Last updated: Dec-13-2018

Surging short-term gains for RBC O’Shaughnessy U.S. Value Fund
12/13/2018 10:55:28 PM
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By Dave Paterson  | Wednesday, October 25, 2017


The RBC O’Shaughnessy U.S. Value Fund is a two-time FundGrade A+® Award winner (2012, 2013) whose longer-term performance has fallen off recently. But given how sub-advisor Jim O’Shaughnessy of O’Shaughnessy Capital Management runs the fund, I fully expect the fund to get its mojo back in the not too distant future. In the meantime, the fund has returned an impressive 21% over the past year to Sept. 30.

In managing the fund, O’Shaughnessy and his team start with the entire U.S. equity universe of more than 3,300 names, and look for those with above-average market capitalizations. They exclude REITs, MLPs, and utility stocks from this screen, which brings the investible universe down to approximately 700 securities.

Next, screens are run that measure a company’s financial strength, earnings quality, and earnings growth. Those names that don’t meet the requirements are eliminated. Finally, the managers rank the stocks based on shareholder yield, which is a measure of a company’s dividend yield, share buybacks, and debt reduction. The names with the best yield will typically make up the portfolio.

Top holdings recently included Boeing Co. (NYSE: BA), Ameriprise Financial Inc. (NYSE: AMP), LyondellBasell Industries NV (NYSE: LYB), Valero Energy Corp. (NYSE: VLO), and McDonald’s Corp. (NYSE: MCD).

With the fund’s focus on value, the portfolio valuation numbers look considerably more attractive than the S&P 500 on every metric. For example, according to Morningstar, the fund trades at a recent price-to-earnings ratio of 15 times, compared with the S&P 500 Composite Index, which trades at 20 times. Further, the dividend yield of the portfolio is higher with the fund, providing a source of return to investors.

Performance has been somewhat disappointing over the long term, but a good portion of that can be attributed to the currency hedge that is in place. For example, for the five years ending January 31, the fund delivered an average annual compounded rate of return of nearly 13%, on a fully hedged basis. Given the changes in currency back then, there may have been approximately 600 basis points in performance resulting from the currency move. Over the five-year period to Sept. 30, the annualized return was 14%.

The fund has done well recently as value names have begun to outperform after several years of lagging. Year to date to Sept. 30, the fund has returned 12.1%, double the benchmark, while the 12-month return is 21%, some eight percentage points over the benchmark.

The fund recently rebalanced and offers higher levels of return on capital, lower reliance on external financing, and more attractive valuations than the benchmark and its peers. Also helping to make this a more attractive option is the MER, which at 1.49%, is well below average. Given this, I expect the fund to do well over the longer term, but would expect volatility levels to remain higher than both the index and the peer group.

RBC O’Shaughnessy U.S. Value Fund
Fund company:
RBC Global Asset Management
Fund type:
U.S. Equity
FundGrade™ Rating: C
FundGrade A+® Award: 2012, 2013
Style: Rules based
Risk level: Medium to High
Load status: Optional/No Load
RRSP/RRIF suitability: Good
Manager: Jim O’Shaughnessy since 1997
MER: 1.55%
Fund code: RBF552 (No-load units)
Minimum investment: $500

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.


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