David King, with his 40 years of experience in income-oriented securities, brings a unique and distinct approach to the Columbia Flexible Capital Income Fund.
A Different Perspective on Asset Allocation
While most funds take a top-down approach to asset allocation, King prefers to draw a big circle around income securities. Rather than categorizing high-yield bonds as good or bad, King and his team make individual bottom-up calls on each security. This approach allows them to have a more nuanced and informed perspective on the overall portfolio composition.
A Balanced Portfolio with a Twist
Unlike many funds that have separate managers for stocks and bonds, the Columbia Flexible Capital Income Fund takes a more integrated approach. Instead of dividing the responsibilities between managers, this fund determines the allocation between stocks and bonds as a whole. This unified strategy has resulted in a portfolio consisting of approximately 40% stocks, 40% bonds, and 20% convertible securities.
Strong Long-Term Performance
The Columbia Flexible Capital Income Fund has a strong track record of long-term performance, boasting a 10-year annualized return of 6.3%. This performance exceeds that of its Morningstar category by approximately half a percentage point.
Recent Challenges and King’s Assessment
However, it is important to acknowledge that the fund has faced challenges in the past year. With a flat performance through November, it currently lags behind its benchmark by about six percentage points. King attributes this underperformance to the fund’s inclination towards value and mid-cap stocks, which have not kept pace with the broader market represented by the S&P 500 index.
King’s Sector Preferences
Despite recent setbacks, King still has faith in certain sectors. He favors laggard sectors such as utilities, telecommunications, and real estate investment trusts (REITs). With his experience and expertise, King believes these sectors hold untapped potential for the fund’s future performance.
Note: The returns mentioned are as of November 30. The three-, five-, and 10-year returns are annualized.
Sources: Columbia Threadneedle Investments, Morningstar
Bullish Outlook on AT&T and Verizon
Both companies display strength in their dividend stability. Verizon has never cut its dividend, and AT&T has no need to do so again. While AT&T previously reduced its dividend by more than 40% during its spinoff of a 71% stake in Warner Brothers Discovery in 2022, investors need not worry about further cuts. On the other hand, Verizon has consistently increased its quarterly dividend, doing so most recently in September. This action marks the 17th year of consecutive annual dividend boosts for the company.
In addition to the telecom sector, King also expresses favor towards the utility sector, which has gained momentum with the bond market rally. Duke Energy and Entergy, both large-cap utility companies, have experienced a slight decline of about 10% this year. Despite this, they offer a healthy yield of 4%. Among King’s top choices is UGI, a Pennsylvania gas utility with a small-cap market value of $5 billion that boasts an impressive yield of over 6%.
Moving further, King sees potential in the out-of-favor group of office real estate investment trusts (REITs), particularly Boston Properties. Despite experiencing a recent 20% rebound, this company’s stock remains below its Covid-induced lows. However, King believes that Boston Properties stands out due to its diversified portfolio in prominent cities such as New York, San Francisco, and Boston. With a strong balance sheet and exceptional properties, King suggests that office demand may be stabilizing. The shares of Boston Properties currently yield over 6%.