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Funds of Note
NinePoint Diversified Bond Fund (NPP 018 – Front End Units, NPP 318 – Low Load Units)
Managed by a team headed by veteran manager Mark Wisniewski, this is an actively managed diversified North American-focused bond fund with a flexible mandate allowing the manager to invest across the capital structure. The fund takes an absolute return approach and aims for a 4% to 6% return, net of fees over a rolling three-year period, regardless of interest rates. It is managed using a disciplined investment process blends top-down macro views, thematic tactical trades, and bottom-up security selection. Management has a range of tools at their disposal including 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.
Performance over the long-term has been decent, with an annualized return of 2.9% over the past three years, and 3.1% over the past five years ending September 30. The three-year number is well above average, while the five year is in line with the average. However, when we factor in the risk level of the fund relative to other global bond funds, the risk adjusted numbers are excellent. For example, according to Morningstar, the annualized five-year standard deviation of the fund was 2.7% compared to 4.9% for the global fixed income category. This results in a Sharpe Ratio that is significantly higher, 0.84 for the fund versus 0.54 for the category. Further, the fund has negative down capture ratio, meaning that it has historically been positive when the broader global bond market is negative. This makes it an excellent diversifier when used in a portfolio.
In a recent commentary, the manager noted that with the deterioration in economic data, they are expecting that markets are likely to remain volatile. In this environment, they have positioned the portfolio somewhat defensively, with a higher exposure to higher quality corporate bonds, and a lower duration with their corporate bonds.
At the end of September, the fund held 28% in government bonds, 61% in investment grade corporate bonds, and a very modest 7% in high yield issues. Approximately 86% of the portfolio is invested in North America, with the balance roughly split between France and Germany. They have moved the overall portfolio curation out to 6.5 years from 5.4 years in June. This may result in gains if rates move lower.
Despite the modest absolute return numbers, the defensive positioning of the portfolio, combined with the experienced management team and active investment process, this remains one of my top bond fund picks.
Sentry Small/Mid Cap Income Fund (CIG 50221 – Front End Units, CIG 53221 – Low Load Units)
In September, it was announced that long-serving manager Michael Simpson had left Sentry. No reasons for his departure were provided. While Mr. Simpson had been a named manager on the Fund, most of the day to day management duties were the responsibility of Aubrey Hearn, who remains as lead manager on the Fund. Mr. Hearn is being joined by Jack Hall, who is co-manager on the fund. Mr. Hall has been with Sentry since 2012.
Capital Group U.S. Equity Fund (CIF 847 – Front End Units, CIF 827 – Fee Based Units)
Last time around, I noted some concern around the recent performance of this Capital Group offering. With a gain of 0.67%, it again trailed the S&P 500, which gained 2.9% in Canadian dollar terms. It also trailed the category average of 1.9%, resulting in another fourth quartile return in the quarter.
There were a few reasons for the underperformance. The first was its significant overweight in energy, which lost nearly 10% in the quarter. Facebook, one of its largest holdings lost 6.5% while the index gained nearly 3%. The fund also missed out on potential gains by not having any exposure to AT&T, which rallied sharply in the quarter. An overweight to materials stocks was another detractor with the sector losing 7%. A final reason for the underperformance was the cash balance which averaged 7.5%. Any cash balance can be a headwind in a rising market.
Earlier in the summer, it was announced that some additional portfolio managers were being added to the portfolio. As a result, it is expected the number of holdings will triple, moving from approximately 60 to about 180. This move is expected to increase the diversification of the fund and provide a more balanced sector mix. Given this change, I will monitor the fund for another quarter, but I am at the point where I need to see an improvement in the risk reward metrics soon.
Manulife U.S. Equity Fund (MMF 4504 – Front End Units, MMF 4704 – Low Load Units)
Mawer Investments, the management team at the helm of this offering, continues to be one of the better managers around, consistently delivering above average returns on both an absolute and risk adjusted basis.
Over the quarter, the fund gained 4.2%, bringing the year-to-date number up to 19.5%, outperforming both the category and index. The fund’s financial, technology and consumer names were the biggest contributors to the outperformance, while materials and healthcare muted gains. Alphabet, Verisk Analytics, and Procter & Gamble helped boost returns.
Looking ahead, the managers remain defensive. There is a lot of “noise” affecting the markets including the ongoing trade war, central banks, elevated debt levels, Brexit, and slowing economic growth. The managers continue to focus on high quality companies with strong recurring revenue streams. They believe these companies are well positioned to benefit from the low interest rate environment and are likely to hold up better if we see a meaningful slowdown in the economic environment.
Fidelity NorthStar Fund (FID 253 – Front End Units, FID 853 – Low Load Units)
Managed by the team of Joel Tillinghast and Dan Dupont, this value focused global all-cap offering has certainly struggled so far this year. Year-to-date the fund is down 1.4% to the end of September, while the MSCI World Small Cap Index is up more than 13% in Canadian dollar terms. The main reason for this underperformance is the fund’s value focus. Value stocks have dramatically trailed growth stocks of late. While we did see a quick rotation from growth into value in September, the trend has not sustained, and growth names are again outperforming. That won’t always be the case, and when we do see a sharp uptick in volatility this fund will be expected to outperform. The Fund tends to do a solid job of protecting investor capital in down markets, participating in roughly 60% of the market downside over the past five years.
Unfortunately, with the value focus, the upside participation of the fund has significantly trailed its peers. To help address this, it was announced on October 24 that Kyle Weaver would be added to the fund as a manager, rounding out the team of Tillinghast and Dupont, starting November 1. Mr. Weaver has not yet run any mandates for Canadian investors but has been active in some U.S. offerings. Under the new structure, Joel Tillinghast will manage half the fund with the balance split evenly between Dan Dupont and Kyle Weaver.
Mr. Weaver uses a more growth focused approach which would be expected to be rather complimentary to the current management team. The U.S. exposure in the fund is likely to increase, as this is the area where Kyle has extensive experience.
I will be watching this change closely to see if it results in any further erosion in the risk reward profile of the fund.
Invesco Emerging Markets Fund (AIM 2143 – Front End Units, AIM 2145 – Low Load Units)
With macro headlines dominating investor sentiment, emerging market equities fell by nearly 3% in the third quarter. In this environment, the Invesco Emerging Markets Fund rose by 2.8% for the Series A units. Helping drive this outperformance was the fund’s overweight in China. While this may seem counterintuitive given the uncertainty created by the ongoing trade war with the U.S., the fund’s China holdings are more domestic and consumption focused businesses, which tend to be less effected.
The manager’s have been finding more opportunities in small and mid-cap stocks in the past few months. According to a recent commentary published by the managers, the reason is small and mid-cap names have largely been overlooked by investors, as most of the fund flows have been going into large cap focused ETFs.
Looking ahead, the managers note that global growth is slowing but don’t see a recession as imminent. This combined with continued uncertainty is likely to result in higher levels of market volatility going forward. Further, they believe that given the uptick in volatility, broad diversification is recommended.
While the macro headwinds can create havoc in the investment markets, the investment managers use a fundamentally driven, bottom up investment process to try to find high quality, well managed companies with sustainable competitive advantages that can do well in most environments. The portfolio is unconstrained and can invest in companies of any size. At the end of September, half of the fund is invested in small and mid-cap names.
Given the investment team and disciplined investment process, this remains my top pick for emerging markets.