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The appeal of mature, dividend-paying companies can wax and wane with market sentiment, but the Legg Mason ClearBridge Equity Income Builder Fund aims to make a case for dividend-based investing for the long haul.
The $3.9 billion fund launched in 2008 and merged into another fund in 2009, rising from an economic meltdown that badly rattled equity markets and left investors searching for safety. With cratered interest rates still holding bond yields at very low levels, companies with strong dividend yields remain appealing, said Hersh Cohen, one of the Income Builder fund's co-managers.
Cohen, a long-time portfolio manager who also serves as chief investment officer for Legg Mason's (LM) ClearBridge Advisors business, has long seen the allure.
"I've always been a dividend hound," he said. "It's just a matter of letting dividends work for you and being patient."
The fund, which recently had 81 holdings, puts at least 80% of its value in equities or similar securities with an emphasis on companies with good dividend policies. Managers have latitude to get creative with the remaining portion, investing in things like preferred stocks and fixed-income securities.
The focus on big, value-oriented companies means the fund tends to lag the broader market during big rallies, but it can make up for that by performing better during rockier times, said Shannon Zimmerman, an analyst for fund tracker Morningstar Inc., which gives the fund a four-star rating.
The fund's performance numbers are most relevant since August 2009, when Cohen and his co-managers took over. Looking further, Morningstar shows three-year returns of 15%, which are about a percentage point behind the S&P 500 during a period that included a sharp market rebound following the recession's worst effects. But the fund's 8.4% return over the last year nearly triples the broader market's flatter performance in that span.
The fund has outperformed similar funds on a one- and three-year basis, more significantly in the last year, Morningstar said.
The Income Builder fund doesn't have a long track record yet, and even part of the three-year numbers are a holdover from before the August 2009 fund consolidation. But analyst Zimmerman noted Cohen's 30-year leadership of another ClearBridge product that "shellacked the S&P 500" and its fund category by, in part, losing less ground in down markets.
Exxon Mobile Corp. (XOM), which saw its share price rise nearly 11% in a 12-month span through Thursday, ranked as the fund's top holding in the most recently available records.
Another big holding, Waste Management Inc. (WM), has been a lagging performer. But Cohen likes the company's 4.1% dividend yield and its "incredibly shareholder friendly" attitude.
Plus, the firm serves a market that isn't going anywhere: trash. "My favorite companies are companies where I don't have to reinvent demand every quarter," Cohen said. He doesn't expect Waste Management stock to appreciate much in the near term, but views it as a long-term holding nonetheless.
Microsoft Corp. (MSFT) is another big holding that has earned its place through dividend policy more than stock appreciation, but Cohen calls it "an easy one to own." His fund also holds Apple Inc. (AAPL) shares even though Apple doesn't pay dividends. As with Google Inc. (GOOG), the fund is taking a flier on the potential the tech giants will eventually set up payouts to shareholders.
The Income Builder fund has dabbled in banks--J.P. Morgan Chase & Co. (JPM) has been a big holding--but Cohen hasn't had much comfort with the banking sector in general. The funds' exposure to financials comes more so through insurers, he said.
Other major holdings include Kimberly-Clark Corp. (KMB) and Procter & Gamble Co. (PG).
Cohen said he doesn't have a very bright economic outlook amid worries about the U.S.'s deficit-cutting efforts, which he views as the wrong policy while the economy sputters, and a "dysfunctional" government he'd like to see focus more on job creation. Nevertheless, while these effects may create uncertain times in the market, these are the conditions the fund is built to manage.
A key question for the managers is, if things go wrong, "how bad can they hurt us?" Cohen said.
(Jon Kamp covers health insurers for Dow Jones Newswires. He can be reached at 617-654-6728 or by email at email@example.com)
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