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Additions
Lysander-Canso Short Term and Floating Rate Income Fund (LYZ 805A – Front End Units) – In the bond space, there are few shops that are as well respected as Canso Investment Counsel, the managers of Lysander-Canso Short Term & Floating Rate Fund. Manager John Carswell aims for high current income and some long-term capital appreciation with a fundamentally-driven credit analysis process.
Carswell can invest not only in traditional short-term bonds, but also in floating-rate securities and convertible bonds. The fund has a go-anywhere mandate, but as of the end of July, more than 90% of the portfolio was invested in Canada.
The fund also has flexibility around credit quality, and can invest up to 40% in non-investment grade issuers. And at the end of September, nearly 10% was in fact allocated to non-investment grade debt.
Canso’s 28-member investment team gives it the bench strength for an in-depth fundamental review to understand a company’s cash flow picture to assess creditworthiness, and covenants, to understand their rights should things go south. An internal credit rating system and maximum loss score sets up a worst-case scenario.
The managers are active in their approach, and will manage credit quality based on the risks of the market. The result is a concentrated portfolio, with the fund holding just north of 60 securities. The top 10 holdings make up roughly half of the portfolio. In the expectation of higher yields, the fund is defensively positioned, with half of the portfolio invested in floating-rate notes.
This positioning has benefitted the fund. In September, the FTSE/TMX Short Term Bond Index fell by nearly 0.5%, the fund was down only 0.1%. For the quarter, the index was down 0.5%, while the fund gained 0.1%. Longer-term numbers are also strong on a relative basis, with a 3-year average annual compounded rate of return of 1.8% to the end of September, compared with 1.4% for the index.
Looking ahead, given the bench-strength of the management team and the active investment process they use, I would expect this fund to be able to outpace most of its peers on both an absolute and risk-adjusted basis. However, given its focus on corporate debt over government issues, it may be a touch more volatile than its peers over short-term periods.
EdgePoint Global Portfolio (EDG 100 – Front End Units, EDG 300 – Low Load Units) –EdgePoint was launched in late 2008 after Geoff MacDonald and Tye Bousada left Invesco Trimark. Using what they learned there, they launched four core funds at EdgePoint.
This is their global equity offering that invests in companies of any size, located anywhere in the world that have strong competitive positions, excellent long-term growth prospectus, and strong management teams. Valuation is a key component, as they look to buy these companies at prices that are below what they believe it is worth.
The portfolio is built purely on a stock by stock basis, with country and sector weights being the byproduct of the stock selection process. The result is a portfolio that looks nothing like the index. To help ensure proper diversification, they look to diversify across business ideas.
It is a concentrated portfolio, typically holding around 40 names, with the top ten representing just under 40% of the fund. Their time horizon is longer term, typically five or more years, and they are rather patient, allowing their investment thesis to play out. Portfolio turnover has been very modest, averaging around 30% for the past five years.
They will typically sell a company for a couple reasons. First is the investment thesis being no longer valid, and second, they have found a better idea for the portfolio. They are constantly looking to upgrade the portfolio and will sell when one becomes available.
Performance has been excellent, on both an absolute and risk adjusted basis. For the past five years, it’s gained an annualized 21.7%, outpacing the index and peer group. Volatility has been above average, which is not surprising given the all cap nature and concentrated portfolio. However, to date, the higher volatility has been more than offset by the higher levels of alpha the Fund has generated.
Costs are also quite competitive, with an MER of 2.13% for the front-end units, which is well below average.
Add it all up and this is a great core global equity offering for those who can stomach the potential for higher volatility. The concentrated portfolio is likely to see periods of dislocation in the performance of the fund and the benchmark, but over the long term, the focus on quality, undervalued businesses has the potential to deliver strong returns.
Trimark International Companies Fund (AIM 1733 – Front End Units, AIM 1735 – Low Load Units) – Since taking the reins in late 2009, manager Jeff Feng has done a great job with this fund, posting above average returns in each year.
Like other Trimark branded equity funds, the managers like to view investing more as taking an ownership in a business, rather than trading stocks. They tend to focus more on the intrinsic value of a company, rather than its share price, leading to lower levels of portfolio turnover. The result is a high conviction portfolio of quality companies with strong management, free cash flow generation, excellent organic growth. and sustainable competitive advantages.
Investing in non-U.S. based companies, they look to buy good companies trading at a discount to intrinsic value. However, if you look at the portfolio valuation metrics, you will see it is not cheap, trading at multiples that are slightly above the market. A reason for this disconnect is management is willing to pay a higher price for what they believe are high quality businesses with growth prospects not yet reflected in the share price. They will not sacrifice quality for “cheap” valuations.
This approach has paid off handsomely. To the end of October, the fund has gained an annualized 17.2% for the past five years, outpacing its peers by a generous margin.
My biggest concern with this fund would be its cost, with an MER of just under 3%.
Given the investment process, I don’t expect the absolute level of outperformance to be sustainable over the long-term, but I do believe it can deliver above average returns with average or better volatility over the long term. I see this as a solid pick for those looking for non-North American equity exposure.
Deletions
Invesco International Growth Class (AIM 633 – Front End Units, AIM 635 – Low Load Units) – First off, let me reiterate, this is a very high-quality fund that invests in international equities. It is managed by a team of portfolio managers headed by Clas Olsson using a growth investment style. Their approach is founded on the belief that sustainable earnings growth over a business cycle is what will drive a company’s stock price higher. To find these companies, the team focuses on companies that have sustainable earnings growth, high quality characteristics, and are trading at reasonable valuations.
The Fund’s long-term performance numbers are very strong, although it struggled in 2016, losing 6.4% while the MSCI EAFE Index was off by 2%, both in Canadian dollar terms. However, I should point out that I am not removing the Fund because of its performance. I still believe it is very well-managed and has the potential to deliver better than average returns over the long-term. If you hold this Fund, have been happy with it, and it still is a match for your investment objectives and risk tolerance there is no reason to make a change. However, if you are looking to make a new allocation to an international equity fund, I believe the Trimark International Companies Fund offers a modestly more attractive risk reward outlook over the long-term.
Trimark Fund (AIM 1513 – Front End Units, AIM 1515 – Low Load Units) – As with the Invesco International Growth Class that was highlighted above, this is a very solid global equity offering. It is managed in a near identical manner to the Trimark International Companies Fund, focusing more on the intrinsic value of a company, rather than its share price. A key differentiator between this fund and the Trimark International Companies Fund is this fund has a global mandate rather than a non-north American mandate.
I am removing this Fund from the Recommended List because I believe the EdgePoint Global Portfolio offers a more compelling risk reward profile than this Fund. As with the Invesco International Growth Class, if you currently hold this fund, it still fits within your investment objectives and risk tolerance there is no reason to make a change. However, if you are looking to make a new allocation, I would favour the EdgePoint offering at this time.
Funds of Note
PIMCO Monthly Income Fund (PMO 005 – Front End Units, PMO 105 – Low Load Units) – In a very volatile bond market, this global focused offering continued to outperform not only the Canadian bond funds, but most of the global offerings as well. This outperformance can be attributed to PIMCO’s diverse global team, and active management style.
They use a mix of top down economic analysis and bottom up security selection to consistently identify mispriced opportunities, while maintaining a focus on generating yield. At the end of September, the Fund had a very modest duration of 3.09 years, with most of that exposure coming from its high quality, government related security holdings in the U.S. and Australia.
Looking ahead, this remains one of the most consistent bond offerings around, and an excellent way to access the global bond markets.
In early October, this Fund was launched under an ETF structure, trading on the Toronto Stock Exchange under the ticker PMIF. Its costs are the same as the F Class mutual fund, offering another great way to access this top shelf bond offering.
RBC North American Value Fund (RBF 766– Front End Units, RBF 130 – Low Load Units) – Managed by the team of Stu Kedwell and Doug Raymond, this Fund invests in a mix of Canadian and U.S. companies that are attractively valued, fundamentally sound, and offer above average returns on capital.
Their investment process is a multi-stage portfolio construction process that incorporates both quantitative screening and fundamental, bottom up analysis. The first stage in their process is a series of quantitative screens that weed out the undesirable companies in their selection universe. Then the team conducts a fundamental analysis on each of the companies and conducts a series of scenario analysis, looking at a wide range of possible outcomes for each stock. Stocks are also evaluated using a 2 Factor Matrix Model that evaluates earnings projections relative to valuation.
For the quarter, it gained 2.2%, outpacing most of its peers, but trailed the S&P/TSX Composite which gained 3.7%. Much of this underperformance can be attributed to its U.S. holdings, which at September 30 sat at just shy of 40% of the Fund.
Portfolio valuations look a bit rich for a value fund, however, when you factor in the expected growth rates of the underlying holdings, it is much more reasonably valued. From a sectors standpoint, it is overweight technology and healthcare, and is modestly underweight energy and financials.
Managers concede that in absolute terms, stock valuations are high, but note that when compared to fixed income they are reasonable. At this stage in the cycle, it will take strong earnings growth to propel the market higher, which explains their tilt towards higher growth sectors in the market.
This remains a strong pick for those looking for a mix of Canadian and U.S. equities for the long-term.
Dynamic Power Global Growth Class (DYN 014– Front End Units, DYN 614 – Low Load Units) – This global offering should come with a warning label telling those who suffer from heart conditions they may want to avoid this Fund. However, for those looking for a way to add a little excitement to their investment portfolio, this fund may be just the ticket.
Managed by Noah Blackstein, it is a very active concentrated portfolio that invests in 20 to 30 companies from around the world that he believes to have the best growth prospects, strong earnings momentum and a history of upside earnings surprises.
Over the long-term, Mr. Blackstein has been very successful with this strategy, gaining an annualized 15.3% for the past 15 years, nearly doubling the 7.8% rise in the MSCI World Index. Recent numbers have also been strong, gaining more than 50% year-to-date to the end of October.
However, running such a concentrated, growth focused portfolio, it has experienced significant levels of volatility over the year. When it wins, it wins big, but when it loses, it tends to lose big. In the past five years, portfolio volatility has been nearly doubling the broader market. Further, if we look at 2008, the Fund lost more than 47%, while the index was down 25% in Canadian dollar terms.
It is concentrated not only in number of holdings, but also sectors. At the end of September, it held 22 names, and nearly two-thirds were invested in tech, with the balance in consumer names.
The portfolio turnover is high as Mr. Blackstein goes where the growth is. In the past five years, turnover has averaged nearly 200%.
Over the long-term however, it has the potential to outpace its peers, but be warned the ride will be very bumpy. But if you have the stomach to stick with this high conviction offering, you have the potential for outsized returns over time. This is more a fund you’ll want to trade, taking profits after a big run to protect your capital.