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A-Grade Dynamic Financial Services Fund invests successfully in Canada’s most-watched stocks
9/25/2018 7:18:56 PM
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DUE DILIGENCE
Objective research, analysis, and insight on investment funds in Canada from an acknowledged industry expert



By Dave Paterson  | Wednesday, May 09, 2018


 



The financial services sector is a cornerstone the Canadian equity markets, and our banks are some of the strongest in the world. The Dynamic Financial Services Fund builds on Canada’s strength, and improves on it, by finding the best financial services companies around the world. The strategy has been a successful one, as the fund produces consistent first-quartile returns over both long and short terms, has a consistent FundGrade A grade, and has won the FundGrade A+® Award twice, in 2014 and 2017.

Manager Yassen Dimitrov uses a high-turnover, growth-at-a-reasonable-price approach to stock selection, looking for financial services companies that have excellent management teams, a credible business strategy, a competitive advantage, and a proven track record. In Canada, that boils down to a handful of giant financial services companies, most of which are well-known names with probably close to 100% analyst following.

Top holdings as of March 31 included, as you’d expect, Bank of Nova Scotia (TSX: BNS), Royal Bank of Canada (TSX: RY, Canadian Imperial Bank of Commerce (TSX: CM), Toronto-Dominion Bank (TSX: TD), and Brookfield Asset Management Inc. (TSX: BAM.A). The fund is concentrated, as befits its name, with only 24 names in its portfolio recently and the top 10 accounting for 60% of portfolio holdings. In addition to the big banks, it also holds a number of other strong financial firms like Blackstone Group LP (NYSE: BX), Global Payments Inc. (NYSE: GPN), and Air Lease Corp. (NYSE: AL).

Dimitrov seeks out companies that are trading at the lower end of their valuation range, and will sell them as they approach the higher end of the range. Definitely not a buy-and-hold fund, Dimitrov’s strategy is very active and has demonstrated extremely high levels of portfolio turnover. In 2016, for example, turnover was more than 500%, but the fund produced a return of 21.1% for the year as a result, compared with 7.4% for the Financial Services Equity category. For the past five years the fund’s turnover has averaged more than 200% per year. This level of trading has added approximately 35 basis points in cost.

But even with the additional costs, performance has been strong, matching its index, and outpacing many of its peers. To March 31, the fund posted a 5-year average annual compounded rate of return of 15.2%, besting its peer group at 11.7%. Volatility has been well below the index and category average, and the manager has done an excellent job of protecting capital in down markets. For the past five years, the fund has experienced on average approximately only 20% of the downside of the index. Part of this strong downside protection comes from the manager’s willingness to hold cash tactically, and to use index hedges when valuations become extended.

Apart from the narrow focus of the fund, another caution is the fund’s relatively high MER, which comes in at 2.47%. Still, for those looking for more diversified financial services exposure, this is a great fund to consider.

Dynamic Financial Services Fund
Fund company:
Dynamic Funds
Fund type:
Financial Services Equity
FundGrade Rating: A
FundGrade A+ Award: 014, 2017
Style: Large Cap Blend
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Fair
Manager: Yassen Dimitrov since July 2010
MER: 2.47%
Fund code: DYN201 (Front-end load)
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

© 2018 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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