McKinley Capital believes excess market returns can be achieved through the construction and management of a diversified, fundamentally sound portfolio of dividend paying equities, and futures, options and swaps whose values are linked to certain dividend paying equities.
McKinley Capital employs a dynamic real-time model that is actively managed by a portfolio management team. Consensus of the portfolio management team for all trading activity is required before any position is removed from or added to the portfolio.
McKinley Capital's investment strategy can be described as bottom-up growth. That is, individual companies are considered based on their own merit without regard for sectors, industry, or current economic conditions. This strategy follows the belief that some companies are superior to and thus will outperform their peers. McKinley Capital employs both a quantitative screening process comprised of proprietary complex statistical modeling and data points, and adds a qualitative overlay of fundamental statistics that provide input into the specific companies, to construct and manage the portfolio. The McKinley seeks to maintain a fully invested portfolio primarily comprised of futures, options and swaps whose values are linked to certain dividend paying equities. Their investment strategy is designed to capture dividends based on the McKinley's ability to forecast future dividend streams and purchase them at a discount to the stream of income actually paid over time. Shareholders may profit from the mispricing of these anticipated dividends if McKinley Capital is able to forecast dividends relative to a benchmark index or at the company level for a single stock with a higher degree of accuracy than the market. It is believed that there is an opportunity to trade company dividends independent from their corresponding securities which may provide different return and volatility profiles relative to equity trading. Dividends provide an inflation hedge while not suffering from multiple contractions and future risk premium associated with equity pricing. Dividends are attractive to long-term investors as they exhibit low correlation to commodities, short term bond rates and corporate bonds. Historically, once initiated, companies reduce dividends only after most other cost cutting practices are deployed. In addition, financial institutions may end up holding dividends as a component of a structured debt deal conversion right or through equity provided as collateral. Many institutions prefer to sell off the potential dividend stream in exchange for cash in hand. McKinley Capital attempts to control risk by balancing the portfolio's systematic (un-diversifiable risk) exposures across multiple factors, including, but not limited to, country, sector, industry, size, issue and counterparty due diligence.
Using proprietary quantitative models McKinley Capital systematically searches for and seeks to identify signs of accelerating growth. Mathematical and statistical data include but is not limited to measurable characteristics such as revenue, earnings, sales margin, market share, liquidity factors, debt-to-equity, dividend-to-price, dividend-to-earnings ratios, one-five-ten year comparison returns, economic ratios, etc. The goal is to accurately capture individual stock dividend growth potential. For example, institutions such as investment banks may end up being long dividends as a direct result of the structured products they created. Essentially, these products are written in terms of capital gains, which result in the issuers holding the dividends. Institutions will sell the dividend exposure through derivatives or swaps. The initial universe from which the portfolio is constructed consists of approximately 40,500 publicly traded global stocks, including growth and value stocks from all capitalisation categories and many countries. The primary model seeks to identify common stocks that are inefficiently priced in the base currency relative to the market. The use of these additional calculations enables McKinley to estimate the reliability of and confidence in the expected results. McKinley Capital's earnings model is designed to identify securities with strong earnings growth and dividend growth acceleration.
The qualitative review begins after the quantitative process has identified candidates for possible inclusion in the portfolio. Each week, the McKinley Capital uses a combination of external brokerage research, internal research provided by the Mckinley's qualitative analysis and team discussions to filter the potential approved list derived from the quantitative process down into an investible short list of potential transactions. The purpose of the qualitative analysis is to confirm that the earnings and dividends outlook revealed through their quantitative analysis is both reasonable and sustainable. While quantitative analysis is more measurable and objective, the qualitative overlay is more subjective in nature. McKinley Capital looks at non-statistical data such as the stock's primary source of revenue for product longevity and resource capabilities; management and leadership expertise; reputation and goodwill; and, general economic conditions.
In conjunction with the Investment Manager's investment style and composite design, the portfolio team focuses on the qualitative portion of the discipline, which includes:
--Qualitative Data Check
* compare data across multiple sources to ensure accuracy,
* review formulas to highlight drivers,
--Street Research Overview
* Who: determine the top analysts,
* What: review top analysts' expectations versus the Street's,
* Why: analyse the top analysts' opinions against the Street's,
* Cross-reference: research top analysts' opinions versus other sources.
The Base Currency of the McKinley Capital Dividend Growth Fund is the Euro.