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NinePoint Diversified Bond Fund (NPP 200 – Front End Units, NPP 237 – Low Load Units) – The past few quarters have been a challenge for bond investors with central banks starting to remove stimulus and moving towards normalizing their interest rate policies. Over the past two years, the FTSE/TMX Canada Universe Bonds Index is lower by an annualized 0.7% to the end of September. The environment is not likely to get any easier in the next little while either, with worries over inflation becoming more real, the yield curve continues to flatten and worries over it inverting remain in view. Further, there are growing concerns over the credit quality of many of the issues in the lowest rated part of the investment grade bond universe. With these challenges, a low-cost passive bond fund, or even a core only product may not be your best option.
That’s where this Fund comes in. The NinePoint Diversified Bond Fund is a diversified North American-focused bond fund with a flexible mandate allowing the manager to invest across the capital structure. The Fund focuses on corporate bonds for their higher return potential, and takes an absolute return approach, aiming for a 4% to 6% return, net of fees over a rolling three-year period, regardless of interest rates
Fixed income veteran Mark Wisniewski took over this Fund a year or so ago but has run this and similar strategies for years at Davis-Rea and Gluskin Sheff. He is supported on the Fund by two associates; Chris Cockeram and Etienne Bordeleau. Their disciplined investment process blends top-down macro views, thematic tactical trades, and bottom-up security selection. Management tools at their disposal include the ability to alter interest-rate sensitivity, currency exposure, security mix, and credit quality to either capture potential upside or to reduce or manage risk.
Given the current credit environment, the Fund is defensively positioned. Duration is 1 year, compared to roughly 7.2 years for the broader Canadian bond market. The yield to maturity of 3.2% is also higher than the benchmark. To achieve this, the fund is heavily weighted toward corporate bonds, with nearly 68% in credit and 16% in high yield, which is more defensive than it was a few months ago, when it had greater exposure to high yield issues. Given the current market, the managers don’t expect to dramatically change that positioning but will continue to improve credit quality where possible. They are also exploring ways to participate in the upside of any potential flight-to-safety trade in government bonds while avoiding the downside associated with the lower yield and higher duration.
Fund performance has outpaced its peers and benchmark since Mr. Wisniewski took the reins a year or so ago. With its defensive positioning, I’d expect it to lag in a bond rally but outperform in volatile periods.
Another interesting feature of this fund is it is available in a corporate class structure, which makes it more tax friendly for non-registered investors.
The biggest concern I have is the fund’s cost. Its 2.10% MER is well above the category average. That said, given the active approach and focus on capital preservation, I think the excess return will more than offset the higher costs. It is also available for fee based accounts with an MER of approximately 1.1%.
I wouldn’t use this as my only fixed-income exposure but would use it as part of an otherwise well-diversified portfolio. It has the potential to reduce overall volatility while helping improve returns over the long-term
Deletions
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Funds of Note
Dynamic Advantage Bond Fund (DYN 258 – Front End Units, DYN 538 – Low Load Units) – The Managers of this core bond offering have been defensively positioned for several quarters, and now that yields are finally moving higher in a meaningful way, the Fund is being rewarded with above average performance. It has a flexible mandate and can invest across the various fixed income sectors including government bonds, corporate bonds, real return, and high yield bonds. The Managers are very active in managing the interest rate and credit exposure of the Fund.
At the end of September, it held just under 90% in Canadian bonds, 7% in the U.S., and the rest in the UK. The asset mix looks very different from the FTSE/TMX Canada Universe Bond, with only 0.6% in Government of Canada bonds, compared with nearly 36% in the index. It holds nearly 40% in Canadian corporate issues and 25% in provincial bonds. This positioning results in a yield to maturity that is well above the benchmark, with a credit quality that is firmly investment grade.
The Managers have some worries over inflation and have nearly a quarter of the Fund in inflation protected bonds. In the past few quarters, as bond yields have risen, the Managers have been adding duration exposure to the portfolio. At the end of September, duration sat at 5.47 years, compared with 7.45 years for the broader market.
Looking ahead, it appears that interest rates are expected to push higher in the next while as the pace of economic growth continues to be reasonably strong. There are also worries that the central banks are behind the curve on inflation. With the Fund’s lower than benchmark duration, higher than benchmark yield and exposure to real return bonds, it is well positioned to benefit if their expectations play out.
I continue to like this Fund for it’s defensive positioning and see it as a strong holding for more defensive investors.
Fidelity Canadian Large Cap Fund (FID 231 – Front End Units, FID 031 – Low Load Units) – Manager Dan Dupont has been concerned about market valuations for several quarters, resulting in the Fund’s very defensive positioning. Unfortunately for investors, this has led to much underperformance. However, in September and October, market volatility has increased as worries over the pace of economic growth, the effect of higher interest rates, and the headwinds caused by tariffs are having on equity valuations have seen a correction in many equity markets. Over this period, the Fund has outperformed significantly, thanks to its positioning.
In the recent volatility, Mr. Dupont has been putting some of his cash to work but continues to focus on protecting capital. The Fund is overweight the defensive sectors including telecoms and consumer staples. Unlike most of his peers in the Canadian equity space, he has no exposure to Canadian banks and a 10% weight in gold. This can serve as a nice haven if we see an extreme bout of volatility. Even with the recent repricing in the equity markets, Mr. Dupont sees many reasons for caution including his view that we are very late in both the economic and credit cycles, high levels of consumer debt will begin to weigh on sentiment and spending, and housing prices remain stretched. In this type of environment, he believes a defense first positioning is warranted.
While the Fund may have trailed its peers in the recent runup in growth names, I firmly believe that this is one of the better funds to hold for the long-term. I expect that if the recent market volatility continues, investors will be rewarded with continued above average returns, strong downside protection, and a much smoother ride.
CI Signature Select Canadian Fund (CIG 677 – Front End Units, CIG 1777 – Low Load Units) – This core Canadian equity fund was flat on the quarter, outpacing the broader market but trailing the peer group. A strong showing from several of its technology names including Shopify and Alibaba were offset by weakness from its energy holdings. It is very well diversified holding more than 100 names, with the top ten making up a third of the portfolio. More than half the Fund is in Canadian equities, 23% in U.S. equities, and 18% in international equities with the balance in cash. The largest sector weights are financial services, energy, and technology. Still, the valuation levels of the portfolio are very attractive when compared to the broader market and the peer group.
This positioning is expected to be a positive as the market leadership turns from the growth at any price names that have driven markets higher over the past 18 months, to higher quality, more value focused companies. The Manager remains bullish on all risk assets, but on equities specifically. Even with interest rates moving higher, overall financial conditions remain rather simulative based on historic levels, making a strong case for gains in stocks.
Sentry Small/Mid Cap Income Fund (CIG 50221 – Front End Units, CIG 53221 – Low Load Units) – Even with more than $1.8 billion in assets under management, this small-cap offering is one of the better funds available in the Canadian small cap space. Led by Sentry portfolio manager Aubrey Hearn, it continues to deliver above-average risk-adjusted returns for investors.
Mr. Hearn uses a bottom-up security selection process that looks for small- and mid-cap companies in Canada and the U.S. that have a history of delivering high return on capital, low leverage, rising free cash flow, low earnings volatility, strong management teams, high barriers to entry, sustainable competitive advantages, and the ability to consistently grow their dividends over time. Valuation is also a consideration in the process, as the manager doesn’t want to overpay for an investment.
With about 60 names, the portfolio is well diversified. The top 10 holdings comprise about a third of the fund.
The sector mix is the result of the stock selection process, and often looks dramatically different than its benchmark and its peer group. The fund currently has overweight positions in consumer cyclicals, industrials, communications, and tech. It is underweight materials and energy.
Somewhat surprising for a fund with an income mandate, it is underweight real estate and utilities, which are staples of more traditional income offerings. It is also nearly 40% invested outside of Canada. Valuation levels are higher than the benchmark, but this is offset by a very healthy earnings growth outlook.
Absolute performance has trailed slightly in the shorter term, with the fund placing in middle of the pack over the past three years to Sept. 30. However, volatility has been well below the peer group, resulting in much stronger risk-adjusted numbers. In addition, the fund’s performance in down markets has been excellent, participating in just a third of the market drops over the past three years.
Given the focus on capital preservation and downside protection, I continue to believe in this fund and see it as one of the stronger small/mid-cap offerings available. It has a solid management team, with recent additions deepening bench strength, and uses a disciplined, sound, and repeatable investment process.
In the short term, we may see higher levels of volatility, but the fund would be expected to be less volatile than its peers. Longer term, I expect the fund to continue generating above-average returns with below-average levels of volatility.
Capital Group U.S. Equity Fund (CIF 847 – Front End Units, CIF 867 – Low Load Units) – This fund has a modest four-year track record here in Canada, but it is modelled on Capital International’s oldest portfolio, the Investment Company of America, which was launched in 1933. The fund is managed with a multi-manager approach, whereby the portfolio is divided into different sleeves that are managed independently by managers of different backgrounds and styles. A portion of portfolio is also made up of top picks from the firm’s own analyst teams.
Because each sub-advisor uses their own unique, research-driven approach to stock selection, the result is a portfolio that tends to be somewhat style agnostic.
The firm’s Portfolio Coordinating Group is responsible for monitoring the portfolio in real time and sets the weight between the managers and analysts within the fund, based on their outlook of the investing environment.
The portfolio is often quite different from its benchmark. For example, at the end of June, it was overweight energy and healthcare and underweight in financials, industrials, and technology. It holds 57 names, with the top 10 making up 41% of the fund. Valuation metrics currently look more attractive than the S&P 500.
The compensation structure for the portfolio is unique. Incentive bonuses are paid to the managers based on their rolling one-, three-, five-, and eight-year performance numbers, with more emphasis being placed on the longer-term numbers.
Performance has been above average, with lower levels of portfolio volatility, resulting in better risk-adjusted performance. Moreover, the fund has done an excellent job protecting capital in down markets, delivering less than 60% of the downside of the index over the past three years.
Costs are very reasonable, with an MER of 2.03% for the front-end units and 2.20% for the low-load units, both of which are below the category average. The lower fee hurdle will help in this category where outperformance is often very difficult.
Given the emphasis on risk management, I wouldn’t expect this fund to shoot the lights out, but I would expect it to deliver index-like or better returns with volatility levels that are slightly better than the broader market.
All these factors add up to a compelling reason to consider this fund a core U.S. equity holding.
Fidelity Small Cap America Fund (FID 261 – Front End Units, FID 061 – Low Load Units) – Like the Fidelity Canadian Large Cap Fund discussed above, it has been a tough couple of years for this U.S. small cap offering. Managed by Steve MacMillan, it has struggled to keep pace in the growth rally in 2016, 2017, and the first half of this year. However, as volatility has returned to the markets, this Fund has begun to show signs of why it has been one of my favourites for the past few years. To the end of September, the Fund was posting above average returns, and modestly outpacing the peer group. However, in October, the Fund outpaced the peer group by more than 550 basis points, as the defensive positioning and focus on quality has seen its holdings fall significantly less than the peer group and market.
Looking at the environment, Mr. MacMillan believes a cautious positioning is warranted and has been adding more exposure to the more defensive sectors including utilities, consumer staples, real estate, and cash. At the end of September, the Fund held nearly 10% in cash. The portfolio remains concentrated, holding roughly 50 names with the top ten making up slightly more than half of the Fund.
In the small cap space, this remains one of my favourites for the disciplined management process, focus on quality and downside protection offered.
Manulife World Investment Fund (MMF 4336 – Front End Units, MMF 4236 – Low Load Units) – I have been a fan of this high quality international equity fund for years now. It is managed by Calgary based Mawer Investments and is a mirror of their highly respected Mawer International Equity Fund. Lead manager David Ragan and his team use a fundamentally driven, bottom up investment process that looks to find well-managed, wealth creating companies that are trading at discount to what the Managers believe it to be worth. They look for companies that have both a history of, and the potential to continue generating a high return on invested capital. They are looking for companies anywhere in the world, outside of Canada and the U.S. While the Manager is aware of the macro environment, they focus the majority of their efforts on bottom up security selection. In the current environment, the Manager notes that valuations are high, and as a result, he remains cautious. He has a high level of confidence in each of the companies in the Fund, however concedes that if there were a significant correction, all stocks are likely to be sold off heavily. However, with their focus on quality, I expect that this Fund is likely to hold in better than most of its peers and has the potential to bounce back more quickly.
Costs are a bit higher than average, but given the longer-term performance, focus on risk management, and volatility profile, I believe this to be an excellent international equity offering. Further, if you are using it in a fee-based account, you can access this fund in an F-class version more cheaply than you can buy it from Mawer directly.
BMO Monthly High Income II Fund (GGF 619 – Front End Units, GGF 941 – Low Load Units) – Managed by the team of Kevin Hall and Michelle Robitaille, this Canadian dividend fund has the goal of providing a high and consistent level of monthly income, with a very modest level of volatility. It has done that, paying a monthly distribution of $0.06 per unit, which equates to an annualized yield of just shy of 5.8%.
The Fund has struggled in the past year or two as market leadership has been focused on the “growth at any price” type companies, which in Canada has included many high flying cannabis names. Given the lack of a dividend offered by such companies, they are not going to be found in this fund. Instead, you have a portfolio of high yielding mid and large sized companies across a wide range of industries. Not surprisingly, the largest sector weights are in the highest yielding including financials, energy, real estate, and utilities. About half the Fund is in large cap names with the rest in small and mid-cap names. The dividend yield of the underlying portfolio is well above both the index and peer group.
The portfolio currently has a value tilt to it, offering a level of valuation that is more attractive than both the benchmark and peer group. While valuation may skew towards value, the underlying companies are still poised to deliver earnings growth in the coming quarters. This combination makes for a strong potential of share price appreciation, if you have the patience to wait out a growth focused market. As equity market volatility spikes, I would expect this Fund to hold up better than the index and peer group.
Looking ahead, the Manager remains positive on Canadian equities, citing the announcement of the trade deal between Canada, Mexico and the U.S., good earnings growth, rising oil prices, and a strong U.S. economy as key reasons for optimism. Still, the portfolio positioning remains somewhat defensive, which is likely warranted as we head into a potentially volatile period.