A stock picker who crushed the vast majority of Wall Street this year shares the 5 investment pillars that have led to his success

Reuters

Traders work on the floor at the NYSE in New York

• Donald Kilbride, lead manager of Vanguard's Dividend Growth Fund, doesn't let the overarching macroeconomic environment influence the construction of his portfolio.
• He employs five primary pillars in his investment philosophy: compounding, value creation/distribution, dividends, low turnover, and facts vs. opinions.
• Kilbride currently manages upwards of $40 billion.
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Donald Kilbride, lead manager of Vanguard's Dividend Growth Fund (VDIGX), had an incredible 2019. In fact, he was one of the year's top performing fund managers.

Since Kilbride took over at the helm of the fund 15 years ago, he's employed a systematic and disciplined approach to investing. Nothing flashy. Nothing over-complicated. Nothing exotic. And he's found great success in doing so.

Today, Kilbride manages upwards of $40 billion.

"It's the constant application of a really simple and straightforward investment philosophy," he said in an exclusive interview with Business Insider. "Think about our basic investment philosophy as having five basic pillars."

Those pillars are: (1) Compounding, (2) Value creation and value distribution, (3) Dividends, (4) Low turnover, and (5) Facts vs. opinions.

Each pillar plays an important role within the approach, and Kilbride's adherence to the strategy is steadfast.

Let's take a closer look.

Compounding

"Compounding is the best way to create wealth over long periods of time," he said. "We want to take advantage of that power of compounding."

The concept is simple. Kilbride wants to find great companies that create and distribute value year after year after year, and let the reinvested earnings do the heavy lifting throughout the process.

He employs a long-term time horizon in order to take full advantage of this notion. Many of the positions that are currently in his portfolio have been there for over a decade.

Value creation and value distribution

"The best way to find those compounding vehicles is to find companies that balance those two dimensions - value creation and value distribution," he said.

In order for an investment to pique Kilbride's interest, he needs to see the company making smart investments, growing returns on capital, buying back shares, and growing dividends. If an investment doesn't check all of those boxes, he's not interested.

Moreover, Kilbride tries not to let the overarching macroeconomic backdrop influence his analysis. He focuses on the idiosyncratic features of the investment and uses a bottom-up approach. To him, the complicated macroeconomic questions aren't worth trying to figure out. He'd rather spend his time vetting a company's competitive advantage and business initiatives.

Dividends

"Dividend growth is the portal through which we find those businesses," he said. "If you find a company that pays and grows its dividend over time, by definition you've found a value distributor. If you find a company that's growing its value distribution to the shareholder over time, by definition you've found a value creator."

Put briefly, when Kilbride finds a company that has meaningful history of growing its dividend, he knows he's found a value creator-distributor. After all, you can't grow something that you're not creating. What's more, the predictable income from dividend distribution can be reinvested.

He continued: "It's that virtuous circle."

Low turnover

"We try to keep our turnover purposely low for a variety of reasons," he said.

Two of the main reasons that Kilbride touches upon are costs and reinvestment risks.

When a portfolio is churned and traded frequently, fees and costs add up quickly. All of which burden the shareholder. Unless the story changes around a stock in the portfolio - acquisitions, divestitures, changes in management, and so forth - Kilbride's sitting tight and not selling.

"The more decisions you make in the portfolio, the more reinvestment risk you introduce," he said.

Facts vs. opinions

"Most of investing is opinion-based," he said. "Value is an opinion; quality is an opinion."

However, Kilbride notes that two variables that are not opinions at the moment of decision are price and dividend. An investor knows with absolute certainty what the price is and what the dividend is - and Kilbride focuses incessantly on them. This notion helps to remove some of the ambiguity and discretion around decision-making and shifts the focus on to hard data.

"To the extent that you can focus your investing on facts - and in this case, price and dividend - the better off we're going to be," he said.

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