Vanguard, Holland & Blackrock

08/06/2004 12:00 am EST


Richard Young

Editor, Young's Intelligence Report

Investors will not find a more honest and straight-forward advisor than Richard Young. He notes, "I’m an open book. I tell you what I do with my own money. I stick to our basic mandate: diversification and patience built on a foundation of value and compound interest. "

"To their everlasting sorrow, most investors not only lack a basic knowledge of compound interest, but also lack patience and dividend/interest religion. Many are greedy, trade way too often, and are in debt. For the record, I have no debt. I buy for cash. I have never employed margin and tend to own the investments I make for a long, long time – sometimes for decades. And I don’t invest without dividends or interest.  If you are retired, or soon to be, your eye toward risk must be intensified. Over time, it is big mistakes that will hurt you far more than big winners will help. Your goal must be avoiding disasters. My upside gains are a product of the time value of money. I rely on patience and the relentless compounding of interest and dividends. By diversifying over a quality list of balance-sheet-strong dividend payers and eschewing trading, long-term results are pretty much baked into the cake. I look for a high batting average, not home runs.

Holland, Michael" Holland Balanced Fund (HOLBX), managed by Michael Holland (pictured at left), only came on the scene in 1995 and, as such, is just getting going in terms of a long-term record. And relatively new and smaller funds pay a penalty because expense ratios are higher. Since inception, even with the temporary drag of the mandated structural charges, the fund’s annual compounded rate of return of 7.1% is close to the fund’s benchmark. When you consider that this fund spends zero on marketing costs, pays no brokerage commissions for anything but execution (a rarity), has no intrusive front-end sales load nor back-end 12b-1, and invests only in dividend-paying blue-chip equities (with the exception of Warren Buffett’s fine company, Berkshire Hathaway) and full-faith-and-credit Treasuries (ex short-term money assets), it’s a pretty comforting mix. In the case of Holland Balanced, the top three holdings were recently all Treasuries, and the top four equities holdings recently were ExxonMobil, Wal-Mart, American Express, and Johnson & Johnson. Were you to pick three fixed-income investments and four equities investments for the long term and for comfort in a retirement portfolio, you might have selected this exact group. I like the mix. I like the dividends. I like the integrity. Through the years, you can add to this fund with absolute impunity. It is impossible to own a more blue-chip, conservative, defensively-constructed portfolio.

"Here’s a closed-end fund to also consider: Blackrock Dividend Achievers Trust (BDV NYSE) invests most of its assets in common stocks that are included in the Mergent Universe of Dividend Achievers. To qualify as a Dividend Achiever, an issuer must have raised its annual regular cash dividend for at least each of the last 10 consecutive years. Last year, 303 US issuers (out of 15,000+ public companies) met the requirements for inclusion in the Dividend Achievers universe. At last count, the closed-end fund’s 65 positions were worth approximately $760 million. The top-10 holdings each yielded more than 3.5%, with its #1 holding, Washington Mutual, yielding 5.2%. The fund has a mandated 6% distribution policy, combining dividends and capital gains or return of capital. Management is counting on 1% to 1.5% in annual average capital appreciation, which I think is a reasonable target. It’s a nice addition for your income list and an ideal core investment for retired investors and investors saving in an IRA for an upcoming retirement."

"Meanwhile, in my own account, I’m investing 100% of my newly available capital in fixed income. Keep your maturities and durations short now that the long two decade secular bull market in bonds is over. Over the next few years, he who wins the most is likely to be he who loses least.  I’m adding to my already sizable positions in Vanguard Short-Term Corporate (VFSIX), which has an average duration of 2 years and Vanguard GNMA (VFIIX), with a duration of 2.6 years. The shorter a fixed-income portfolio’s duration, the less the reaction to a change in interest rates. A portfolio with a short duration of two years will lose 2% of its value with a 1% increase in rates. As interest rates track up, positions will quickly mature in a short portfolio, allowing a fund to reinvest at the new higher rates. Vanguard Short-Term Corporate has a 30-day SEC yield of 2.84% and includes a portfolio of nearly 700 positions. With Vanguard’s GNMA, the yield is a comfortable 4.66%. Don’t forget, GNMAs come with the full-faith-and-credit pledge of the US government. If you are currently retired and require a flow of income to pay your bills, I strongly suggest you build meaningful positions in these two Vanguard funds."

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