Columbia Dividend Opportunity Fund Q2 2024 Investment Commentary

Fund performance Average annual total return (%) for the period ending 30 June 2024

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• Columbia Dividend Opportunity Fund Institutional Class shares returned -1.31% in the second quarter. For monthly fund performance, please check columbiathreadneedleus.com.
• The fund outperformed the -1.95% return of its benchmark, the MSCI USA High Dividend Yield Index – Net.

Market overview

Major US stock indexes produced gains in the second quarter. However, the dark return of the headline is that most of the positive performance came from a very small group of mega-cap technology companies that have grown to represent an ever-increasing share of the total US market . Outside of this area, returns were rather unimpressive amid persistently high interest rates and growing concerns about the economic outlook. This resulted in a considerable return gap between the growth and value styles and translated into a loss for the fund’s benchmark.

Quarterly portfolio review

Major US stock indexes produced gains in the second quarter. However, the dark return of the headline is that most of the positive performance came from a very small group of mega-cap technology companies that have grown to represent an ever-increasing share of the total US market . Outside of this area, returns were rather unimpressive amid persistently high interest rates and growing concerns about the economic outlook. This resulted in a considerable return gap between the growth and value styles and translated into a loss for the fund’s benchmark.

Main holdings (% of net assets) as at 30 June 2024

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Top Five Contributors – Effect on Return (%) as of June 30, 2024

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Top Five Detractors – Effect on Return (%) as of June 30, 2024

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Sector weights (%): fund vs. benchmark on June 30, 2024

The trends described above contributed to the fund’s performance, highlighted by the fund’s slight loss for the quarter. Still, the fund outperformed the index thanks in part to positions in stocks poised to benefit from the rise of artificial intelligence. Most importantly, shares of Dell Technologies rose as demand for its AI servers increased. Holdings in Broadcom and Qualcomm also surged on expectations that they will be among the main gainers in AI growth, helping the stock to outperform the fund’s larger investment universe.

Investors’ search for potential AI winners also contributed to strong returns for utility stocks, which are expected to capitalize on growing demand for power from data centers. Vistra ( VST ), a Texas utility, has been a notable performer in this regard, thanks to investors’ favorable view of its mix of natural gas and nuclear power generation. Southern Co. ( SO ) and NextEra Energy ( NEE ) also participated in the outperformance of the broad utilities sector, contributing to the fund’s performance.

Financing was an additional area of ​​strength for the fund, with three of the sector’s top holdings posting a positive return. Goldman Sachs produced an impressive gain on the back of better-than-expected earnings and was the biggest contributor to relative performance. JP Morgan Chase and Bank of America also performed well thanks to a combination of their strong capital positions and a favorable interest rate environment.

On the other side of the ledger, the fund underperformed materials, largely due to a position in lithium miner Albemarle. Sales of electric vehicles have slowed considerably, sending lithium prices sharply lower and causing stocks to fall from their mid-2023 peak. Health care was another challenging area this quarter, Bristol Myers Squibb ( BMY) continued to trade lower on concerns about the lack of a catalyst for business improvement. In addition, medical device maker Baxter International ( BAX ) lagged behind persistently weaker-than-expected profit margins. I sold both from the portfolio. CVS was another key detractor in health care, but in this case, we chose to add to the position on the belief that the stock’s decline has reduced the company’s pricing challenges too much. Outside of these sectors, a position in Paccar – which has been pressured by concerns about the demand outlook for heavy trucks – was a key detractor.

Outlook

The poor performance of dividend payers, along with the wide dispersion of returns across sectors and individual stocks, gave us the chance to rotate the portfolio to capture emerging values. For example, we added International Paper (IP) in the view that the company will benefit from both positive industry trends and a new management team focused on more disciplined pricing. Manufacturing giant 3M ( MMM ), which also has new management, slipped after announcing a dividend cut. We believe this has created a buying opportunity as the payout is now at a more sustainable level which should help the company preserve capital. We also added holdings in Hewlett Packard Enterprise (HPE), which has a similar business to Dell but with a higher yield and more compelling valuation, as well as Starbucks (SBUX), which we thought had fallen to a very attractive level. We believe these moves are indicative of the array of opportunities that have emerged following a prolonged period of underperformance for the fund’s investment universe.

In this regard, we believe that the uneven returns of dividend stocks in the first half of the year have led to an increasingly compelling long-term outlook. The broader market has reached an extreme degree of concentration as capital has poured into the six biggest mega-cap tech stocks and pushed their valuations to very rich levels. While it’s impossible to say exactly when these companies will fall from favor, a change in leadership is inevitable. In our view, dividend stocks – by virtue of compelling valuations for a wide range of companies in the category – are poised to benefit once investors regain interest in ideas outside the large-cap tech sector.