styles include:

1. Buy and hold

2. Value : buy stocks with low valuation and sound fundamentals

3. Growth: buy stocks with growing sales, earnings,etc

4. Contrarian: buy what is unpopular

5. Momentum: buy stocks that exhibit positive price performance

6. Size: small cap vs. large cap

7. Cyclical: buy stocks that exhibits high correlation with market conditions

8. Defensive: buy stocks that exhibits low correlation with market conditions

9. Income generator: buy stocks with steady cash generation ability

In a latter part of his talk, he discussed the advantages and drawbacks of each strategy. He suggested that IF you know where in the 'market cycle' we are in, you can achieve higher return by rotating between different styles and asset class. The flip side is that if you are always SLOWER than the market and is always playing catch-ups, you'll face greater downside and limited upside.

Credit Suisse has a similar program that 'guides' investors on which style/asset class to focus in during different market cycle. Full diagram available here.

The professor also mentioned that in the LONG RUN (he used data that goes back to 1926), small caps value stocks beats large cap growth.

Tweedy, Browne has recently published a paper on the importance of dividends on investors returns. Do read this amazing article and you may want to rethink those debates between growth vs value.

Dividend Policy

We must always look analyse dividend policy in relation to the earnings potential and return on incremental of a firm. For a high growth company with decent return on capital, there is no reason why earnings should be paid out and debt be incurred to sustain growth.

For low growth company with HIGH return on capital, i think a high dividend payout policy prevents management from feeling the need to build empire with their spare cash. The recent corporate action of San Miguel to diversify from high return liquor business into low return utilities could be such an instance. Of course, you can also argue that they are creating a wider revenue base and the company can be more sustainable over the long term. However, i would also think that cash can be distributed to individuals and they can decide how the best diversify their portfolio.

On a separate issue, for my Singapore friends who are reading this post, do be cautious of your own bias when buying high yielding stocks. I have a mental accounting habit of looking at my portfolio as recorded on my brokerage account and 'forget' that a large part of annual returns is sent to my bank account. This could lead to certain unintended behavior like having a bias towards company that show price appreciation than high dividend return.

In time to come, I hope the SGX/CDP can work out a program to allow direct crediting of dividend to individual brokerage account. Furthermore, corporation can work directly with shareholders in administrating "DRIP" - dividend re-investment program, to allow individual shareholder to accumulate more shares when they are younger, and to reduce trading and commission expense of individual investors.