Steadyhand Equity Fund

Analysis: With a focus on high quality companies run by great management teams that are trading at a significant discount to its intrinsic value, the Steadyhand Equity Fund has quietly blossomed into one of the stronger Canadian focused equity funds available today. The fund is managed by CGOV Asset Management using a fundamentally driven, benchmark agnostic, bottom up approach that strives to deliver investors absolute returns in all market conditions.

The result is a concentrated portfolio of the 25 best companies they can find. The fund is an all cap mandate, meaning the managers can invest in companies of any size. At the end of May, about a third of the fund was invested in mid-cap companies, with the balance in the bigger names. It is Canada focused, but they are not afraid to go outside of Canada to gain exposure to high quality investment opportunities. At the end of May, more than 46% was invested abroad. The highest they can go is 49%.

The portfolio looks nothing like its benchmark. It has a significant overweight position in consumer defensive, industrial and healthcare names. It has virtually no exposure to real estate and is about half the index weight in financials. This will result in a portfolio that will be expected to behave much differently than the benchmark.

Judging by the fund’s performance history that is indeed the case. For the past three years returns have been stellar, gaining an annualized 13.3%, leaving the index and most of its competition in the dust. A lot of that outperformance can be attributed to its foreign holdings, which have significantly outperformed Canadian equities. The portfolios concentration was also a factor, as the focus on strong, cash flow generating businesses paid off with outsized returns. The concentration can be a double edged sword, causing periods of significant underperformance as well. That’s what happened in 2009 and 2010, when it was left behind the index and category.

The fund’s volatility has been significantly below average, outperforming in both rising and falling markets. The focus on quality has certainly helped in falling markets, as the fund has experienced less than half the drop of the S&P/TSX Composite Index over the past three years.

With just under $60 million in the fund, the managers can be very flexible in managing the fund, and can continue to take positions in mid cap names, if the investment opportunity is there. Portfolio turnover has been relatively modest, coming in at 43% in the past year.

While I don’t expect that the three year number will be repeated, I do believe that the fund can continue to deliver above average returns with below average risk, making it a solid core holding for most investors. The emphasis on downside protection and margin of safety will go a long way in helping the cause, especially in volatile markets. Investors in this fund must be in it for the long term, because it is very likely to experience periods where performance lags significantly. I would expect this to happen more in a sharply rising market.