Despite an upcoming management change, we are maintaining our Bronze rating on this value-oriented dividend fund.
BlackRock Equity Dividend's efforts to build out its team and refine its process have prepared it for an impending manager change, so it keeps its Morningstar Analyst Rating of Bronze.
The manager who has run this team since 2001, Bob Shearer, announced on Feb. 14, 2017, that he will step down in August and retire in September. That's a lot of institutional memory walking out the door, but the fund is prepared for the transition, which will be gradual. Current comanager Tony DeSpirito, who joined Shearer in August 2014 from Pzena Investment Management, will succeed him this August. At that time two other team members that DeSpirito spirited away from Pzena last year, David Zhao and Franco Tapia, will become named comanagers. David Cassese, a named manager since 2011, also remains.
It quickly became clear after DeSpirito joined that he would eventually lead the team. He has overseen its expansion and added quantitative screens and more face-to-face meetings to the team's process to help make it more competitive with active and passive rivals. While adding people and tools, the fund hasn't altered its philosophy and standards. It still looks for shares offering attractive valuation, consistent dividend growth, competitive yield, and financial and business model strength. The fund also still leans toward higher-quality value stocks. At the end of December 2016, it had more money in stocks with wide or narrow Morningstar Research Services Economic Moat Ratings (nearly 82%) than the Russell 1000 Value Index (about 80%).
The competition among dividend-growth funds, however, has stiffened. This fund's willingness to own more-cyclical stocks with narrower or debatable competitive advantages in the financial, energy, and basic-materials sectors has sometimes held it back relative to the Nasdaq US Dividend Achievers Select Index, a dividend-growth benchmark that owns more wide-moat stocks and fewer no-moat stocks than this fund does. That said, owning cheap dividend-payers has helped this fund beat the average large-value fund and its stated benchmark over time, and recent tweaks could make it more competitive.
Process Pillar: Positive | Dan Culloton 02/22/2017
This fund looks for stocks with a balance of earnings and dividend growth, yield, quality, and low valuations. All else equal, it will usually opt for a lower-yielding stock with a steadier growth rate rather than a higher-yielding but more erratic one, though it has been known to dip into lower-quality fare at times.
The managers start by looking for dividend-paying companies among the 500 largest U.S. stocks with debt/capital ratios below 50%. They rely on quant screens more than in the past in this initial step but still resort to bottom-up analysis of individual companies and industries to find affordable shares of large companies generating enough profits and cash flow to satisfy dividend payments without stinting on research and development, capital spending, and debt service. This usually keeps the fund focused on a pool of businesses with competitive advantages that enable them to earn consistent returns on invested capital in all kinds of economic environments--in other words, blue chips.
This fund buys dividend-growers when their valuations are below their five-year averages. It trims or sells when valuations rise or when company fundamentals or industry dynamics change, but it will hold some stocks past their median historical valuations if fundamentals warrant it. Price consciousness makes the fund more value-oriented than a lot of dividend-growth funds.
In the past year, the fund has increased its stake in energy stocks, while also maintaining its interest in financials, technology, and healthcare.
The fund, which was underweight energy heading into the 2015 correction, has begun adding names in what has been a volatile sector because comanager Bob Shearer, a longtime energy and natural-resources fund manager, thinks the oil industry will be challenged to produce enough to keep prices low. The portfolio has added what it views as low-cost producers with healthy balance sheets that can support dividend payments for no matter where oil prices are, including Pioneer Natural Resources PXD, Marathon Oil MRO, and Hess HES. More recently it added French integrated oil company Total SA TOT for its above-average production growth potential.
The fund maintains a large helping of bank stocks despite higher price/earnings ratios from a year ago. Bank business models and balance sheets look stronger and more resilient than they have been in many years, the managers contend. And prospects for increased dividend growth and stock buybacks are promising for holdings like JPMorgan Chase JPM. The fund also has continued to add to mature tech companies, such as Taiwan Semiconductor Manufacturing TSM, for their capital return potential and still favors large drugmakers and health-maintenance organizations. Consumer staples have been a source of funds.
Performance Pillar: Neutral | Dan Culloton 02/22/2017
This fund's respectable record comes with caveats. It has done well versus its Russell 1000 Value benchmark and the large-value Morningstar Category average, but less well versus indexes more focused on dividend-growth and high-quality stocks. It's also in the midst of a manager transition, so the Performance Pillar rating stays Neutral.
From the November 2001 start of manager Bob Shearer's tenure through Jan. 31, 2017, this fund's 8.9% annualized gain beat the 6.5% advance of the typical large-value fund and the 7.9% gain of the Russell index. In August, however, Shearer will hand the reins to Tony DeSpirito, his comanager since August 2014, and three other team members who also cannot claim credit for most of the fund's long-term record.
Furthermore, the fund has turned in more-mixed results versus more-dividend-focused indexes, such as the Nasdaq US Dividend Achievers Select Index. Its 7.5% annualized gain since the Dividend Achievers' April 2006 inception beat the Russell 1000 Value and average large-value fund (6.6% and 5.7%, respectively) but paced the Dividend Achievers' 7.6%.
There has been recent improvement. The fund's 9% annualized gain since DeSpirito joined on Aug. 4, 2014, through January 2017 beat the typical large-value fund's 6.4%, the Russell 1000 Value's 8.0%, and Dividend Achievers' 8.3%. Though promising, that's a short period.
People Pillar: Positive | Dan Culloton 02/22/2017
Bob Shearer, who has managed this fund since November 2001, will leave it in August 2017 and retire in September. Tony DeSpirito, who has assumed more control here since joining the team from Pzena Investment Management in 2014, will take over with two other recent additions to the squad. BlackRock has telegraphed this development in recent years by adding experienced personnel, such as DeSpirito, so the fund's People Pillar rating stays Positive.
When Shearer retires, DeSpirito will comanage with two former Pzena colleagues whom he recruited in 2016 to serve as this team's co-directors of research: David Zhao and Franco Tapia. Senior consumer stock analyst David Cassese also remains a named comanager.
About six other analysts, most of whom have joined the squad in recent years, support the managers. They are energy analyst William McSweeney, materials and utilities analyst Andrew Ralph, healthcare analyst Ibrahim Kanan, industrials analyst Kelsey DeBriyn, and financials analyst Nikhil Uppal. The team expects to add a junior analyst in June 2017.
There have been a lot of changes here, including the 2016 retirement of Kathleen Anderson. However, Shearer's transition will be gradual and the addition of personnel with industry experience instills confidence. So does the fact that DeSpirito's investment in the fund has increased to more than $1 million in the past year.
Parent Pillar: Neutral | Dan Culloton 02/04/2016
BlackRock is a success story. The former unit of private equity firm Blackstone has used acquisitions and operational savvy to become the largest asset manager in the world, with $4.6 trillion in assets at the end of 2015. With great size and complexity, however, comes enough challenges to limit this company's Parent rating to Neutral.
BlackRock is a diverse and influential investing colossus. It spans styles, strategies, geographies, and vehicles. A common technology platform and other structures bind its diverse investment teams. Institutions and governments seek its advice.
The firm, however, has been in its current form since 2009 and is still developing. Average manager tenure and retention ratios still rank in the lower half of the top 20 U.S. mutual fund families. Active strategy performance remains spotty. Nearly half of the BlackRock funds sold globally that have Morningstar Analyst Ratings get Neutral or Negative Performance Pillar ratings. Manager ownership has improved but could be higher, fees have come down in places but remain average at best overall, and it has some regulatory blemishes, notably a $12 million settlement of SEC charges that the firm mishandled a former portfolio manager's conflicts of interest. The firm also must balance its duty to existing clients with those of its public equity shareholders to grow assets. Biggest does not mean best yet.
Price Pillar: Positive | Dan Culloton 02/22/2017
Fees are not an impediment here. Most of this fund's assets are in share classes with below-average expense ratios relative to other large-cap funds in similar distribution channels. That earns the fund a Positive Price Pillar rating.
The fund's low turnover also helps keep transaction costs reasonable. The fund's average brokerage commissions as a percentage of net assets are a fraction of the average large-value fund's. Tax costs, as measured by Morningstar's tax-cost ratio, were above average over the trailing three-, five-, and 10-year periods through Jan. 31, 2017, because of large distributions in 2014, 2015, and 2016.