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Funds of Note
Fidelity Canadian Large Cap Fund (FID 231 – Front End Units, FID 031 – Low Load Units) – It’s no secret that I’ve been frustrated by the performance of this fund over the past few quarters. The fund struggled through the latter part of 2016 and all of 2017. The main reason for this underperformance was the its defensive positioning. Manager Dan Dupont follows a very disciplined value-focused approach. Consequently, as valuations crept higher, he became more defensive, both in terms of stock selection and in increasing his cash weighting.
So why continue holding it? It is in fact the manager’s defense-first approach that highlights why I like the fund. Dupont has done a great job over the long term delivering solid risk-adjusted returns, with lower-than-average volatility and excellent downside protection in falling markets.
For the past three years, it’s participated in only 40% of the downside of the markets and only 22% over the past five years. The fund’s volatility has been significantly below the broader market and the peer group.
The portfolio has a definite value tilt and trades at valuation levels below the broader market and other Canadian-focused equity funds. Unfortunately, the past few quarters have seen these more value-type names lag the more richly-valued growth stocks in such currently hot sectors as technology, cannabis, and crypto currency. Not surprisingly, the fund has no exposure to the FANG stocks (Facebook, Amazon, Netflix, and Google), which have driven a good chunk of the market gains.
Another contributor had been the lack of overall market volatility for a long period. Investors were more concerned about missing out rather than focusing on the quality and valuation of their investments.
However, in February it looked like market volatility returned with a vengeance, and markets have once again been rewarding quality and fundamentals. Not surprisingly, that has been a positive for this fund, which has handily outperformed both the markets and its peer group during the market selloff through February and into March.
In March, the fund was down 0.04%, while the category average slid more than 0.8%. It was a similar story in February when the fund edged down 0.7%, while the peer group lost more than 2.1%.
The manager continues to sit on a lot of cash and will step in and pick up quality companies at compelling prices as valuations become more attractive. With volatility expected to remain high, and markets likely to continue to focus on fundamentals, I expect this fund to deliver above-average risk-adjusted returns and provide better capital protection when the markets sell off. However, should we see a beta-driven rally, this fund will again lag the markets and peer group. Still, it remains one of my top picks for the long term for its disciplined, value-focused strategy.
Trimark U.S. Companies Fund (AIM 1743 – Front Units, AIM 1745 – Low Load Units) – The Fund jumped out to a strong start in the first quarter of 2018, thanks to a strong contribution from its healthcare and technology holdings. The Fund gained 5.1%, outpacing both the index and the peer group. Longer term numbers are also strong, gaining 11.5% for the ten years ending March 31, besting its category, but slightly lagging the S&P 500
In a recent commentary, the Manager noted that on the whole, he views the market as fairly valued, particularly when compared to interest rates. However, he concedes that certain pockets of the market have become overvalued, as investors chase returns in the late stages of a somewhat frothy market. In response, he has been trimming some of the more richly valued names in the portfolio including Starbucks and Estee Lauder.
Further, he sees room for a rotation into more modestly valued companies, which are expected to help mitigate some of the risk in the portfolio, and also set the stage for the next upturn. Making such a shift would be expected to help lower the overall volatility of the portfolio. It would also help to bring the overall valuation numbers of the Fund more in line with longer term averages.
The portfolio remains rather concentrated, holding just north of 40 names with an overweight in technology, healthcare and industrials. Unlike most of the other Trimark branded funds, it is nearly fully invested, with cash of less than 1%.
The Fund still remains UNDER REVIEW as I am watching to see how the Manager repositions the portfolio over the next quarter or two.
Mackenzie Ivy Foreign Equity Fund (MFC 081 – Front Units, MFC 7107 – Low Load Units) – While this fund is another of my long-time favourites, it has also been causing me a lot of frustration over the past few quarters. Coincidentally, its underperformance started around the same time as the Fidelity Canadian Large Cap discussed above.
This has been a fund with low-volatility characteristics long before it became fashionable. It is very much a defense-first type of a fund, with a concentrated, quality-focused portfolio of high-quality, multinational companies trading at what the manager believes are attractive valuation levels.
When valuations are rich, as they have been recently, the manager will hold cash. For example, at the end of February, the portfolio was allocated to more than 30% cash. This high cash balance, combined with a lack of higher beta, growth-focused names have been a major headwind for performance.
For example, in 2017, the fund gained 1.7%, while the MSCI World Index was up by more than 15% and the peer group was ahead more than 13%. But with volatility returning in February and March, things seem to have turned around, with the fund outperforming the index and peer group in both months. In February, the fund fell 0.55%, while the MSCI World Index lost 1.51%.
It’s a start, but there is still a long way to go to catch up with the index and peer group after what has effectively been a couple of “lost years.” I still believe that the past few quarters have been more of an anomaly than the norm for the fund, and as things return to normal, I would expect the performance to improve.
Furthermore, with volatility likely to remain above recent levels and more selling likely, this fund will once again earn its keep. I am watching the cash position and I’m hopeful the managers can find some attractive opportunities and reduce the cash drag.
All in all, this fund is a great way for more conservative investors to access global equities. However, those with a higher appetite for risk may want to consider an alternative with a bit more torque.
I continue to monitor this Fund closely.
Manulife World Investment Fund (MMF 4536 – Front Units, MMF 4736 – Low Load Units) – This remains an excellent international equity offering that is available to financial advisors. It is the highly regarded Mawer International Equity Fund in a Manulife wrapper that allows advisors to earn an ongoing trailer fee, or to use it in fee-based accounts at a price cheaper than going direct to Mawer.
If there is one drawback to this fund, it is its cost. The full freight advisor units carry an MER of 2.55% However, for those using fee-based accounts, the F class version carry an MER of 1.2%, which is below the 1.40% charged by Mawer directly. Certainly, some may be turned off by the higher cost, and I get that. But I still believe that this is a case of “you get what you pay for.”
Performance has been very solid, and it has consistently been one of the better rated international equity funds delivering above average returns. For the three years ending April 30, it gained 7.6% outpacing its peers and matching the index. In addition to solid returns, volatility has been below the index and peer group, resulting in above average risk adjusted returns. That said, it has struggled a bit year-to-date, gaining 1.5%, while the MSCI EAFE rose by 3.3%. Much of this underperformance is the result of the quality focus inherent in Mawer portfolios. It has largely been the lesser quality, higher beta names that have surged higher, while the more reasonably price, value names have only risen modestly. This is not a sustainable trend, and the Fund is very well positioned to rise when the market again rewards fundamentals.
The investment process is highly disciplined and looks for wealth creating companies that are trading at discounts to their estimate of intrinsic value. A typical company will also generate high returns on equity. Their research process is one of the strongest in the business, with analysts conducting thorough, in-depth analysis on the company’s business model, financial position, and quality of management. Another interesting exercise that analysts put a company through is scenario analysis. They test a wide range of their assumptions to get a stronger understanding of what the company’s true worth will be under a range of situations.
The result is a portfolio that is made up of between 50 and 60 names, with the top ten making up 30% of the fund. Sector and country weights are largely the result of their rigorous stock selection process. At the end of April, the portfolio had nearly 60% invested in Europe, a third in Asia, with the balance in the Americas. More than 80% is invested in developed markets, with the rest in emerging markets.
Despite the recent struggles, this remains a top pick for investors looking for a disciplined, well-managed fund with a focus on non-north American stocks.
CI Signature High Income Fund (CIG 686 – Front Units, CIG 1786 – Low Load Units) – Over the long-term, this fund has been a stellar performer, offering an attractive mix of solid total returns, a stable stream of income, and below-average volatility. In the shorter term, however, it has struggled, trailing the index and peer group in 2017, and year-to-date in 2018. A key reason for this underperformance has been the portfolio’s construction.
The fund’s main objective is to generate income without taking on excessive risk. As such, it has avoided growth-focused sectors such as technology and high-flying consumer names. But because these have been key market drivers for the past 12 to 18 months, this fund’s performance has lagged.
Contributing to that lag was the fund’s high exposure to the energy sector, which has suffered from rising rates and general lack of interest in energy in general. And with the fund’s higher level of interest rate sensitivity in the equity sleeve, rising rates have created an additional headwind to performance.
So where do we go from here? Despite the recent underperformance, this remains an excellent fund. Managed by Eric Bushell and the Signature Global Asset Management team, the fund has a tactical mandate and can invest anywhere in the world. The approach is somewhat style-agnostic, involving an analysis of a company’s entire capital structure, as well as the many qualitative aspects of the company, such as management, disclosure, and governance. This gives the fund its opportunistic slant, allowing it to buy the most attractive part of a company.
At the end of February, the portfolio was allocated 40% to bonds, 9% preferred shares, 47% equities, and the balance in cash.
The fund pays a monthly distribution of $0.07, for an annualized distribution yield of 6.6%. My concern is that we may see a cut to the distribution if performance doesn’t pick up; otherwise, there will be a continued erosion of net asset value, as the fund pays out more than it earns.
Still, I expect the fund to continue delivering modest returns, with low volatility, resulting in very decent risk-adjusted returns for investors. In addition, I expect the fund to hold up better than many of its “growthier” peers in periods of heightened volatility.
Manulife Global Infrastructure Fund (MMF 4569 – Front Units, MMF 4769 – Low Load Units) – Brookfield is one of the preeminent players in the global infrastructure space, which is why I have liked this Fund to access infrastructure. However, the Fund has failed to keep pace with its peers, with an overweight exposure to pipelines and utilities being a key reason for this. Pipelines have struggled for the past few years, selling off hard in the aftermath of the oil price collapse in 2015 and 2016, and have faced headwinds again recently as the regulatory environment continues to cause challenges, as governments squabble over whether to allow new pipelines to be built.
Another headwind to the Fund is its overweight exposure to sectors that have a high degree of sensitivity to interest rates such as utilities and telecoms. With interest rates on the rise, these sectors are often viewed as bond proxies, and are impacted by movements in rates. Combined, it has almost been a perfect storm for the Fund. I am actively looking at potential alternatives, however, I am not yet prepared to make a change.