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Additions
PH&N Total Return Bond Fund (RBF 6340 – Front End Units, RBF 4340 – Low Load Units) – With interest rates now at or near record lows and expected to remain there for some time, investors looking for ways to generate returns may have to look outside of your basic government and corporate bond issues. It is that ability to invest in non-core bond fixed income products that makes this an attractive fund.
It is managed by a very deep and well-resourced fixed income team at the RBC owned PH&N Investment Management. The majority of the portfolio will look very much like the highly regarded PH&N Bond Fund, which invests in a diversified portfolio of investment grade corporate and government bonds. Where this fund differs is in its ability to invest up to 20% in non-core and high yield bonds to allow for a higher return potential.
The managers are very active and tactical in the management of the portfolio, with portfolio turnover levels that have averaged 138% over the past five years, as reported in the fund’s MRFP. The managers will also use periods of market volatility to tactically shift the portfolio. For example, back in March after corporate bonds had sold off, the managers stepped in to take positions in very attractively priced credits. The managers also added some high yield exposure to benefit from the rally spurred by central bank announcements they would be purchasing corporate bonds and ETFs for the first time.
Performance, particularly in the short term has been strong, with a year-to-date gain of 8.1%, which outpaced both the index and the peer group. Longer term performance numbers are also strong, with a three- and five-year return of 4.7% and 3.7% respectively. In both cases, this beat the category average, but trailed the benchmark.
The Fund’s volatility has been below both the index and peer group, resulting in very competitive risk adjusted returns. It is competitively priced with an MER of 1.05% for the advisor sold units. For those looking for high quality core fixed income exposure, this is certainly a fund worthy of consideration.
Fidelity Special Situations Fund (FID 1298 – Front End Units, FID 1098 – Low Load Units) – Managed by March Schmehl since it’s April 2007, this fund has a unique and opportunistic mandate that looks for companies of any size that are or are expected to undergo some positive changes in their underlying fundamentals. These opportunities may come in a wide range of investments including high growth companies with underappreciated potential, or significantly undervalued companies that may be in a position to benefit from improvements in company or industry fundamentals. They may also look at restructuring and merger opportunities, where the outcome has the potential to unlock significant value for shareholders.
It is a Canadian focused small and mid-cap equity fund, meaning it can invest up to 49% of the Fund outside of Canada. The manager has certainly taken advantage of this, and at the end of April, 44% of the fund was invested in U.S. equities.
The investment process is very much a bottom up approach where each opportunity is evaluated, considering the economic and market conditions, the industry, and financial position. They also review total growth potential, earnings and quality of management. The portfolio is diversified, holding 65 names, with the top ten making up more than 40% of the Fund. Not surprisingly, it is overweight technology, communications, healthcare, and consumer names. The top ten includes such highflyers as Shopify, Zoom, and Amazon.
It is an approach that has worked well, with return numbers that have left the benchmark and the overwhelming majority of its peer group in the dust. For the five years ending June 30, the Fund has gained an annualized 12.1% and nearly 15% annualized over the past five years. Since 2010, the Fund has delivered above average returns in each calendar year except 2018, when it posted third quartile performance. Part of this above average return is certainly due to the growth bias of the fund, which has benefitted from a market environment that has rewarded growth over all other styles. Another factor driving returns has been its U.S. equity exposure, which has outperformed Canadian equities. Another benefit of the U.S. holdings is the strengthening U.S. dollar has provided a further tailwind to the Fund as the currency has remained unhedged. While these factors have certainly helped, Mr. Schmehl’s stock selection approach has been the biggest driver of the excess returns.
While returns have been above average, so too has been the volatility, with a standard deviation that is well above the category average. However, even with the higher volatility, the risk adjusted returns have blown away the peers, and it has delivered better returns in both up and down markets.
This is a great fund, and like the name suggests, is more of a specialty fund, rather than a core holding. Given the risk profile, this is better suited for those investors who are looking to enhance returns and are comfortable with a higher risk investment. I certainly don’t think the historic returns are sustainable on a go-forward basis, but the combination of the flexible mandate and active, well-established manager make this an interesting fund to consider for those looking to add a little torque to their portfolios.
Canoe Global Equity Fund (GOC 1081 – Front End Units, GOC 1082 – Low Load Units) – This global equity fund is managed by a management team headed up by Nadim Rizk, who has been successfully using the same investment process since 2006.
The managers look for best-of-breed companies with strong growth potential that are trading at reasonable valuations. They like well-managed companies with sustainable competitive advantages operating in industries with high barriers to entry.
The fund has an all-cap, go-anywhere mandate that relies on basic screens focusing on quality, valuation, and growth measures to help identify potential investment candidates. Managers conduct a detailed fundamental analysis focusing on both company and industry factors that help them determine their estimate of a company’s intrinsic value, screening further for companies with a potential minimum return of at least 50% over the next three years.
The investment process is benchmark-agnostic, and country and sector weights are a byproduct of the managers’ stock selection process. The result is a concentrated, yet diversified portfolio. At the end of May, it held 20 equity positions, with the top-ten making up two thirds of the fund’s assets. From a sector perspective, the fund is overweight financial services, consumer defensives, and healthcare. It has no exposure to real estate, utilities, or energy.
The managers typically take a long-term view when analyzing a stock, so it is expected that portfolio turnover will be modest. For the past five years, turnover has averaged roughly 20%, which corresponds to an approximate holding period of about five years.
Performance has been excellent with a 5-year average annual compounded rate of return of 8.9%, placing it firmly in the top quartile. It has however trailed the MSCI World Index, which has gained an annualized 9.4% over the same period.
The fund’s volatility has been running roughly in line with the index and peer group, which translates into stronger risk adjusted returns. It has also delivered performance in up markets that equal or beat the index, while outperforming nicely in down markets, protecting capital for investors.
The Fund’s growth focus has certainly helped boost shorter term returns. Another caveat is that the recent strong absolute performance is not likely sustainable, particularly if the market leadership moves more into cyclical names. However, the manager has a disciplined investment style and has done a solid job protecting capital in falling markets, making this a good pick for investors looking for a more “growthy” option for the global equity portion of an otherwise well diversified portfolio.
iA Clarington Loomis Global Allocation Fund (CCM 2470 – Front End Units, CCM 2472 – Low Load Units) – With a strong management team and a disciplined investment process, this has been one of the best performing global equity balanced funds over the past one, three, and five years. Boston based Loomis Sayles and Company took over the management duties of the fund in February 2015.
The investment process used is very nimble and opportunistic with the ability to invest anywhere in the world. The Managers are patient and take a long-term horizon of seven to 10 years when evaluating a potential investment opportunity. However, they tend to use periods of market volatility opportunistically as a way to improve the portfolio. The asset mix is the byproduct of the bottom up investment process and dependent on the available opportunity set. Historically, the equity weight of the fund has ranged between 35% and 60% of the portfolio.
The equity sleeve is managed by a team headed by Eileen Riley and Lee Rosenbaum, using a fundamentally driven, bottom-up, benchmark-agnostic approach that looks for what the managers believe are high quality companies, the ability to grow the intrinsic value, and are trading at a compelling valuation. They also look to be able to fully understand and quantify the risks of any potential investment candidate. The equity portfolio tends to be high conviction, typically holding fewer than 50 names. The portfolio currently has a definitive growth bias to it, trading at valuation levels well above those of the peer group and index. This growth bias is also evident from the sector mix, which is overweight technology, healthcare, and consumer discretionary names. It has little or no exposure to the more defensive parts of the market such as real estate, utilities and energy. The top ten holds many growth names including Amazon, Alibaba, and Facebook. Geographically, the focus has been primarily in North America, which at the end of June comprised two-thirds of the equity portfolio, with the U.S. being the dominant country.
On the fixed-income side, managers Daniel Fuss and David Rolley have the ability to invest across the entire fixed-income spectrum. The investment process used is a blend of top-down macro analysis and bottom-up security selection. The top-down analysis helps the team find the most attractive opportunities anywhere across the quality curve. It has tended to focus more in the AA to BB range, looking for credits that are attractively priced and that can add potential return.
Historic returns have been strong, with the equity growth bias helping drive much of the higher returns of late. But even with the growth bias, the Fund has done a solid job at keeping volatility in check, with a standard deviation that has typically been below the peer group, and in line with the benchmark. The Fund has historically outperformed in both rising and falling markets,
With its recent performance validating the fund’s, deep management bench strength, and disciplined investment process, the fund is a solid global balanced offering.
Mackenzie Canadian Growth Balanced Fund (MFC 724 -Front End Units, MFC 3197 – Low Load Units) – Despite the massive market meltdown in February and March resulting from the COVID-19 pandemic, this growth-focused balanced offering has had a decent first half, gaining 0.6%, outpacing both the benchmark and peer group. Further, it has posted top-quartile performance for the past three calendar years and except for 2016, has been a top quartile performer in every year since 2012.
The fund is run like a fund of funds, with the top asset mix being determined by Mackenzie’s Multi-Asset Strategies Team, headed by Nelson Arruda. Mr. Arruda took over from Alain Bergeron, who moved to iA Financial Group. There’s a bit of flexibility in the mandate, with equity exposure expected to range between 60% and 90%.
The equity sleeve looks very much like the Mackenzie Canadian Growth Fund, which is also on the Mutual Fund Focus List. Veteran bond manager Steve Locke leads the fixed-income team. His a “core plus” approach uses not only Canadian investment-grade issuers but also high-yield bonds, floating-rate loans, and other fixed-income instruments, using a blend of top-down macro analysis and bottom-up credit analysis.
At the end of April, the fund had 31% in fixed income, 34% Canadian equity, 28% in U.S. equity, 2% in international equity, and the balance in cash. The bond portfolio was split roughly between corporate and government bonds. Credit quality was high, with only a small exposure to high-yield debt.
With its slight growth tilt, the equity portfolio was overweight industrials, healthcare, and consumer staples. It was underweight energy, financials, and utilities. The top ten equity names include Quebecor, Intact Financial, and Accenture.
Longer-term performance has been excellent, with a 5-year average annual compounded rate of return of 6.4% to June 30, handily outpacing the benchmark and peer group. As impressive as the outperformance in absolute terms has been, the Managers have done a great job keeping volatility in check, with a standard deviation that has been below the peer group, although higher than the benchmark. The result in a very strong risk adjusted return profile. The fund has historically outperformed in down markets with a down capture ratio of below 100, indicating
Over the long-term, the fund has the potential to deliver above-average returns, but also with above-average levels of volatility, given the growth tilt of the equity sleeve. So only those with an above-average risk tolerance will want to consider this fund. More conservative investors may want to look elsewhere.
Deletions
IA Clarington Global Equity (CCM 3071 – Front End Units, CCM 3073 – Low Load Units) – The Fund is managed using a very disciplined, bottom up value focused process that looks for high quality, invested management that has delivered strong growth in equity, earnings, sales and cash flows. The company must be generating a level of free cash flow that will allow it to increase dividends over time, and the balance sheet cannot be over levered. Finally, it must be trading at a level of valuation that is well below current market levels, while providing return on equity that is above average. The portfolio is somewhat concentrated, holding more than 40 names, with the top ten making up about a third of the portfolio.
The Fund has a value focus which helps to explain some of its underperformance. However, it has consistently trailed funds that follow a similar value focused approach. It has higher cyclical exposure than its peers and has failed to participate as strongly to the upside. It has also been hit harder than the benchmark in a falling market.
Given the continued underperformance, I am removing the Fund from the Focus List immediately. It is being replaced by the Canoe Global Equity Fund.
CI Signature High Income Fund (CIG 686 – Front End Units, CIG 1786 – Low Load Units) – With nearly $6 billion of retail assets in the mandate, the CI Signature High Income Fund is one of the largest balanced funds in the country. It is managed by a well-resourced investment team, headed by the highly regarded Eric Bushell, who in my opinion, is one of the best in the business. At the end of June, the Fund held about 3% in cash, 10% in preferred shares and other investments, 51% in equities, and 36% in bonds. The equity sleeve is invested in companies of all sizes but tends to focus more on the large cap space. It also has a bit of a value tilt to it, with valuation levels below the index and peer group. The bond sleeve is invested in corporate bonds, all of which were investment grade at the end of June.
Unfortunately, in recent years, the fund’s once stellar performance has become more inconsistent and I believe there are stronger global balanced funds available. As a result, I am removing the fund from the Focus List and replacing it with the iA Clarington Loomis Global Allocation Fund.
TD Monthly Income Fund (TDB 679 – Front End Units, TDB 681 – Low Load Units) – This Canadian neutral balanced fund has been managed by the team of Doug Warwick and Greg Kocik since 1998, and at the end of June had more than $7.0 billion of assets. Like most balanced funds, it invests in a mix of stocks and bonds and holds 8% in cash, 50% in equities, 30% in bonds and about 6% in preferred shares. The equity sleeve looks a lot like you’d expect with a healthy dose of banks, pipelines and utilities, and healthy underweights to technology, healthcare and consumer names. The stock selection process is bottom up and has a bit of a value bent to it. The fixed income sleeve is well diversified across the quality spectrum. The majority of the bonds are higher quality investment grade and also holds a healthy exposure to lower rated high yield issues and non-rated bank loans to enhance yield. Historically, this had been a somewhat lower risk balanced fund, but in the past couple of years, volatility has been moving higher. The Fund struggled in December 2018 and so far, year to date. It is now more volatile than both the peer group and the index and has done a poor job in both rising and falling markets.
I am removing this fund from the Focus List immediately.
Funds of Note
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