Fidelity Focused Stock (FTQGX) has been a very strong performer. Stephen DuFour has managed Fidelity...
Manage Risk with These 4 Mutual Funds
04/20/2012 7:00 am EST
Destra Capital’s Peter Amendolair describes his firm’s mutual funds, which manage risk through “responsible alpha.” Here, he details the investment strategies of the sub-advisors for each fund.
Kate Stalter: Our guest today is Peter Amendolair, Chief Investment Officer of Destra Capital.
Peter, as I understand it, you specialize in what you call “responsible alpha.” It sounds like risk management is a key component of that methodology. Can you tell us a bit about that?
Peter Amendolair: Sure. I’d be happy to. Risk management is a huge component of what we do, and in terms of sourcing sub-advisors, that’s certainly one of the things that I focus on. I look for sub-advisors that have a very formal and comprehensive risk-management policy. I like to see that it’s enforced.
In terms of the responsible alpha, what we’re doing there is certainly trying to protect on the downside. We know that as the markets go down, if we can protect and go down less than the markets, you don’t have to earn as much on the upside to still be ahead and add alpha to the portfolio.
Just mathematically, for example, if you lose 50%, you have to make back 100% just to get back to even. So if you can lose less, you have to make less on the upside and still be able to outperform your benchmarks.
- Also read: Advantages of a Manager of Managers Fund
Kate Stalter: So let’s then drill down a little bit, and talk about some of the mutual funds. One that got my attention when I was looking at your Web site was Focused Equity, which appears to have shown a double-digit gain so far this year.
Peter Amendolair: Focused Equity is a great strategy. It’s managed by WestEnd Advisors. It’s the Destra Focused Equity Fund (DFOAX).
The approach taken there is one of determining the sectors that are expected to do well in the current business cycle, and very importantly, avoiding the sectors that are not expected to do well, and then picking representative stocks in each of the sectors that are in the portfolio.
And there might only be four or five sectors represented in the portfolio with stocks in each of those sectors, or industries within those sectors. It’s done very well.
WestEnd is also a manager who provides separately managed accounts, and has been employing this strategy consistently since the mid-1990s.
Kate Stalter: Do you focus primarily on large-cap names in this particular fund?
Peter Amendolair: You know, in this fund it’s large cap or mega-cap stocks.
Kate Stalter: I know you’ve got three other funds, according to your Web site, and I want to hear about each of these, and how you employ the responsible alpha strategy in each one of these cases.
Peter Amendolair: Sure. A fund that we also offer that is somewhat unique is an open-end preferred stock fund, Preferred Securities Fund (DPIAX), managed by Flaherty & Crumrine. They’ve been managing Preferred Securities for over 30 years.
There aren’t a lot of open-end preferred funds, and what we like about it is: It has investment-grade securities with one of the highest, if not the highest, yield, and we find that many investors own corporate bonds in some of the same companies that offer preferred securities.
So for a lot of investors, it’s a way to step up the yield and not change their credit risk or credit exposure. This fund has also done very well.
Kate Stalter: That raises the question: For many investors, when they’re thinking about seeking income, they really only think about bonds. But of course, preferreds are another way to do that. How should they be incorporating preferreds into their portfolios?
Peter Amendolair: Well, that’s a great question, and one of the things we focus on at Destra—in addition to trying to source either unique investment strategies or unique managers, and they might be managers that have managed institutional portfolios, but not available on the retail side before.
One of the other things we focus on is generating income, or strategies that generate income for clients. We found much too often that clients and their advisors spend an awful lot of time focusing on the equity portion of the portfolio, and doing a really good job in allocating to different cap sizes, or internationally, or growth vs. value.
But they don’t spend the same amount of time and effort on the income side, so there are a lot of investors that might just own Treasuries, or corporate bonds, fixed rate—so they’re exposed when interest rates rise.
One of the things we like to focus on is diversifying the sources of income, whether it’s dividend income from common stock dividends or the preferred dividends. We also are focusing on funds that will provide diversification globally, and we think investors should have a well-balanced income portion of their portfolio that’s not overly exposed to rising rates, or one country, or interest, and that’s why we favor dividends as well.
Kate Stalter: And that leads into the Dividend Strategy Fund. Could you say a bit about that?
Peter Amendolair: Yes, it’s the Destra High-Dividend Strategy Fund (DHDAX), sub-advised by Miller/Howard. Something that’s somewhat unique in this fund is that we also include MLPs in the fund, and it’s a fund that focuses on companies that have a history of growing their dividends.
- Also read: These 4 Dividend Funds Are Still Worthy
There are companies that pay high dividends and companies that have a history of growing dividends, and the dividend growers are the companies that we look to put into this fund, because over time they tend to perform better, and also provide a nice yield.
Kate Stalter: And I imagine that these are probably, again, mostly large caps, because those are the ones that tend to be growing their dividends most of the time?
Peter Amendolair: You know, they might run the spectrum, but they’re not solely large caps. But predominantly.
Kate Stalter: You’ve got one more fund that I wanted to touch on today, which is the Destra Next Dimension Fund (DLGSX). Tell us about that.
Peter Amendolair: That’s truly a unique strategy, developed by Roger Ibbotson of Zebra Capital. They are the sub-advisors.
This is a strategy that focuses on taking advantage of companies that have the lowest liquidity premium. Every public stock, a portion of its stock price is the liquidity premium, just the ability to buy and sell that stock. Some have very high-liquidity premiums. Some have lower premiums.
There are a number of ways to determine the premium. One of the things—not the sole thing—but one of the things that Roger looks at is a V/E ratio, which is volume over earnings. So a company might have lower trading volume, or it could have normalized trading volume and very high earnings, and therefore have a low V/E ratio.
Roger buys those companies with a lower V/E ratio, or lower liquidity premiums, and they run across the cap spectrum from small-, mid- to large-cap companies—growth and value—and add a little bit of a longer holding period, maybe something like two years. But these companies tend to outperform.
Roger also runs a hedge fund with that same strategy, and he’s certainly been able to add value or some alpha over the benchmark. So we do that as a core equity holding. You could reallocate from your large-cap, small-cap, mid-cap, growth value, US, international stock holdings into this liquidity strategy, the Next Dimension Fund.
Kate Stalter: Now, from what I understand by looking at some of the Morningstar data here, Peter, is a number of the stocks in the fund are non-US based. Would that account for some of the lower volume, perhaps?
Peter Amendolair: Well, not just the fact that they’re non-US based. I mean, part of the strategy does focus on low-volume stocks, whether it’s in the US or outside the US. They might be stocks that have fallen out of favor or they might be stocks that might not get a lot of analyst coverage.
Kate Stalter: Yes. So, in other words, they’re just something that for some reason they might be off the radar.
Peter Amendolair: For some reason they might be off the radar. Correct.
Kate Stalter: Are most of your funds purchased for clients through advisors, or are these something that individual investors normally purchase through you themselves?
Peter Amendolair: No, through advisors.
Kate Stalter: Yes. And are they only available through advisors?
Peter Amendolair: Yes.
- Also read: Q&A with a Top Income Fund Manager
Related Articles on FUNDS
I think we’re finally seeing the bottom forming in MLPs, which is good news for JPMorgan Aleri...
When we recommended large-blend Parnassus Core Equity Fund (PRBLX) a year ago, what stood out most w...
On November 1, we featured Doug Hughes' recommendation for investment banking firm Oppenheimer Holdi...