For much of his career, David King has been a mutual-fund fixer, cleaning up other money managers’ mistakes. “If you look at my career, the last 20 or so years of it have been as a mutual fund turnaround specialist,” says King—“fixing something, repositioning something.”
King now runs one of his own inventions—the Columbia Flexible Capital Income fund (CFIAX), a hybrid income-oriented fund that can invest almost anywhere—putting the pressure on him to deliver. It has thrived.
The fund resides in Morningstar’s Allocation—30% to 50% Equity category, which consists of balanced funds that invest 30% to 50% of assets in stocks and the rest in bonds. In the past five years, it has beaten 92% of its category peers, with an average annual return of 5.4%. Since its July 2011 inception, the fund’s 88% cumulative return crushes the category’s 43%.
King, 62, spent the first 25 years of his 36-year career as a jack-of-all-trades manager at Putnam Investments in Boston, heeding the call to overhaul global-equity, convertible-bond, balanced, and equity-income funds. But he got tired of fixing other people’s problems, so after a management shake-up, he left to go on sabbatical in 2008. During his time off, he conceived of the flexible income strategy.
When Columbia Threadneedle Investments—also in Boston—offered him the job of fixing Columbia Convertible Securities (PACIX) in 2010, he agreed, on the condition the firm launch a new fund based on his design.
Because Flexible Capital Income has the leeway to invest in stocks, bonds, convertibles, real estate investment trusts, and master limited partnerships, King’s polymath investing skills have been useful. He believes increased specialization on Wall Street has created market inefficiencies he can exploit. “When I first started in asset management, all of the portfolio managers could get together in a medium-size dining room and have sandwiches,” he explains. “So, if you wanted to know what the interest-rate forecast was, you asked the bond guy. There was a lot of exchange of ideas because you were just hanging out with people in these different disciplines.”
Now, instead of that cross-fertilization, everyone is siloed, King observes. This is especially so for income-paying securities, as investment professionals often consider their bond allocations separately from their equities. “The specialization has driven people to think there’s not much commonality between high-yield bonds and dividend-paying stocks,” he says. “I disagree with that.”
While there are other multiasset income-oriented funds, King points out that most employ a high-level allocation strategy, indexing entire asset classes. By drilling down to the security level, King says he can find better opportunities. For example, the fund owns United Parcel Service (UPS) common stock, which yields more than the company’s 10-year bond, thanks to concerns about competition from Amazon.com (AMZN), among other factors. King points out that those concerns should be reflected in the bond’s yields as well. “These inconsistencies are a hallmark of our process,” he says.
The fund can invest any amount in income-paying stocks, bonds, or convertible bonds. In practice, the bond weighting has ranged between 20% and 35%, stocks between 33% and 45%, and convertibles from the mid-20% to the upper-30% range. Currently, stocks make up 38% of the fund, convertibles 31%, and bonds 27%.
Although the fund seeks total return—capital appreciation plus income—it has an income emphasis, leading King to favor higher-yielding securities. (The fund’s current SEC yield is 4%.) Sometimes, that can mean buying one-off bonds like that of the We Company—formerly known as WeWork—a private shared-workspace company akin to Airbnb but for office space. Since the company is private, there is no public equity to invest in, but the bonds King owns have a healthy 7.9% coupon yield.
Sometimes, a company King likes has strong earnings potential but poor dividends, so he opts for its convertible bonds or preferred stock, which captures some of the common stock’s upside while offering yield. One example: medical-instrument maker Becton Dickinson (BDX), whose common stock yields only 1.3%. It acquired C.R. Bard at the end of 2017, financing the deal by issuing some convertible preferred stock (BDXA) yielding 6.125%, which will convert into common stock in May 2020.
Often, King swaps between the different securities options of a single company based on their total return potential. “We’ve owned several different issues of [tool maker] Stanley Black & Decker (SWK) during the fund’s history—a long-term bond, convertibles, common stock,” King says. “We know this company and we generally like it, so we make comparisons of the different issues in its capital structure.”
One recent investment is food company General Mills ’ (GIS) common stock. A food analyst in Columbia’s New York office recommended it when the stock’s dividend yield got as high as 5% last December while shares fell to $40. (Dividend yields move inversely to stock prices.) Some investors were concerned the acquisition of pet-food maker Blue Buffalo increased the company’s leverage, but not King.
“This is a company that hasn’t cut its dividend in my lifetime,” he says. “It’s temporarily heavily levered. But we’ve done the fundamental work and feel the acquisition will work out.”
Such fundamental work is never easy, especially for a go-anywhere fund with a vast universe of potential investments, but King’s varied experience and Columbia’s collaborative culture help. There are 150 different Columbia analysts whose brains he and co-managers Yan Jin and Grace Lee have picked over the fund’s eight-year life. Bonuses for investment staff at Columbia are in part determined by how effectively everyone works together. Without that teamwork, King’s vast investment domain would look much more like an isolated fiefdom.
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