This is a fund that I continue to struggle with. There is no denying that recent performance has been abysmal, and there was a definite uptick in the volatility, and an erosion in the downside protection offered in the most recent selloff. But unlike the Franklin U.S. Rising Dividends Fund, which I removed from the Recommended List, I am more comfortable with the reasons for the decline and the investment process used.
In very simple terms, it was largely the pipeline holdings that were responsible for the fund’s significant underperformance. Yet, when I look at the underlying fundamentals of the sector, but more specifically the stocks in the portfolio, things are not nearly as dire as one would surmise from the stock price annihilation. According to the manager in a recent commentary, “…pipeline shares are still the 4th best performing sector in Canada over the past 10 years, with a 9.75% annualized return and representing the highest dividend yield and dividend growth in our portfolios.” Further, pipelines, while technically energy stocks, are not directly affected by oil and gas prices, as much of their revenue is driven by fixed contracts, meaning they get paid regardless of the price of energy. When you factor in the increasing demand for energy in North American and elsewhere, the picture begins to brighten.
Understandably, the managers believe that 2016 will be better than 2015, as the benefit of cheaper dollar will help offset some of the impact of the lower oil price. They are also expecting to see some firming in the oil price in the latter part of the year.
The managers remain true to their process, which focuses on high quality businesses that are trading at attractive yields. This explains why the fund is underweight technology, consumer and healthcare names. While these sectors were responsible for a significant portion of the market gains, they also tend to pay very little in the way of dividends – a key requirement for this fund.
While I am more positive on this fund than I have been in the past few quarters, it remains Under Review, and I continue to monitor it closely.