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Dave Paterson’s fund news roundup
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Objective research, analysis, and insight on investment funds in Canada from an acknowledged industry expert

By Dave Paterson  | Wednesday, August 08, 2018


Every month in my Top Funds Report newsletter, I write a summary of my views about specific funds and fund companies based on queries from readers. These are often funds that have undergone management changes or are new issues, a little less well known, or not as widely covered as some of the high fliers. Here’s a recent roundup of my take on funds from Franklin Templeton, VanEck, Mackenzie, PIMCO, and Steadyhand.

Franklin Mutual Global Discovery Fund (TML180). Last October, Franklin Templeton announced that Philippe Brugere-Trelat, long-time manager of this fund, would retire in May. The transition was very gradual, and given the team management approach and the manner in which the transition took place, any disruption to the fund management is likely to be minimal.

In January, Christian Correa was added as a co-manager along with current co-manager Tim Rankin under lead manager Peter Langerman, who is chairman, president, and CEO of Franklin Mutual Series. Mr. Rankin is well versed in the process used by the Franklin Mutual Group. He has more than 20 years’ experience in the iindustry, of which 14 have been with Franklin Mutual.

The management process is very much a bottom-up approach that looks for undervalued stocks, with an identifiable catalyst that can unlock share price appreciation. This is a go-anywhere approach that allows the fund to invest in companies of any size anywhere in the world.

The portfolio is broken into three different components. The first is relative value, which is focused on undervalued stocks. This is typically the largest slice of the portfolio. At the end of June, roughly 90% of the equity exposure was in relative-value names. The other components of the fund include merger arbitrage and distressed companies. Combined, these sectors represented approximately 4% of the equity weight at the end of June. The amount invested in each sleeve will be dependent on the opportunity set.

Given the defensive focus of the fund, performance has lagged both the index and peer group over most time periods. However, historically it has held up well in periods of extreme market volatility and tends to experience less fluctuation than the index or peers.

VanEck Vectors Vietnam ETF (NYSE: VNM). I was asked by an advisor about the best way to invest in Vietnam, one of the fastest growing economies in the world. Its improving living standards and rising incomes are paving the way for it to emerge as one of the more potentially attractive investment opportunities. Vietnam has a population of 95 million, nearly half of whom are under 30. There has been significant urbanization and industrialization, with more expected to come.

However, screening mutual funds and ETFs based on country weights is a tricky proposition at the best of times. In Canada, a quick search revealed that there are no dedicated mutual funds or ETFs that focus exclusively on Vietnam. The fund with the largest exposure to Vietnam is the Franklin Templeton Frontier Markets Fund, which had approximately 14% allocated to the country as of the end of October.

In the U.S., the VanEck Vectors Vietnam ETF was the only dedicated Vietnam ETF currently available. It invests in companies that are incorporated in Vietnam or generate at least 50% of their revenues in that country. At the end of June, the portfolio consisted of 27 positions, representing roughly 70% of the market capitalization of the Vietnam equity market.

VNM’s sector mix looks a lot like you would expect an emerging-market country to look – heavy emphasis on consumer stocks, financial services, and real estate. Combined, these sectors make up 70% of the fund.

Performance has been strong over the past year, with the fund advancing 8.1% to the end of June in U.S. dollar terms. Over the long-term, however, performance has been somewhat disappointing, with the fund posting an average annual compounded rate of return of just -1.0% for the past five years.

For those looking for dedicated Vietnam exposure, this is really the only way to access it. But it is risky, as it is a single-market ETF focused on a very young economy. Unless you need dedicated Vietnam exposure, you’re likely better off looking at a broader emerging markets fund, or if you are really looking for something more speculative, a frontier markets fund.

Mackenzie Global Leadership Impact Fund (MFC5279). Mackenzie launched this interesting new fund last October. It’s unique in that it looks to invest in companies that promote gender diversity and women’s leadership. The fund is based on the Pax Global Women’s Leadership Index, which scores companies based on their gender diversity, based on such factors as the percentage of women on the board of directors, percentage of women in key leadership roles, and whether the company is a signatory to the Women’s Empowerment Principles.

In addition to the gender score, each company must meet certain environmental, social, and governance (ESG) criteria, or sustainability standards. The fund also avoids companies involved in weapons and tobacco products. These screens whittle the MSCI World Index down from more than 1,600 names to roughly 400.

The companies are then weighted based on their gender score and other risk factors. While the fund has a go-anywhere mandate, sector weights are capped at +/- 5% of the weight of the MSCI World Index. It is expected the initial geographic mix will be 60% U.S. and 40% international equities. The index will be rebalanced and re-weighted annually.

One concern with funds that use screening factors to both eliminate and weight stocks is the potential performance differential. For example, between January 2012 and September 2017, the PAX Ellevate Global Women’s Index delivered an annualized 11.2%, while the broader MSCI World Index returned 11.8%. For the 12 months through the end of June, the PAX Index advanced 12.2%, while the MSCI World Index gained 9.8%.

It is far too early to be evaluating the investment merit of this fund. However, the index performance and unique mandate may make this an interesting choice for those who are looking for more socially-aware investment options.

PIMCO Monthly Income Fund (PMO005). In a very volatile bond market, this global-focused offering continued to outperform not only the Canadian bond funds but most of the global offerings as well. This outperformance can be attributed to PIMCO’s diverse global team and active management style. They use a mix of top-down economic analysis and bottom-up security selection to consistently identify mispriced opportunities while maintaining a focus on generating yield.

At the end of June, the fund had a very modest duration of 3.41 years, focused mostly on its high-quality, government-related security holdings in North America.

Looking ahead, this remains one of the most consistent bond offerings around. Last year, the fund was also launched with an ETF structure (TSX: PMIF). Its costs are the same as the F Class mutual fund, making it a great way for do-it-yourself investors to access this top-shelf bond offering.

Steadyhand Income Fund (SIF120). With a quarterly gain of 1.57% to June 30, this fixed-income-focused balanced fund placed in the first the Canadian fixed-income market but failed to keep up with its more balanced peers. With rising bond yields putting pressure on the two thirds of the fund that is invested in fixed income, the equity sleeve was a positive contributor, helping to buoy the fund.

The focus of the equity holdings is on attractively-priced companies that have the potential to grow their dividends in higher-yielding sectors such as financials, pipelines, and industrials. Throughout the quarter, the manager has been actively reducing the risk exposure in the fund, but still prefers corporate and provincial bonds over governments for their higher yield and lower interest rate sensitivity. With the benefit of some equity exposure, this remains a strong pick for those looking for a fixed-income fund in a rising yield environment.

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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