Last updated: Mar-18-2019

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By Dave Paterson  | Wednesday, September 27, 2017

Most Canadian-focused dividend funds look for Canadian companies that have the ability to pay, sustain, and grow their dividends. And most do a reasonable job to meet their targets. Some managers, however, take the next step, looking for an extra boost by supporting an active investing mandate with a rigorous fundamental investment approach in the hope of delivering at least index-matching longer-term returns or better. One such fund is the Horizons Active Canadian Dividend ETF (TSX: HAL).

To find companies that are likely to give the fund that extra kick, manager Sri Iyer and his Systematic Strategies team at sub-advisor Guardian Capital, run the Canadian equity universe through screens that analyze 31 different factors, looking for positive rates of change. These factors focus on growth, payout ratios, efficiency, valuation, and investor sentiment. Further, the team also conducts a fundamental review to validate any of the potential buy candidates to ensure the rating is appropriate.

The portfolio is well-diversified, holding around 60 names, with the top 10 making up just under 30% of the ETF. The fund invests in companies of any size. Roughly 45% is invested in big cap names, with the balance invested in small and mid-caps.

At the end of August, top holdings included Royal Bank of Canada (TSX: RY), Rogers Communications Inc. (TSX: RCI.B), Exchange Income Corp. (TSX: EIF), Boyd Group Income Fund (TSX: BYD.UN), and Telus Corp. (TSX: T).

The sector mix is dramatically different than the broader Canadian market, with an overweight in energy, financial services, and consumer cyclicals. It is underweight basic materials, technology, and healthcare. Despite this overweight to the higher yielding sectors, valuation metrics look more attractive than the broader market and the peer group.

This positioning has led to underperformance in the short-term, but over the long term, the fund has outpaced the broader S&P/TSX Composite Index, delivering an average annual compounded rate of return of 9.5% for the five years to Aug. 31, compared with 8.1% for the index. Volatility, with a 3-year average standard deviation of 7.6%, has been in line with the index.

Going forward, the managers remain defensive. They are placing a greater emphasis on companies that offer higher earnings and cash flow visibility, and higher-than-average dividend yields. This would be expected to allow for better downside protection if we see a large pullback in the market.

I like the process used by the management team. It has resulted in a portfolio that I believe is better diversified than the broader Canadian market. The drawback is its cost, with an MER of 0.79%, which is well above the 0.06% MER of the iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC). Even with this higher cost, I believe the ETF has the potential to deliver index-like returns with better downside protection over the long-term.

Horizons Active Canadian Dividend ETF
Fund company:
Horizons AlphaPro Management
Trading symbol: TSX: HAL
Fund type:
ETF, Canadian Dividend & Income Equity
FundGrade Rating: B (August 2017)
Style: All Cap Blend
Risk level: Medium
RRSP/RRIF Suitability: Good
Manager: Sri Iyer, Guardian Capital
MER: 0.79%
Fees: Commissions may be payable on trades

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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