Portfolio Manager Perspectives

Jeff Benjamin

Now's the time to place your chips on chips: Hogan

Cyclical semiconductor industry on the cusp of a rebound, says PM; dividends an added draw

Aug 27, 2012 @ 12:11 pm

By Jeff Benjamin

The semiconductor space is poised for a rebound that should represent a particular boost for income-seeking investors, according to Paul Hogan, co-manager of the $120 million FAM Equity Income Fund Ticker:(FAMEX).

“When I look at sales growth of the semiconductor names, I can see that the cycle is turning around,” he said. “They've had declining sales for the past four quarters, and I like what that means for the futures because the comps will be easier to beat.”

In essence, a year or more of weak sales should lead to at least a year of stronger sales growth, and that typically is good for stock performance.

But the bonus is that certain semiconductor names can represent potential income in the form of increasing dividends, according to Mr. Hogan.

He manages the fund along with Tom Putnam at Fenimore Asset Management Inc., with $1.8 billion under management.

The strategy, which holds about 30 stocks, concentrates on midsize companies with market capitalizations of between $1 billion and $20 billion.

Any stock added to the fund has to be paying a dividend, however. “We're looking for high-quality companies with a lot of cash flow, and low or no debt,” Mr. Hogan said.

The focus on income in the form of dividends puts the fund in a unique sweet spot that represents very little overlap with the large-cap dividend universe.

“In the large-cap space, more than half of the companies in the [S&P 500 Index] pay dividend yields of more than 2%, so you tend to see a lot of equity income funds concentrated in the large-value box, and that means those funds have all the usual suspects in them,” Mr. Hogan said. “In the mid-cap space, we have a universe of 800 names with yields above 2%, which means our universe is four times larger, and 60% of the names in our fund aren't even in the S&P 500.”

Another example of the contrast between a broad market index and smaller-cap stock-picking is the pace and direction of dividend growth in recent years. Over the five-year period through June, the annualized dividend growth rate of the stocks in his portfolio was 11%, according to Mr. Hogan.

Over the same period, the S&P had an annualized dividend decline of 2%.

Mr. Hogan owns several companies in the semiconductor sector. Those holdings include Altera Corp. Ticker:(ALTR), Microchip Technology Inc. Ticker:(MCHP) and Xilinx Inc. Ticker:(XLNX).

Altera stock, which has a 1.1% dividend yield, is down 1.3% from January; Microchip, which is yielding 4%, is down 2.3%; and Xilinx, which is yielding 2.6%, is up 7.7%.

That compares with a 7.4% gain by the semiconductor sector and a 13.8% gain by the S&P since the beginning of the year.

The FAM Equity Income Fund is up 7.7% so far this year.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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