The fund invests in a mix of income-focused equities and fixed income, with
a decided focus on corporate bonds. It has a tactical mandate and can
invest anywhere in the world. At the end of March, it had 55% of its
portfolio invested in the U.S., 27% invested in Canada, with the rest
The investment approach is somewhat style-agnostic, and involves an
analysis of an investment candidate’s entire capital structure. This
provides a very holistic view of the company, allowing the managers to be
opportunistic and invest in the most attractive part of the company. In
addition to the fundamental review, the management team focuses on many
qualitative aspects of the company, such as management, disclosure, and
governance. The team also develops a comprehensive outlook for economic
growth, interest rates, capital market conditions, and geopolitical
tensions, which helps identify the asset classes and sectors that are most
likely to benefit.
In the equity sleeve, the focus is on higher-yielding instruments including
REITs, and infrastructure, as well as more traditional dividend paying
stocks. The underlying yield of the fund’s equity holdings was recently
approximately 3.5%, which is well above the index and peer group.
While the stock selection process is bottom-up focused, the sector mix is
consistent with a yield-focused portfolio, with overweights in real estate,
utilities, and energy infrastructure plays. The managers like
infrastructure as an asset class, because it quite often will have revenue
streams that move up with inflation.
On the fixed-income side, the focus is on corporate bonds. The managers can
invest in government bonds but will typically do so only when they are
being very defensive. Given the outlook for rising interest rates, they
expect credit spreads to tighten, particularly in high yield bonds, which
is why they have taken a significant weight in the non-investment grade
space. They also hold some floating-rate preferred shares and some
floating-rate loans. This will help lessen the duration exposure of the
portfolio, protecting against any further yield hikes.
As we head into the summer, we can expect continued global growth, but a
continuation of the volatility that has characterized markets since the
start of the year. If higher volatility continues, I would expect to see
the fixed-income sleeve hit harder, given its larger exposure to high-yield
bonds. However, the quality and yield focus of the equity sleeve should
hold up better than many of the highly-levered, richly-valued names that
have been responsible for much of the recent market moves. Over the long
term, I expect the fund to continue to deliver average or better returns
with lower levels of volatility.
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
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.
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