How an award-winning dividend fund manager Conquer all of His peers

Building a diversified Canadian portfolio necessarily means looking much different than the Samp;P/TSX composite index.

“So much of this index is dominated by the banks, the energy and materials companies,” stated Conrad Dabiet, a portfolio manager at Manulife Asset Management.

“But we could find opportunities in businesses that are not as followed, or are not large weights in the index. And we have managed to do this without giving up much of what you would expect from a dividend fun”

Specifically, that means a good yield, the prospect of excellent revenue growth and the stability which typically comes out of a basket of dividend payers.

By conducting a fund that combines balance among Canadian businesses with strong investment principles, Mr. Dabiet and his staff have been able to realize award winning returns.

U.S. fund-research firm Lipper Inc., a unit of Thomson Reuters, Wednesday night passed out awards to Canadian mutual funds and exchange-traded funds for superior returns in a wide set of classes within three-year, five-year and 10-year periods. (See the award winners )

The Lipper Fund Awards recognized about 80 Canadian mutual funds and exchange-traded funds, such as Manulife’s Dividend Income Fund, which beat all of its peers in earnings over the previous three and five decades. (As the finance started in 2012, it was ineligible for the 10-year category.)

That fund posted annualized returns of 10 per cent and 14 percent, respectively, over those time frames.

With two-thirds of its worth based in three businesses — financials, energy and materials — and with comparatively little variety in engineering, consumer and health-care industries, the Samp;P/TSX composite index gives a shoddy template for equilibrium in portfolio construction.

However, Mr. Dabiet stated he has little difficulty in locating worthy Canadian titles outside the big three businesses. “Health care is one that is definitely under-represented. But in technology, there are opportunities out there.”

Information technology together with consumer discretionary and principles stocks accounts for close to 25 percent of the fund’s holdings, while the key Canadian indicator has about half that amount of vulnerability to those three businesses.

Meanwhile, the fund is less heavily traded in financials, at about 17 percent, compared with the index’s financial sector weighting of 35 percent.

The listing of the fund’s top holdings also differ considerably in the typical Canadian dividend fund.

The single biggest holding is in Waste Connections Inc., the Toronto-area solid-waste-services business.

“It’s a company that’s straightforward. It is run by a solid management team with an awesome history of creating shareholder value,” Mr. Dabiet stated. In addition, it has high recurring earnings, strong cost management and margin growth, and generates a whole lot of free cash flow.

Those qualities add up to a persuasive earnings-growth outlook sufficient to finance dividend payouts — and reinvest in the business itself, ” he said.

And it’s that type of company that’s well positioned for a rising-rate environment, Mr. Dabiet stated. While certain rate-sensitive sectors and high-yielding stocks could be exposed as interest rates continue to rise, there’s protection in companies that could continue to expand, he said. He said he believes Telus Corp. and Pembina Pipeline Corp., which will also be top fund holdings, to be great examples.

“Regardless of where interest rates are down the street, they are building bigger and better companies which ought to be worth more over time.”

Another of the fund’s significant holdings is in cash, which represents nearly 20 percent of resources and reflects a more cautious stance as a consequence of current valuations.

“It is the one-year anniversary of President Trump’s election, and there has been a substantial rally in the U.S. stock market,” Mr. Dabiet stated. “We have seen a big, big jump in stock prices generally, and there appears to be lots of optimism out there.”

The fund’s sizable cash hoard can allow for both everyday adjustments in positions as well as the potential for larger moves when bulk deals arise, as they did in ancient 2016, when the Samp;P/TSX composite index began the year with a 9-per-cent decrease over three weeks.

“The valuation of those businesses in fact changes much less frequently than what occurs in the current market,” Mr. Dabiet stated.

Courtesy: The Globe And Mail

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