This is a fund I have struggled with for a few quarters now. I originally like it because of its conservative nature, decent returns, and lower than average levels of volatility. To do this, the managers focus on well-managed, high quality Canadian companies that pay an above average dividend that is not only sustainable, but also growing. One of the risks of this strategy was over time, it became fairly concentrated in energy. More specifically, it invested heavily in energy infrastructure such as pipelines – the types of names that historically exhibited much less commodity sensitivity. However, when the energy swoon hit last year, investors sold off anything related to energy, including many of the names held in this fund. The result was a significant increase in volatility and levels of downside participation that were uncharacteristic for this fund.
I had numerous conversations with management, who remained consistent in their approach and continued to believe in these high quality, “backbone” type companies. Their belief was that as the energy markets normalized, so too would the risk reward profile of the fund. I felt comfortable with this, and continued to keep the fund on the list.
In February, IA Clarington made a change to the management team, bringing Terry Thib into the co-manager role alongside long-time manager Doug Kee. The fund was also given more flexibility in its mandate, allowing for some exposure to smaller companies, and also some foreign holdings.
In a meeting with Mr. Thib, he reiterated that the fund’s positioning is likely to remain consistent for the near term. The focus will remain on high quality, well managed companies that deliver high levels of sustainable cash flow. In fact, he underscored that under his leadership, the fund will once again emphasize the conservative. He expects, the concentration in energy will be lessened as many of the names rebound and are sold as they approach full valuation.
I am strongly encouraged by the changes and what I heard from Mr. Thib. I believe that if successful in executing its strategy, it will return to its former self. That said, these changes are in fact significant, and I have some concerns on how the new managers will work together and how the changes may be executed in real time. Until that is determined, I feel it prudent to monitor it closely.