Asset-Class Agnostic

{Q} With parts of the world growing much faster than the United States, how has your portfolio shifted to focus on foreign investments?

{MAHAR} It’s a bottom-up process for us. We’re interested in low earnings multiples, a higher growth rate, and higher dividends. We have been able to find very attractive opportunities that meet our investment criteria in international companies.

{Q} Do you find many of those kinds of investments, especially with worldwide markets trading so high?

{MAHAR} It’s uncanny how many of the businesses that meet our criteria are international companies that trade as American depository receipts here in the United States. What we’re finding is that we’re paying discounted prices for better fundamentals with higher yields.

We own companies like Huaneng Power International [NYSE: HNP]—which isn’t exactly a household name here. It’s an electric utility holding company in China.

{DAWKINS} Barclays Bank Plc [NYSE: BCSPR] has been a favorite of ours, which is in a big takeover battle. We also own Hong Kong Shanghai Banking Corporation [NYSE: HBC], a London-based multinational bank. All of these companies pay very large dividends, have nice growth prospects, and trade at 10 to 12 times earnings—probably cheaper than U.S. banks.

{Q} If 44 percent of your portfolio is in stocks, what’s the rest of it?

{MAHAR} The next biggest piece is converts, which account for 36 percent of the portfolio. These investments are a great way of capturing current yield and investing for appreciation while managing risk. A significant proportion of those converts are convertible preferreds, where we are getting a 15 percent dividend tax treatment on the income.

{Q} That takes us to about 80-plus percent of the portfolio.

{MAHAR} [We also own] a few bond positions and we own some energy trusts.

{Q} Has that mixed changed within the last year or two?

{DAWKINS} Convertible bonds aren’t as attractive as they once were; we’ve shifted some of that money into foreign dividend-paying stocks.

{Q} You mentioned one chinese company. Are there income producing opportunities in emerging economies such as China and India ?

{MAHAR} Yes, and those businesses tend to be large, infrastructure-oriented companies that have significant government ownership. In China, there is Petro-China [NYSE: PTR], of which the government is the majority shareowner. It is the largest energy company in China, and it’s a very interesting dividend, and the dividend growth has been very interesting as well.

{Q} Where else in the world are companies paying high dividends?

{DAWKINS} Canada. We have an investment in Canadian Oil Sands [Toronto Stock Exchange: COS-UN]. It’s a great opportunity in the energy sector, where we think we could get double or triple [dividends].

{Q} Are you investing in energy in general, or only in companies paying high dividends?

{MAHAR} We are pound-the-table energy bulls. We think you should be overweighed for reasons of both playing offense and defense. This portfolio is almost 20 percent in energy. The S&P, by contrast, is about 9 percent. Our clients in this strategy have two interests: Current income for individuals or endowments and foundations, and purchasing power. Having a significant weighting in energy is a tremendous advantage in that case and so is international diversification.