Dividend Growth Portfolio November 2017 Letter to Investors

If it ain’t broke, don’t fix it.

That was the approach I took this past month. Apart from some modest rebalancing, I made no major portfolio changes. And barring any expected new opportunities, I’m not expecting to make many major changes between now and year end. Frankly, we are already well allocated to the sectors that I consider the most attractive on a valuation basis. And if investors continue to rotate out of growth names and into value names – a trend that has been in effect in the first few trading days of December – we should enjoy a very strong finish to the year.

After all fees and expenses, the Dividend Growth portfolio returned 0.4% in November and 7.6% year to date. While a respectable performance, it is has significantly trailed the S&P 500’s year-to-date return of just over 20%.

When you run a strategy that has a low correlation to the broader market, periods of underperformance like this are part of the game. It’s fun when your strategy is performing well, as it did last year. In 2016, Dividend Growth returned 26% after all fees and expenses vs. a 12% return for the S&P 500. Of course, it’s less fun when you’re lagging as we are today.

My advice here is to keep the faith. My strategy is a patient one: I buy stocks I consider undervalued and collect a growing stream of dividends while I wait for the market to recognize the value. If I’m slightly early in a trade, that’s perfectly ok. I’m generally being paid quite handsomely to wait.

Over the past month, our performance was dragged down by our MLP and alternative asset manager holdings. In particular, Energy Transfer Equity (ETE) and Oaktree Capital (OAK) had the biggest negative impact. Skilled nursing REIT Omega Healthcare Investors (OHI) also had negative month, as did most of its peers in the skilled nursing space.

Our biggest winners for the quarter were deep-value play Prospect Capital (PSEC) and our play on a recovering Europe, Northstar Realty Europe (NRE).

With tax-loss selling now likely having run its course, I expect to see very strong performance from our MLP investments. I believe strongly enough in this to have made Enterprise Products Partners (EPD) my pick in InvestorPlace’s Best Stocks for 2018 contest, the annual stock picking contest I enter every year.

For what it is worth, my 2017 submission – General Motors (GM) – has been a strong performer, up 27% for the year.

That’s going to wrap it up for this month. Here’s looking for a strong finish to 2017,

Charles Lewis Sizemore, CFA