- Vanguard’s Sharon Hill has delivered a fantastic return for her $48 billion focused fund.
- It targets stocks with promising dividend growth, valuations, fundamentals and sentiment.
- Hill shared her investment and risk management strategy with Insider in detail.
Sharon Hill is not your typical fund manager. He advocates the Vanguard Equity Income Fund (VEIPX), which has $48 billion in assets and ranks in the top 12% of mutual funds this year and in the top 15% over the past decade—a performance strong enough to warrant a five-star rating from Morningstar.
The former head of quantitative equity research at Macquarie Group told Insider that a few years ago, it took time to sink in that she would be working at one of the world’s leading asset managers and overseeing a large portion of $8 trillion in assets. her. .
“When I came to Vanguard, I stopped and said, ‘How many zeros are there in a trillion again?’ Hill said in a recent interview with Insider. “You get used to it, in a sense. But it’s a huge responsibility.”
The first year and a half of co-managing Hill’s fund has been relatively uneventful, even as the global economy appears to be teetering on the brink of recession. While Hill acknowledged that her company’s view is that an economic downturn is likely, she still sees plenty of investment opportunities ahead.
How to invest like a $48 billion manager
Vanguard’s income-focused fund takes a sector-agnostic approach and consists of stocks from a wide variety of industries that have one thing in common, Hill said: They’re more attractive than their peers when it comes to dividend increase, assessment, qualityand feeling.
That first feature is the most important, Hill said. Companies that have a history of commitment to sustainably growing their dividends and have the balance sheets to do so tend to be a good fit for the fund. Since the company pays a dividend that is competitive with its bonds, Hill said there is no set minimum yield – but added that its capital stocks rarely have weak returns.
In addition, Hill looks for companies that have fair values relative to their history and to others in their sector and industry. That said, there’s no specific price-to-earnings (P/E) ratio that makes a stock worth buying or puts it off limits, he said.
Hill also emphasized that she uses a multi-factor model to make buy or sell decisions, meaning a stock is not bought solely because it is cheap compared to its history or peers. To use a recent example, shares of Meta Platforms ( META ) plummeted Thursday after the company’s disappointing earnings report the night before, but a 9.5x P/E ratio alone doesn’t make it a buy.
“They might end up being extremely cheap, but then you might look at it based on, say, earnings stability, and it’s going to have a very poor earnings stability rating, or maybe it’s going to have a very high short-term interest rate, and that happens to be a negative rating,” Hill said of value traps in general.
A focus on quality helps Hill avoid stocks that are cheap for a good reason. Stable margins and profits are a sign of a healthy company, Hill said, as is a high return on equity (ROE).
Finally, Hill examines whether her analysis of a stock’s fundamentals and valuation are accurate by gauging market sentiment. But that doesn’t just mean seeing if stocks are up or down, he said.
“We’re looking at market sentiment, we’re looking at things like the short interest rate, changes in short interest, we’re looking at analyst price target change, and we’re also looking at what I guess I’ll call related company optimism,” Hill said. , if we start to see momentum – say in a supply chain or across a company’s customer base – we feel that is also a positive indicator of market sentiment.”
Once Hill’s fund has its typical 150-180 stocks, she said she manages risk by regularly running an optimization process to ensure the fund’s volatility is acceptable — and that the holdings continue to meet the criteria that earned them a place in it in the first place.
In terms of cash, Hill said the level of unused capital in its portfolio is as close to zero as possible. This market environment can be volatile, but her view is that investing in the right stocks with proven dividend growth is better than letting idle money erode under high inflation.
“Dividend growth is one of the few things that keeps pace with inflation as you go back and look over the decades,” Hill said. “So when you go back and look at the 70s, 80s — which is the last time you can find significant inflation — what you see is that dividend growth pretty much kept pace with it.”
Hill added: “In an inflationary environment, dividend-paying stocks are a good place to be.”