Richard Sherry, senior portfolio manager and analyst for KAR’s Global Dividend Yield portfolio, believes we’ve seen more normalization of performance between low and high quality companies during the second quarter of 2021, after a period in which lower quality stocks were outperforming.
After the announcement in late 2020 that effective vaccines had been developed against COVID-19, companies that had been negatively impacted by the pandemic and stood to disproportionately benefit from a return to normalcy had a heyday — and this boom included lower-quality stocks.
At the same time, lower quality stocks were also benefiting from higher than normal levels of inflation caused by COVID-related supply and demand imbalances. Lower quality companies benefit most from high inflation because it gives them a source of pricing power they don’t normally have. In other words, they can charge more in an inflationary environment than they might otherwise be able to ask.
However, as Q2 2021 began, investors started to consider that these higher levels of inflation may be transitory, setting off a chain reaction leading to a greater performance balance between low and high quality. Lower quality companies settled into a closer range of their fundamentals, while higher quality companies that were able to strengthen their competitive positions over the past year, continued to perform well on the road to normal.
Key Contributors and Detractors in Global Dividend Yield
To learn about the top five contributors and detractors in KAR’s Global Dividend Yield strategy for Q2 2021, listen to the podcast above.
This Delta May Not Be an Indicator of Change
Sherry believes, despite the concerns over the COVID-19 Delta variant, that vaccines will continue to have a growing and positive impact on returning society back to normal. Given that, he expects economic activity to continue its return to normal as well. What does that mean for his portfolio strategy?
“We continue to invest in increased exposure to businesses that have been uniquely impacted by COVID in a negative fashion, yet remain high-quality businesses.
“We also continue to do what we’ve always done, which is to look for opportunities to invest in businesses that pay stable dividends and are priced to provide attractive yields.”
This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.