Nicholas Puncer: Hi, I'm Nick Puncer, Portfolio Manager and member of Bahl & Gaynor's Investment Committee. Welcome to the Dividend Corner It's August 2025, and for this quarter's mid-quarter update, fresh off of earnings season, we're going to be speaking with fellow Investment Committee member and Bahl & Gaynor's Chief Investment Officer, Pete Kwiatkowski. Thanks for your time today, Pete. Pete Kwiatkowski: Thanks, Nick. It's great to be here. Nicholas Puncer: Pete, one could argue that markets today look much the way they did at the end of 2024. They're concentrated, got pretty high valuations, and perhaps the market's vulnerable to small changes in the growth narrative. But investors have been handsomely rewarded for being invested in equities over the last 15 plus years. Now, as equity investors ourselves here at Bahl & Gaynor we don't want to come off as bearish on equities, but maybe a good place to start is talking about the role of risk management and how we manage our strategies given the market backdrop. Pete Kwiatkowski: Yeah Nick, it's a great place to start since paying attention is at the center of our investment process. Our process is designed to put downside protection potential along with inflation beating dividend growth at the center of our portfolio construction and management. We want downside protection potential to be a perennial characteristic of how we invest. Investment environments can change so quickly as we have seen. So, I believe the emphasis that we place on risk as a firm differentiates us. And while equities, as you said, they've done a tremendous job generating wealth for investors over the long run, our timing for this discussion, I feel, is a bit more precarious than usual. If you look since 1999 or mid 1999, over the last 25 plus years, there are only handful of observations where we've seen forward PEs greater than what we've had today, 22 times earnings. And of those handful of observations, all of them have produced negative forward five year returns. So what we saw in the first quarter culminating with the early April drawdown, as well as the recent volatility around the July non-farm payroll release, those were good real world signals that we were appropriately positioned across our strategies to deliver the downside protection potential that we target if you look at how we performed. This primary focus on risk has led our strategies historically having a risk profile with lower volatility than their respective benchmarks. We feel that allows our clients to potentially consider a higher allocation equities in their portfolios than they otherwise might be comfortable with. And we feel, as you know, this can help our clients build more wealth over the long run. It's a good starting point and good context from a risk perspective. Nicholas Puncer: I wonder if we can double click on that risk element and talk a little bit about how we incorporate risk management specifically into our approach, maybe from a company selection or a portfolio construction standpoint. Pete Kwiatkowski: Yeah, sure, so, I think again, I'll double click on the point that we most when you think about stocks, you just think about returns, right? So, we spent from the very beginning when we're looking at stocks, and then how the stocks roll up to the sector and the portfolio, we pay very close attention to how that stock performs when the market goes down or downside capture. We're always looking at volatility and beta. So we have to respect risk first and not just chase returns, which as you know today is extremely tempting. So, what we're looking for within our dividend growth universe, we aim to own the best companies that meet our requirements within that. And while we're keeping portfolio risk within our constraints. So, you know, one big point within that is a stable company that leads its peer group and possesses competitive advantages is something that we would love to invest in. And the main thing there is that those types of companies tend to defend very well when the market declines. To us, that's as valuable as fast-growing companies can be. Nicholas Puncer: Yeah, absolutely. Yeah. I'm reminded of a quip that think Warren Buffett made where if you have $100 and you lose 50%, it's really unfortunate because you need 100 % return to get back to even. But, if with that same hundred dollars, maybe you lose 25%. You only need a 33% return to get back to even. So, while the return is important on the upside, you know, we're really focused on trying to constrain that downside risk element to keep the capital employed for recovery. Pete Kwiatkowski: A lot of what we do, Nick, is it's behavioral, right? Human beings were all wired to look for returns first. Yeah. We want, we want to chase those returns at times. The great thing about our firm is you know we've been focused on dividend growth for 35 years now and it's just ingrained in who we are so there's no question at this point whether we stray from our process. It's very embedded and we think that at this point when returns are really in vogue and risk isn't that our companies are more attractive than they've you know they've been in a long time. Yeah. So we think that's an attractive fact pattern. Nicholas Puncer: Great, great. So, you mentioned kind of the market level returns being very strong. We've done a lot of work on market concentration, which maybe is an outcome of market level equity returns being strong for so long. And we published a fair amount of that in client facing collateral. So, can you maybe talk a little bit about current market level concentration alongside valuation and where we fit into that continuum maybe as a dividend growth manager in our opportunity set? Pete Kwiatkowski: Yeah, sure. I so I mean, we've heard all the terms out there. You've got Meg 7, you've got Great 8. But, you generally right now, the top 5, 10 companies on a given day represent at least right around 40 % of the S &P 500, which, you know, that is high when you look back at the last call at 45 years or so. going back even farther historically, you know, in American history and American stock market, you have had times where you've had banks in the early 1800s and railroads in the late 1800s have even larger concentrations. We don't have a lot of great data on those times, but basically what's happened subsequent to those periods where you saw those high levels of concentration you really saw a period where there was a lot of disruption post that and some capital destruction. I think what we're really concerned about at this point is in any one of these periods, it seemed like that period would never end and it would go on forever and the market loves to extrapolate current trends out, which is understandable, but it's something that we have to be very cognizant of as we go forward. So we've been in this concentration cycle for about 20 years now, and growth has continued to outperform value with this. Cap weighted portfolios have beaten equal weighted ones, sometimes handily, and large cap has outdone small cap. What generally happens when this reverses is the concentration cycle gives way to a diversification cycle. And obviously, like we're not seeing that right now at all. with the fast pace of change with AI, seems like it's extremely ripe for that to happen. It's something that we saw post that first tech boom and while this is certainly different in a lot of ways we would never argue that it's also ripe for a lot of disruption with this with this new technology. We also think the math does get a little harder the larger these numbers get and this year in particular these numbers have gotten very very large if you look at the amount of capital spending that's going into call it AI and the entire build out of AI. One other point with this, you talked about how we're looking at this. The rest of the market really does look pretty reasonably valued. And most of the stocks that we invest in, of course, we have some exposure to the AI trends. There's no doubt about that. The stocks that we invest in, we're always underwriting and re-underwriting these names. And what we do see though is that the rest of the market that lasts 490 or so stocks is much more reasonably valued. So we do feel like active that results in us having a high active share. I think everybody kind of sees that, you know, in our historical performance. We don't look much like the market. Right. But we think that's a good thing. Again, when you go back to our process and the fact that we have not strayed, you do see the benchmark moving quite a bit and the sector concentrations changing. While our portfolio will certainly move around depending on what's rewarding us in our process and what companies we see are the best to invest in from that perspective, it does not lend itself to that level of concentration and our risk controls also keep us a little bit more cautious about adding too much risk in one area of the economy or any kind of disrupting type of technology right until it's more proven. So we're looking to companies that have already shown us historically that they can produce great returns. And so maybe one last point on that, Nick. I know I've talked for a little bit here, but the companies in that top 10 have tended historically, although they performed very well, have been also very volatile and had some significant drawdowns. So that does give us a caution going back to that risk framework. Nicholas Puncer: It is interesting that a lot of the narrative right now is around a capex cycle that in many respects is a lot of those top companies maybe willingly disrupting their core business models through this disruptive technology that we know as AI. And the market will have to digest what that looks like for each individual company and that probably is maybe one of the sources of volatility. It will be interesting to,
