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Analysis: This small cap fund has the dual investment objectives of providing investors with consistent monthly income and capital growth. To meet these objectives, the fund invests in income producing securities of small and medium sized companies. The fund formerly invested predominantly in income trusts, but has since shifted its focus to invest in high yielding common shares, preferreds, and to a lesser extent bonds and other debt securities.
The management team use a value oriented process that seeks out companies that have high returns on invested capital, modest capital expenditure requirements, and have the demonstrated ability to generate free cash flow.
The portfolio tends to be fairly concentrated, holding between 40 and 60 names. The top 10 holdings as of December 31 made up 45% of the fund. Given the focus on income, the portfolio’s make-up is much different than the benchmark. For example, the fund is significantly underweight in energy and materials, and significantly overweight in industrials and consumer discretionary names.
This would also help explain why the performance and volatility profile is much different than the benchmark. For the five years ending February 29, the fund posted an annual compound return of 12.1% compared with the BMO Small Cap Index which returned 3.9%. The volatility of the fund is much lower than the index and the category.
The fund pays investors a monthly distribution of $0.05 per unit. At recent prices, this equals an annualized yield of approximately 4.1%. The MER is 2.84%, which is in the upper half of the category.
Given the total risk profile, combined with its focus on income, this is a fund that we believe will perform very well over the long term. We would expect that it will outperform its small cap brethren in flat or volatile markets, but will likely lag in a rising market environment.
This fund is one of our top picks in the small and mid cap equity category.