Seeking dividend growers in the U.S. and abroad: Q&A with Wellington’s Peter Fisher

Wellington Management’s Peter Fisher became the sole portfolio manager for Vanguard Dividend Growth Fund earlier this year, taking the reins from long-time manager Don Kilbride. He also manages the recently launched Vanguard International Dividend Growth Fund. In this conversation, he chats about the transition from Don, the challenges of dividend growth investing in today’s market environment, and how he adapts his approach to international markets.

About a year ago, Vanguard announced that Don Kilbride would step down as portfolio manager for the Dividend Growth Fund but continue to be part of the team. How’s that transition going?

Fisher: The transition has been seamless. Don and I merely switched seats, so now I have the final say on trades for the fund. Our team—Don, analysts Silas Brown and Ashley Carew, and I—meets twice a week to discuss holdings. The dialogue remains robust and healthy. And Don, who continues to manage the Advice Select Dividend Growth for Vanguard Personal Advisor Services^®, is just as engaged as ever. So, it feels very consistent with what it was like before the transition.

Have you made any changes to how the fund is managed?

Fisher: No. Don and I have worked together for more than a decade and share the same investment beliefs and process. We are still focused on finding high-quality companies that we believe will compound value over the long term. To accomplish that, we use the presence of a dividend and, more specifically, a growing dividend, to initially identify those companies.

You also manage Vanguard International Dividend Growth Fund. How has the fund fared in the six months or so since its launch?

Fisher: We couldn’t have picked a more challenging market environment! Growth and momentum factors have dominated returns, and markets have become increasingly concentrated. The portfolio is concentrated and consists of high-quality, dividend-paying stocks. The result is that the portfolio has a strong factor tilt toward quality and low exposure to beta, leverage, and volatility. This profile has been a headwind for the past six months, and we have lagged the index as a result. In fact, more than half of our underperformance is attributable to factor headwinds. Our underweights to beta and momentum have been our biggest headwinds.

From a sector perspective, health care and financials have hurt the most. Consumer staples has also been very out of favor. Basically, the types of companies we like have received little to no attention from the market. We would expect to lag in markets like this, so performance is within expectations. But we are still disappointed. We’ve been through this before and believe that this will change. We also believe we have to be patient to be successful in the long run.

How has security selection factored into performance?

Fisher: We’ve made our share of errors, but that comes with the territory. One example is Reckitt Benckiser, a U.K.-based global consumer goods and health care company. More than anything else, headwinds in the consumer staples sector have weighed on its stock price. Reckitt has also had to deal with an unfavorable ruling related to its baby formula division and saw some weakness in cold and flu this past winter. But we think the long-term outlook for the company remains bright. Overall, we feel very good about the companies we own right now, both from a fundamental perspective and valuation perspective.

If you could pick a stock that you currently hold that epitomizes the strategy for the Dividend Growth Fund, what would it be?

Fisher: Visa is a good example. When we decided to add significantly to the position in Q4 of 2021, the stock had underperformed the market by 40% for the prior two years, reaching a decade-low relative multiple with significant upside to our projected DCF (discounted cash flow) value. The market was preoccupied with the potential for new competition from startup fintech companies like Square and Affirm.

We had a different perspective on Visa. We’ve lived through these cycles of fear before, when other companies, such as Apple or PayPal, were expected to take Visa’s business away but failed. The market fundamentally misunderstood the depth of Visa’s competitive advantage, which is largely predicated on owning the network “rails,” comprising millions and millions of irreplaceable nodes. We worked with the global industry analyst who covered the payments industry to assess the competitive offerings from the fintech companies and where Visa could be vulnerable. Wellington’s growth team was also a valuable partner to us on the payments landscape. These conversations reinforced our thesis in how entrenched and durable the Visa network is and, given the valuation was as attractive as we’ve seen, we added to our position.

But we don’t assume that just because a company has been great, it will continue to be so. We are constantly challenging our hypotheses and whether the world has changed in a way that could impair a company’s historical advantage. In the case of Visa, our research led us to hold fast to our conviction and buy while the stock was “on sale.”

And how about for the International Dividend Growth Fund?

Fisher: Defense company BAE Systems (BAE) is an example of a classic international dividend growth company. In 2021, the stock had underperformed the market by 35% in the prior year, reaching a decade-low relative multiple to the MSCI EAFE Index with significant upside to our projected DCF value. We decided to add significantly to our position. At the time, the market was more interested in stocks that were perceived to have unlimited growth potential and huge total addressable markets, which BAE—as the largest defense company in the U.K. and one of the top five U.S. defense contractors—clearly did not have. Additionally, many investors decided that “defense” was no longer relevant in a relatively peaceful world and were fearful that defense companies would be targets of increased ESG-related scrutiny.

While we didn’t foresee the Russian invasion of Ukraine as we added to our position in BAE, we had long envisioned a world with a more balanced appreciation of the role companies like BAE play in protecting free societies from the threat of hostile actors.

In what environments do you expect your approach to perform well? In what conditions might it underperform?

Fisher: The strategy will generally outperform in downward-trending markets, slowing economic growth scenarios, and when quality is in favor. It will generally underperform when the market is not focused on quality or is in “risk-on” mode. Strong growth or value markets are challenging. Because we have a long-term investment horizon and absolute return mindset, we are happy to endure these periods as the investment horizon spans over the full market cycle. That’s why we value our partnership with Vanguard so much; it is very important to us that clients understand the long-term nature of our approach and are aligned with our mission.

What types of companies do you believe are most likely to benefit from AI technology over the short and long term?

Fisher: We believe that AI will likely lead to significant investment opportunities and risks. We think the trend will unfold in three stages, with different beneficiaries at each stage. The first beneficiaries will be the leaders in the development and rollout of the technology itself. These are the chip and architecture companies like NVIDIA or ARM.

The second phase will benefit companies that will use the technology directly, likely what we know today as “big tech”—Microsoft, Apple, Meta, Google, and the like.

The third phase is where companies will use these models to improve their businesses. This will be integration into existing processes. Sectors that will likely benefit include health care, consumer companies, and manufacturing.

How do those AI opportunities align with your investment approach?

Fisher: In looking at the portfolio today, we have a clear concentration in later stage beneficiaries. But we also hold companies like Microsoft that are on the leading edge of developing AI technology and Accenture, a consulting company that we believe will benefit by helping companies incorporate AI into their businesses.

The majority of our companies will benefit from the adoption of AI in some form or another. The successful integration of AI could be a point of differentiation, causing dispersion among our opportunity set. We expect that we will get more information from our companies as this trend evolves and plan to use it as a component of the overall mosaic we form when researching a holding.

Note: This interview was edited for length and clarity. The interviewee’s opinions don’t necessarily reflect those of Vanguard.

Notes:

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