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INVESTMENT MANAGEMENT CORPORATION Small Cap Dividends: A Potential Path to Superior Returns By: Andrew Bass, Director of Research at North Star Investment Management Corporation Vanguard Dividend iShares Select Appreciation Dividend ETF (VIG) (DVY) Market Cap (000’s) SPD® S&P Dividend ETF (SDY) North Star Dividend Fund (NSDVX) $450,000 $350,000 $250,000 $150,000 $50,000 $(50,000) Average Market Cap: $25.4B Average Market Cap: $30.8B Average Market Cap: $36.9B Average Market Cap: $0.4B North Star Investment Management believes that small capitalization dividend stocks (defined as dividend- paying stocks with market capitalizations of less than $1 billion) offer investors the best of both worlds, superior returns and lower risk. Since 2010, the North Star Dividend Fund (NSDVX) is one of the few mutual funds that provides investors with the opportunity to invest in a basket of dividend-paying small cap stocks. Dividend payments for high quality small cap companies can provide a return component less volatile than the capital appreciation component, there is an opportunity for superior long-term price appreciation that can be associated with the small cap stocks, and there may be some risk mitigation when companies pay out a portion of their free cash flow in the form of dividends. Volatility and Dividend Payers Long-term return data tells us that dividend-paying stocks enjoy lower volatility versus non-dividend paying stocks. For example, from 1927-2014 non-dividend payers had a 30.1% standard deviation while dividend payers had an 18.3% standard deviation (Source: Forbes). The same trend of lower volatility can be seen in the North Star Dividend Fund with a standard deviation of 16.4% since fund inception in 2010 versus 20.4% for the Russell 2000 Total Return Index. One can see that part of the general explanation for lower standard deviation lies in the stability of return that is derived from dividend payments. For example, according to Standard & Poors, dividends contribute more than one-third of historical equity returns from 1926 to 2012. When adjusting for market conditions, dividend yield contributed an average of 13.5% of the total return during bull markets and 34.7% of the total return during bear markets. So, though share price returns can be negative and quite volatile, dividends provide consistent positive equity return contributions, especially during periods of weak price appreciation in broad market indices. Dividend Income as a Percent of Monthly Total Return of the S&P 500 60% 40% 20% 0% 1940s 1950s 1960s 1970s Source: S&P Dow Jones Indices 1980s 1990s 1926 to Dec-2012 High Quality Small Caps…Even Better! In addition to the stability of returns that comes with dividend payments, the North Star Dividend Fund also seeks to invest in higher quality businesses, which we define through lower than average leverage ratios as well as higher than average ROEs. As of January 20, 2016, the Fund’s Debt to Equity ratio is 0.86x versus 1.90x for the Russell 2000, and the Fund’s average Quality Portfolio Returns ROE, excluding negatives, of 11.4% versus 7.5% for the Russell 2000. (1985-2014) Higher ROEs provide for higher long term price return potential in addition to the dividend component of the Fund as studies have shown that higher Russell quality businesses tend to outperform lower quality businesses over long 3000® Index: periods of time. A study from 1985 to 2014 that compared a portfolio made 11.3% up of High Quality stocks versus a portfolio of Low Quality stocks showed that the High Quality portfolio outperformed by a wide margin. In addition to lower than average leverage ratios and higher than average return on equity ratios, the North Star Dividend Fund primarily seeks to invest in stocks whose characteristics are inherently stable, which we think is synonymous with quality in a dividend portfolio. For example, 15.7% of the Fund’s exposure was to the Utility space. Source: Atlanta Capital Investment Managers Dividends as Potential Protection A history of dividend consistency as it relates to dividend policy is another important condition that we look for when investing through the North Star Dividend Fund. We generally find that corporations that have a long history of paying dividends may be more attentive to managing capital structures appropriately in order to maintain dividend payments. In the North Star Dividend Fund, for example, the average company has had a consistent dividend policy for over 15 years with one portfolio company in particular, The York Water Company, 1.7% of the portfolio as of 12/31/15, having paid a dividend since 1816! The primary objective of the Fund is to generate dividend income, however income is not assured. Our Formula Matters We stick to a few basic principles that drive long term performance in the North Star Dividend Fund including finding stocks whose market capitalizations are under $1 Billion, businesses whose capital structures support long term dividend payment and growth potential, management teams whose interest align with shareholders, and business models that generate high returns on equity. These characteristics combine to provide return characteristics that generate lower volatility in a volatile market. ANNUALIZED RETURNS OF FUND unaudited (net of fees) North Star Dividend Fund Russell 2000 TR 12/31/15 1-YR 3-YR 5-YR Inception -2.8% -4.4% 10.4% 11.7% 9.6% 9.2% 12.5% 12.6% *The Russell 2000 Index measures the performance of small-cap segment of the U.S. equity universe. Past performance is not indicative of future results. Current performance may be lower or higher than the performance data quoted above. For performance information current to the most recent month-end please call toll-free 855-580-0900. Performance shown before June 1, 2013 is for the Fund’s predecessor limited partnership (North Star Dividend Fund, LP). The prior performance is net of management fees and other expenses, but does not include the effect of the performance fee. The Fund has been managed in the same style and by the same portfolio manager since the predecessor limited partnership’s inception on February 1, 2010. The Fund’s investment goals, polices, guidelines and restrictions are, in all material respects, equivalent to the predecessor limited partnership’s investment goals, polices, guidelines and restrictions. From its inception on February 1, 2010 through the date of this prospectus the predecessor limited partnership was not subject to certain investment restrictions of the 1940 Act of the Code, which if they had been applicable might have adversely affected its performance. The Vanguard Dividend Appreciation ETF (VIG) seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. This ETF is subject to Stock Market Risk, Investment Style Risk and the target inded may become concentrated in a particular market sector subjecting it to additional risk. The annual fee for this ETF is 0.10%. The iShares Select Dividend ETF (DVY) seeks to track the investment results of an index composed of relatively high dividend paying U.S. equities. This ETF is subject to Asset Class Risk, Authorized Participant Concentration Risk, Concentration Risk, Consumer Discretionary Sector Risk, Consumer Goods Industry Risk, Consumer Staples Sector Risk, Dividend-Paying Stock Risk, Energy Sector Risk, Financials Sector Risk, IndexRelated Risk, Management Risk, Market Risk, Risk of Secondary Listings, Secondary Market Trading Risk, MidCapitalization Companies Risk, Passive Investment Risk and Utilities Sector Risk. The annual fee for this ETF is 0.39% The SPDR® S&P® Dividend ETF (SDY) seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® High Yield Dividend AristocratsTM Index. This ETF is subject to Sector Risk, Market Risk, Index Tracking Risk, Dividend Paying Securities Risk, Equity Investing Risk, Financial Sector Risk and Non-Diversification Risk. The annual fee for this ETF is 0.35. The primary investment objective of the North Star Dividend Fund (NSDVX) is to generate dividend income and the secondary objective is to seek capital appreciation. The Fund seeks to achieve its objective by investing in a diversified portfolio of dividend paying securities with market capitalizations under $1 billion. The sales charge (load) for purchases of the North Star Dividend Fund is 1.38%. You should carefully review the prospectus for each ETF identified and understand all risks. *The S&P 500® is widely regarded as the best single gauge of large cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. *The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The indices shown are for informational purposes only and are not reflective of any investment. As it is not possible to invest in the indices, the data shown does not reflect or compare features of an actual investment, such as its objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features. Past performance is no guarantee of future results. Mutual Funds have investment risks including loss of principal. There is no guarantee the fund will meet its objective. The risk that the securities of small-cap and micro-cap companies may be more volatile and less liquid than the securities of companies with larger market capitalizations. These small-cap companies may not have the management experience, financial resources, product diversification and competitive strengths of large- or mid-cap companies, and, therefore, their securities tend to be more volatile than the securities of larger, more established companies. Investors should carefully consider the investment objectives, risks, charges and expenses of the North Star Funds. No-Load Mutual funds are sold without sales charge; however, they have ongoing expenses, such as management fees. This and other important information about each of the Funds are contained in the prospectus, which can be obtained at www.nsinvestfunds.com or by calling (855) 580-0900. The prospectus should be read carefully before investing. The North Star Funds are distributed by Northern Lights Distributors, LLC member FINR/SIPC. North Star Investment Management Corporation is not affiliated with Northern Lights Distributors, LLC. 4131-NLD-2/10/2016