Active Managers Have an Edge in Dividend Growth Investing

Dividend growth investing is an area in which active management may be particularly impactful.

Dividend growers may offer a rare combination of income, capital growth, and volatility reduction, potentially adding significant value to client portfolios. However, it can be challenging to separate quality companies from melting ice cubes, particularly in a shifting economic environment.

“Our view is that the 2020s are proving to be a very, very different decade from the post-GFC environment,” Kristoph Gleich, president and CIO of Harbor Capital Advisors said during a webcast on June 26, 2023.

Gleich believes the economy has gone through a regime shift and now looks vastly different than the past decade. The new regime is characterized by sticky inflation, a higher for longer interest rate environment, increased geopolitical uncertainty, deglobalization, and technology.

As markets remain more complex and challenged by the new economic regime, active managers may have a unique advantage over indexes in navigating dividend growth. Active managers have the potential to quickly respond to changing fundamentals and capture market dislocations.

“Ultimately, I think agility and adaptability are going to be key,” Gleich said. “Exceptional active managers pride themselves on being able to adjust to new information, to new opportunities.”

No Such Thing as Passive Investing in Dividend Growth

When it comes to dividend investing, Gleich said there is no such thing as passive investing. Whether a fund is actively managed or tracking an index, it’s actively taking bets on which stocks to hold.

Indexes are generally constrained or follow fixed rules, which may have positive or negative effects on performance. Gleich said he thinks this does more harm than good with dividend investing.

Gleich cited the pandemic as an example of a disruption that caused indexes to miss out on ripe opportunities.

“During the pandemic, a number of companies prudently suspended their dividends during a period of unprecedented uncertainty driven by the global pandemic,” Gleich said. “Despite this, the majority of these companies have now gone on and sort of reinstated their dividends at that original growth trajectory they had before the pandemic.”

However, despite companies returning to dividend growth, some dividend growth index funds are now precluded from holding these companies. In some cases, for five years or longer, Gleich added. “[It] just doesn’t make any sense to me,” he said.

Furthermore, indexes are inherently backward-looking, focusing on past performance of dividend increases. Indexes effectively underweight the fundamental research that active managers may use to select opportunities that are well-positioned for the future.

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Important Information

The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice. The information provided in this presentation is for informational purposes only.

This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

This article was prepared as Harbor Funds paid sponsorship with VettaFI.