Vanguard’s Sharon Hill has overseen a fantastic performance for her $48 billion income-focused fund. She targets stocks with promising dividend growth, valuations, fundamentals, and sentiment. Hill shared her strategy for investing and risk management in detail with Insider. Sharon Hill isn’t your typical fund manager. She co-leads the Vanguard Equity Income Fund (VEIPX), which has $48 billion in assets and is in the top 12% of funds this year and top 15% in the last decade — a performance strong enough to warrant a five-star rating from Morningstar.
The former equity quantitative research head at Macquarie Group told Insider that a few years ago, it took time for it to sink in that she’d be working at one of the world’s top asset managers and overseeing a sizable chunk of its $8 trillion in assets.
“When I came to Vanguard, I stopped and said, ‘How many zeros are in a trillion again?'” Hill said in a recent interview with Insider. “You get used to that, in a sense. But it’s a huge weight of responsibility.”
Hill’s first year and a half of co-managing the fund has been relatively seamless, even as the global economy appears to be on the brink of a recession. While Hill acknowledged that her firm’s view is that an economic downturn is likely, she still sees plenty of investing opportunities ahead.
How to invest like a $48 billion managerVanguard’s income-focused fund has a sector-agnostic approach and is composed 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 growth, valuation, quality, and sentiment.
That first attribute 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 great fits for the fund. As long as the firm pays a dividend that’s competitive versus its peers, Hill said there’s no set minimum yield — but added that stocks in her fund rarely have weak yields.
In addition, Hill looks for companies that are fair values relative to their history and to others in their sector and industry. That said, there’s not a specific price-to-earnings (P/E) ratio that makes a stock buy-worthy or puts it off-limits, she said.
Hill also emphasized that she uses a multifactor model to make buy-or-sell decisions, meaning that a stock doesn’t get purchased solely because it’s cheap compared to its history or peers. To use a recent example, shares of Meta Platforms (META) plummeted on Thursday after the firm’s dismal earnings report the night before, but its P/E ratio of 9.5x alone doesn’t make it a buy.
“They may end up being super cheap, but then you might look at it on the basis of, say, earnings stability and it’s going to score very poorly on earnings stability, or maybe it’s going to have very high short interest, and that’s going to be a negative score,” Hill said of value traps broadly.
A focus on quality helps Hill avoid stocks that are cheap for good reason. Stable profit margins and earnings are a sign of a healthy company, Hill said, as is high return on equity (ROE).
Finally, Hill examines whether or not her analysis of a stock’s fundamentals and valuation are accurate by gauging market sentiment. But that doesn’t just mean seeing if shares are up or down, she said.
“We’re looking at market participant sentiment, we’re looking at things like short interest, changes in short interest, we’re looking at analysts’ price target change, and we’re also looking at what I guess I’ll call optimism in related companies,” Hill said. “So if we start to see momentum — say in a supply chain or in the set of customers of a company — we feel like that, too, is a positive indicator of market sentiment.”
Once Hill’s fund has the 150-180 stocks that it typically carries, she said that she manages risk by regularly running an optimization process to ensure that the fund’s volatility is acceptable — and that the holdings continue to meet the criteria that earned them a spot in it in the first place.
As far as cash goes, Hill said that the level of unused capital in her portfolio is as close to zero as possible. This market environment may be choppy, 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 has kept up with inflation as you go back and look over the decades,” Hill said. “So when you go back and you look at the ’70s, ’80s — which is the last time you can actually find any notable inflation — what you see is dividend growth pretty much kept pace with it.”
Hill added: “In an inflationary environment, dividend-paying stocks are a good place to be.”