Manulife Dividend Income Fund

Analysis: While the retail version of this fund is relatively new, it has been operating as an institutional mandate since June 2004.

The goal is to build a portfolio of businesses that are creating value at a pace faster than the broader equity markets. To do this, they use a bottom up, fundamentally driven process that seeks out businesses of any size that have high returns on invested capital. Each potential investment candidate is scored on a number of factors, including stability and level of their earnings power, and managerial skill and ownership, and financial leverage. A deeper due diligence review is conducted on the most attractive opportunities. This includes meetings with management and generating an estimate of fair value. They also determine buy and sell prices.

Once a company is in the portfolio, they actively manage position sizes based on real time valuation levels. The closer a name is to its buy price, the greater the weight it has in the fund. Surprisingly, turnover levels have been modest, averaging around 70% for the past three years.

The portfolio is fairly well diversified, holding more than 70 names, with the top ten making up about 30% of the fund. The portfolio is much different than other dividend mandates, with an underweight in energy and financials. It can invest outside of Canada, and has about 30% in the U.S. at the moment. They will also hedge part of their currency exposure.

Performance has been very strong, gaining 17.5% for the past three years compared with the 9.3% rise of the S&P/TSX. Even more impressive is this has been done with a level of volatility that is less than half the index. It has also done a great job protecting capital, with a downside capture of less than 5%.

I don’t see the absolute levels of return likely to be repeated, but I expect that it will be able to produce above average returns with less risk going forward. I see this as a great core holding for investors looking for Canadian equity exposure.