By Philip van Doorn, MarketWatch
The U.S. stock market has been devastated, with a 28% decline from record highs and all but three S&P 500 members in the red. Daniel Peris of Federated Hermes, as a long-term dividend-growth investor, is picking through the wreckage.
The 20-year veteran of the stock market sees many bargains that he wouldn’t have bought a month ago. The bull market had driven prices so high that yields were at historic lows.
Peris is now suggesting that investors who need income look at sectors that may not be grossly affected by the spread of the virus or the oil-price decline, and whose yields have increased considerably during the market decline that followed the S&P 500’s /zigman2/quotes/210599714/realtime SPX -0.62% most recent record closing high Feb. 19.
Those sectors include consumer staples, communication services, health care, utilities “and even technology,” he said during an interview March 11.
“Indiscriminate selling leads to opportunities for active managers,” Peris said.
Pointing to the incredible popularity of index funds (the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY -0.65% is a prime example), he said that index-fund and ETF managers had been forced to sell shares of “largely unaffected” companies, along with ones in hard-hit industries, such as energy, hospitality, air and cruise travel.
“There are companies that aren't significantly impaired, but they are [much cheaper] than a month ago,” he said. “That is the opportunity, a structural flaw in the passive approach that has dominated in the last decade. It was tested during the fourth quarter of 2018 [when the S&P 500 fell 14%], and it is being tested now.”
‘Indiscriminate selling leads to opportunities for active managers.’
Daniel Peris, head of the strategic value team at Federated Hermes
Peris is head of the strategic value team at Federated Hermes, in Pittsburgh, which has about $32 billion in assets under management and advisement. He co-manages the $8.1 billion Federated Strategic Value Dividend Fund /zigman2/quotes/205699251/realtime SVAIX 0.00% . The fund’s institutional shares are rated four stars (out of five) by fund-research firm Morningstar.
He sees the coronavirus and its associated slowdown as exacerbating a long-term deflationary trend, which is making it more difficult for companies to increase their dividend payouts. That said, his goal is to grow dividend payouts by 4% to 5% a year, in dollars and unadjusted for inflation.
Income-seeking investors for years have been forced to take on more risk as bond yields have declined. The current crisis has completely distorted the fixed-income yield environment as investors have flocked to U.S. Treasury securities.
A quick look at the Treasury yield curve for March 12 illustrates this point. Yields on Treasury paper with maturities ranging from one month to 10 years were all well below the Federal Reserve’s current target range for the federal funds rate of 1% to 1.25%, while the yield on 20-year U.S. Treasury bonds was 1.27% and the yield on 30-year /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -1.73% bonds was 1.49%.
The Federal Open Market Committee announced an emergency cut in the federal funds rate to the current range of 0.50% on March 3. Investors have shown through the rapid decline of yields that they expect another significant cut at the Fed’s regularly scheduled meeting on March 17 and 18.