It is taking an increasing amount of patience to keep recommending this fund. Year to date, it is down more than 15%, and is off nearly 20% in the past year. In comparison, the S&P/TSX Composite is down 7% year to date, and 8.4% over the past year.
The biggest reason for this dramatic underperformance stems from its significant overweight in high yielding energy names. At the end of September, it held nearly 30% in energy compared with an 18% weight in the index. Most of the energy names are pipeline or infrastructure plays, such as TransCanada Corp., Pembina, and Enbridge. These types of names make up about half the energy exposure, and unlike previous energy corrections, have been punished just as severely as a number of the lower quality companies. The managers believe that a rebound to a more sustainable oil price is forthcoming over the near to medium term, which will bode well for the fund.
Another positive note is dividends paid by the underlying companies has continued to grow, and has grown by more than 15% in the past five years. The current underlying yield of the portfolio is nearly 5%, which is an all-time high, and they believe put an underpinning of support under the fund, helping to restore its downside protection.
While I don’t disagree with their position, I have been extremely disappointed in the volatility profile. Historically, downside capture had been around 50%, meaning the fund experienced about half the drop of the market. But over the past year, it has tripled to nearly 150%. I am monitoring the fund closely and am looking for a significant improvement to the downside protection. If I do not see any such improvement, I will be removing the fund from the Recommended List. The strong downside protection was the key differentiator for this fund. Without that, there are many other Canadian Equity and Canadian Focused Equity Funds that offer potentially better risk reward profiles.