Adams Diversified Equity Fund, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Jan 2021

[Operator:]

Good day, and welcome to the Adams Diversified Equity Fund Annual Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lyn Walther, Director of Shareholder Communications. Please go ahead.

[Lyn Walther:]

Good afternoon and thank you for joining us today as we discuss the results for Adams Diversified Equity Fund for 2020. With me today are Mark Stoeckle, the Fund's Chief Executive Officer; Brian Hook, our Chief Financial Officer; and Janis Kerns, our General Counsel.

[Mark Stoeckle:]

Great. Thanks, Lyn, and thanks to everybody for joining us today, as we discuss the results for 2020. Today, I'm going to provide some brief remarks and then Brian Hook will provide some details on our performance, and then we will take some of your questions. Well, what a year 2020 was, certainly one that we will never forget. As I look back on the beginning of the year, investors were pretty optimistic about the stock market as a result of the rally that it ended in 2019 continued into January. Unfortunately, as COVID-19 began spreading around the world and ultimately leading to the pandemic, the S&P fell by over 30% by mid-March. The world went on lockdown. And to stop the spread of the virus, unemployment reached levels not seen since the great depression. In a pretty unprecedented way, the Federal Reserve acted very quickly, making a series of rate cuts and purchasing large quantities of government debt to provide liquidity to the market. These actions, combined with a $2.2 trillion stimulus package, led to a historic rebound in stocks, which rose 68% from their March lows. Promising news on the vaccine front and hopes of a second stimulus drove the market to new highs in both November and December. The S&P ended up 18.4% for the year. Our fund rose 18.8%, exceeding our peer group by two percentage points. The largest contributors to our outperformance came from just consumer discretionary, real estate and industrial sectors. As we move into 2021, there are a number of reasons to be optimistic, although we expect stock market gains to moderate relative to 2020. The economy should begin to see the impact of the new $900 billion stimulus package, the vaccine rollout and the Fed's plan to keep interest rates low.

[Brian Hook:]

Thanks Mark. Good afternoon, everyone. Let's turn to our funds performance. For the year, the total return on the fund's net asset value with dividends and capital gains reinvested was 18.8%. This compares to an 18.4% total return for the S&P 500 and a 16.8% total return for the Lipper large cap core funds average over the same time period. The total return on the market price of the fund shares for the period was 16.4%. The fund distributed 6.8% to our shareholders in 2020, exceeding our 6% commitment. On January 21 of this year, ADX declared a distribution of $0.05 per share, consisting of $0.02 net investment income and $0.02 long-term capital gain, both realized in 2020; and $0.01 of net investment income that was realized in 2021. The distribution is payable February 26, 2021, to shareholders of record February 12, 2021. This represents the first payment in 2021 toward the fund's annual 6% minimum distribution rate commitment. We would now like to begin the Q&A portion of our call. Operator, would you please remind our listeners how they may participate?

[Operator:]

Certainly, we will now begin the question-and-answer session.

[Lyn Walther:]

Okay. First question is reflecting on the year. Looking back on this year, what surprised you the most?

[Mark Stoeckle:]

Well, that's a good question. I think what surprised us the most is the resilience with which the market came back. And I don't know about the listeners on this call, but when -- in late March, it was hard to figure out how this was going to end, but the resilience with which it came back. And I think what ended up happening is that the market started viewing it more viewing the pandemic, more like a natural disaster as opposed to something that was fundamentally broken with the economy. And I think that gave investors a lot of confidence that -- because we do get past hurricanes and we get past floods and those kinds of things. There's a lot of damage in its wake. But eventually, we get past those things and get passed them pretty quickly. So I do think that the resilience of the market, which I think was led by thinking of it more of a natural disaster as opposed to something that was terribly wrong with the economy.

[Lyn Walther:]

Okay. Following along that, can you talk about some of the changes that you made to the fund in response to the pandemic?

[Mark Stoeckle:]

Sure. I will tell you, when we were knee-deep into this, we -- as you might imagine, we're working remotely, like everybody else was. And the communication was terribly important among us, among the team, and really trying to get everybody to take out a motion and to focus as much as we could on fundamentals. In addition to doing that, we did place a careful eye towards stocks that we thought were just unnecessarily hit. And there were a couple of those that we went in and bought opportunistically, companies like Darden Restaurants, Williams Sonoma and DICK'S Sporting Goods, all had -- we believe, had gotten hit well beyond what we thought was reasonable. And we took the opportunity to go in and take some positions in those. But outside of those, really the opportunistic trade, it was trying to work through the balance sheets and income statements of the strongest companies, which companies we thought had the best chance of continuing to generate revenue and earnings growth in spite of a natural disaster like a pandemic. So, that's really what we ended up doing at the beginning of this.

[Lyn Walther:]

You mentioned earlier that consumer discretionary was the fund's strongest relative performer. What stocks contributed to the returns the most?

[Mark Stoeckle:]

Well, we were fortunate in consumer discretionary because we had a handful of stocks that really did exceptionally well. And I think there were two keys to us doing well in discretionary. One was, we had -- already had positions in Amazon. We already have positions in Target, Chipotle, all of which were up at least 50%. Target was up 54%; Chipotle, up 66%; and Amazon up, 76%. In addition, we also had Lowe's -- a position in Lowe's that did very well for us, which all performed well during the pandemic. And part of the reason for that is because each of them in their own way had invested a significant amount of money in e-commerce and really had infrastructure in place to be able to take advantage of a stay-at-home environment. And so those were the names that really benefit us. In addition to that, we fortunately and for good reason, we did not own a lot of the department stores and the other retailers that were just forced to close. Even prior to the pandemic, we didn't think that there was -- we thought there was more opportunity in Amazon and Target and Lowe's and Dollar Generals of the world as opposed to some of the mall-based retailers and some of the others.

[Lyn Walther:]

Okay. Real estate investments also performed well relative to the benchmark. Can you talk about what drove the performance in that sector?

[Mark Stoeckle:]

Sure. I think this is a really good -- it's a good question because one of the things that I think sets Adams' Diversified Equity Fund apart from its competition is, the way we approach how we invest relative to our benchmark. Our benchmark is the S&P 500. And we have long been believers that we should be sector-neutral. And sector-neutral to us means our weighting in a given sector should be the same in the fund as it is in the S&P 500. I say that because the real estate investment sector, REIT sector, is about -- maybe a little less than 3% of the S&P 500. I know a significant number of funds that don't even bother with it. They just -- they think they would rather spend the time elsewhere. It's only 3%. I can ignore it. As I said, our approach is very different from that. We believe that we are good at selecting stocks. And therefore, we will be equal weight that sector relative to S&P 500 and go among the stocks in the sector to try to outperform. And that's really what ended up happening in real estate is, we were fortunate Jeff Scholar, our real estate analyst, I mean he had positioned us in what we would call non-REIT REIT. I mean, when I think of a REIT, I think on apartment REIT, I think of a commercial REITs. And we were in, as I said, non-REIT REITs. Things like Prologis, which is logistics for e-commerce, again, had a wonderful year because of the pandemic with all the need for space as it relates to logistics for e-commerce work. Equinix, another one, which is a REIT that addresses data centers. In the data center business, as you can see from Microsoft and some of the other large tech companies continue to be in demand. So, we were able to significantly outperform the REIT sector and add significant value for a very small sector, really concentrating on, again, what I call non-REIT that really paid off for us.

[Lyn Walther:]

The other sector that you called out was industrials. Can you talk about what drove the performance in that sector?

[Mark Stoeckle:]

Sure. Industrials is an interesting one, and I will -- unlike discretionary or real estate, I'll talk about sort of the two sides of the success in industrials. One side is what we owned and the other side is what we stayed away from. And what we owned is, we were fortunate to have a position in United Rentals.

[Lyn Walther:]

That's interesting. The technology sector had another strong year. The fund investments did lag the benchmark, though. Could you talk about what worked and what did not work this year?

[Mark Stoeckle:]

Sure. What worked is some of the stocks that we've owned for quite some time, Adobe, was up about 52%; Microsoft, which was the -- is the biggest weight in -- that we had in technology during the year, it was up 42%. Those were big jams and did very nicely. Where two areas that we did not do very well in, one is in the credit card business in Visa and MasterCard. We've made a lot of money in Visa and MasterCard over the years. Shu Yang Chang, our tech analyst, has followed them for quite some time and had done a good job. We did end up trimming some of the Visa and MasterCard shortly after the pandemic began because we were concerned about cross-border travel, which really drives a lot of what they do. In hindsight, I wish we had sold all of it because they really did take it on the chin during the year.

[Lyn Walther:]

Okay. We received a question on our investments on following up on what you just spoke about in Visa and MasterCard. Do you see the credit card -- do you think credit cards as always being a primary method of payment? Or do you think alternative solutions such as PayPal will take the lead?

[Mark Stoeckle:]

Well, that's a good question. We still believe that the durable business models represented by Visa and MasterCard will continue. We think that once we get past this pandemic, and I would like to believe that as we get closer to being able to see over the horizon with the vaccines coming and fewer cases being registered, that we will begin to see some in MasterCard and Visa. I think there's a place for PayPal. I do not believe that it will supplant the traditional credit cards. PayPal has a very good business model itself. We do own a little bit of PayPal, so we do think that there is a place for it. But as it relates to a wholesale today anyway, as it relates to a wholesale move to using just the PayPal, we think we're many years away from that being a reality.

[Lyn Walther:]

Okay. Paul, can you remind everyone how to ask the question?

[Operator:]

Certainly.

[Lyn Walther:]

Okay. Our next question relates to the IPO market and how strong it was this year. Did Adams participate in any of -- any IPOs?

[Mark Stoeckle:]

We did not. The short answer is we did not. I will tell you, in my prior life, we did IPOs. And we had a big staff that was able to do all the work you need to do that. I think that IPOs can be an interesting way of investing in the market. But that's if you have the other staff to really be able to go in and evaluate the IPO prior to it coming public. We don't have an abundance of staff here. We have everything we need. And so the idea of taking a resource and looking at an IPO and being right on that, we think that the risk/reward is not in our favor. So, we chose -- we've chosen not to do that. The other thing that's a practical part about IPOs is, it's really hard to get a meaningful position in an IPO when you're only $2.5 billion in assets like we are. So, you'll put in for an IPO and you'll get 10,000 shares out of 100,000 shares you wanted. And the IPO pops that day, and it runs away from you, runs away from what you think is fair value, and then you've spent all that time, all that effort, and you didn't get very much. So, we think it's a better use of our time to represent our shareholders in other places than doing IPOs.

[Lyn Walther:]

Okay. I think we received a couple of other questions. Mark, do you want to take those?

[Mark Stoeckle:]

Sure. One of them here is, is there too much optimism in the current market? I actually think it's a good question, given the volatility that we've seen, especially today. I would almost look at the market in a bifurcated way. I think that there is a big part of the market that is doing well and should continue to do well. One of the things that I mentioned early is that we actually think that the stock market should do pretty well this year. We've got stimulus. We have -- we've got a very accommodated Fed. We have a very underrepresented group in equities. There are a lot of people that are still on the sidelines. We've continued over the last couple of years to see flows go out of equities. But when you have what we consider to be a good, probably above-trend GDP growth for this year, coupled with being able to see over the horizon with COVID and an accommodative Fed, those things end up -- you put all those together, and it's a pretty good picture. And I will draw your attention to what Microsoft reported last night. There were a lot of people that were concerned about Microsoft report. And by every indication, they did very, very well. It was a great quarter. I mean they exceeded revenue expectations. They exceeded margin expectations. They expect to exceeded EPS expectations. They continue to be addressing markets that continue to be in favor, things like Azure, the cloud. The cloud business was great. Collaboration with teams is something we use every day, a lot of people use every day. That kind of thing will continue. And things like gaming were also very good. So they really are in the sweet spot, and we don't think that this quarter is the end. We think that they gave enough guidance -- enough detail on the last quarter, enough guidance looking forward that we think that there -- that there's a lot of promise there. So there's sort of the traditional area. Then there is an area -- when I talk about bifurcation, there is an area that I think is overheated. When you start looking at some of the alternative energy stocks, you start looking at some of the small speculative stocks, what's happening -- what's happened in the last several days with GameStop. As I said, the electric vehicle market, there are pockets of it that I really do think are overheated. Now by the way, that doesn't necessarily mean that they're bad companies at all. What it means is they've had run-ups that I think go beyond their fundamentals. And therefore, I would -- if you're interested in those areas, I would wait for a better alternative. So, I really do think it's a tale of two markets, and that's the way that I would describe that. We have -- there's another question here, and I'm going to surprise Lyn. But what is ADX doing to give back to the Baltimore community? And I'm going to turn that over to Lyn because Lyn is -- one of the jobs in addition to being a Director of Shareholder Communications is, she really is the -- spearheads what we do in the community. And we've done several things. I'd like to her to take a minute to talk about those.

[Lyn Walther:]

Thanks Mark. We do try to give back to our community. At Adams, we all have two days that we try to give back and one organization that we have as a group gotten together to work is Paul Place, which helps homeless people in Baltimore City, by feeding them, clothing them, things like that. We've also done work as a group at Soup Kitchen. And we continue to individually give back in different ways. Some people go to the Baltimore Zoo and help out. Some people go to different local charities and try to do their part. So, this year was a little bit more challenging given all the restrictions, but we look forward to getting back to doing that. And obviously, we, as a group -- not just our time, but as a group, we also contributed to a COVID fund at Johns Hopkins and Mass General early on in the pandemic, and we had 100% participation. And we were really pleased with that because, obviously, everybody is passionate about finding the vaccine and getting back to normal.

[Mark Stoeckle:]

I would just make one maybe a clarification. The two days -- so everybody gets two days away from work -- workday that they can use for to volunteer. And in addition to the COVID work that -- response that Lyn talked about, we also match up to $1,000 of our employees' contributions to their charities. So we do try to -- Lyn's right, this year was -- 2020 was very frustrating because it was hard to get out, but we were able to do it a little bit more on a monetary basis, but we're looking forward to getting back out physically and being able to do those kinds of things.

[Lyn Walther:]

Another question we have revolves around growth stocks. And obviously, they performed really well for many years. How do you think about growth versus value stocks going forward? And how has this influenced your investment decisions?

[Mark Stoeckle:]

So, as everybody is likely aware, growth stocks have beaten up value stocks for quite a long time, but recently. And there are usually one or two months a year that value stock sort of lift their head off of the math and look up. We do look at value stocks. Value stocks generally are considered -- financials would be considered in the value bucket, energy would be considered in the value bucket. And we will end up investing in each of those just because, as I mentioned earlier, we are -- we're sector-neutral. So -- but we do look at -- we are always on the lookout for better alternatives to what we have. I mean I would consider Adams Diversified Equity Fund to be a sort of a Garthy growth at a reasonable price type manager. Not Heron fire growth, but we have some growth, not deep value, but we have some value. But we're always looking for the right blend of growth and reasonable price. So I think a deep value move in the market is not terribly likely. We could have fits and starts with it, but I don't like the chances of a real deep value rally happening. But we're on the lookout for those. I mean it is -- it's a chance for us to look among the landscape of stocks. And we're not opposed to owning value. But right now, we are skewed a little bit more toward growth than toward value.

[Lyn Walther:]

Okay. And then looking ahead, this year, 2021, what sectors do you think are best positioned?

[Mark Stoeckle:]

Well, the sectors -- I'll give you the smart answer, which is I love all of our sectors because we have to own them. It's like your kids. But I will tell you that I do think that when I look over the horizon, we do think that consumer discretionary will continue to do well, had a good year last year. And I think it's poised to have a good year this year. And part of that will be a result of reopening stocks. In the portfolio today, we do own some reopening stocks. Hilton Hotels is one of the names that we own. TJX Companies is another. Certainly, we own Amazon, which we think will continue to -- whether it's an opening stock or not, I guess we could debate, but we think that, that will continue to do well. So we believe that consumer discretionary should do well. We also think that the financials should begin to do better. There, we own Wells Fargo. I guess maybe he's been there a little more than a year. So it's hard to call him the new CEO, but the new CEO is really finally getting around to having an impact on the operations. We think that there's a lot of really low-lying fruit for him to address there, not the least of which is a -- what we consider a bloated expense ledger. We think that, that company is well poised to have lots of costs taken out, which should help margins over time. In addition to that, we like Capital One. Capital One is a credit card in a bank, credit card company in a bank. They've got about 48% of their business is credit cards and about 25% is consumer loans. One of the interesting parts, and we -- Capital One reported this morning, and we did see it, is the consumer is in great shape, is in really good shape. And we're speculating a little bit, but we think that the consumer has taken the opportunity to pay down debt. Credit card charge-offs are the lowest that they've been since pre-financial crisis for Capital One. People paying down credit card debt and they're paying down regular debt. And that, to us, we believe, means that, the consumer is in really good shape and that should bode very well for companies like Capital One.

[Lyn Walther:]

Okay. We have another question regarding marketing. And do you feel a more frequent presence on CNBC or other channels to answer current questions would be useful in -- for ADX in terms of getting the word out about the fund. I know, Mark, you've done quite a bit. Would you like to elaborate a little bit?

[Mark Stoeckle:]

Sure. I will tell you. I think on the margin, it helps. Lyn has really done a wonderful job with our marketing. We have a pretty frequent presence on LinkedIn. And I can see that we have more LinkedIn followers every time I'm on Bloomberg TV or any time I'm quoted in Barron's or any of the other areas that Lynn is able to get me into. And I think that does help. The other thing that I think helps is having a really good website. And one of the things that Lyn spent a big part of 2020 doing is updating our website. We put our website together in 2015, I think. I think we finished it in '15. And so, it had gotten a little tired. So Lyn put a lot of effort in there. In addition to making it visually appealing, I think, she did a really good job of making it easier to navigate. And I think that all of these things in their own way, being quoted in the journal and Barron's, being seen on Bloomberg TV and those kinds of things, I think helped. We hope that this call helps to get the word out to people. We do have it taped so that people can listen to it if they weren't able to hear it live. So all of these things, I think, do a good job of raising our profile so that when people are thinking about -- I'd like to put some money into a high-quality, large cap fund that they consider Adams Diversified Equity Fund.

[Lyn Walther:]

Yes. And I will add that Mark was on Bloomberg TV this morning as well. So thank you for continuing to get the word out about Adams and our investment thoughts. So that is all the time we have today. Mark, do you have any closing comments?

[Mark Stoeckle:]

I do. I want to thank everybody for the time you've given us. I also want to acknowledge the team that we have here at Adams. It's a very experienced group of investors, industry analysts and portfolio managers, which I just love working with. I think we do really good things for our shareholders. And we're supported by a very strong infrastructure in accounting and compliance. The team is really good. We're a team that takes a long-term view and incorporates a rigorous disciplined approach to investing. And I also want to thank our shareholders for investing with us. We do appreciate your trust in us. We do not take it for granted. We intend to keep earning that trust by maintaining a focus on delivering consistent investment results. And we hope you all stay safe and happy and healthy. Thanks, again, for joining us.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.