According to MSCI Inc.’s ESQ Quality Score, the Dynamic Financial Services
Fund has a 31.4% exposure to industry “leaders” and no exposure to industry
“laggards.”
“Our focus is on companies with sustainable growth and profits,” says
Dimitrov. “We stay away from companies with weak balance sheets or
structural problems. We do a lot of work on balance sheets and income
statements, which are really an extension of the balance sheet.”
As for where the financial services sector – and the fund – is headed these
days, Dimitrov acknowledges growth has been “fairly slow” since the
financial crisis of 2018, but rising interest rates – a more realistic
prospect for Canada now that the NAFTA (or USMCA as it’s to be called)
haggling is done – will be beneficial. “Growth has been stronger since
interest rates bottomed out in 2016, and rising rates would be beneficial.
There’s no incremental cost, so [higher rates] can have a big impact on
earnings.”
Nevertheless, Dimitrov adds some cautionary notes to that blanket
assessment. “A lot has changed in recent years,” he says. “Taxes are down,
at least in the U.S., NAFTA has been resolved, the regulatory regime has
changed...We’re trying to find areas where there are still opportunities
for good sustainable structural growth.”
And, given that the fund has significantly reduced its portfolio allocation
in Canada, opting for a current cash component of 14% and 38% in Canadian
equities (four of the big banks, excluding Bank of Montreal, along with
Brookfield Asset Management Inc., now represent about 33%), those
opportunities may be in the U.S. rather than Canada despite the positive
prospect of rising rates here.

“We’re usually 50-50 between Canada and the U.S., but we’ve reduced our
allocation in Canada and taken out cash,” says Dimitrov. He adds that in
the quest for sustainable returns, the fund is also moving away from
traditional asset managers and towards alternative management models.
“Due to low interest rates and bond yields, institutional investors have
been challenged to generate returns, and have been turning to private
equity investments as a result,” says Dimitrov. “In fact, they have
increased their allocation to alternate investments from 5% of assets to
25% in recent years, and that’s a very significant increase.
“Traditional funds have been losing business to alternative asset managers
and index funds in part because of management fees,” Dimitrov adds. “While
traditional funds are feeling pricing pressures, index funds and alternate
managers feel no such pressures. And so alternative asset managers with
proven records and strong alpha are getting a disproportionate share of the
business.”
Dimitrov cites Brookfield – now the fund’s largest holding (other than
cash) at 6.9% of total assets – as one of those alternates that holds
particular promise. “Brookfield is a diversified company that manages real
estate as well as infrastructure, credit, and renewable energy assets,” he
explains. “Coming up, they’re launching a new infrastructure fund, a credit
fund, a real estate fund in Asia, so there’s growth potential.
“Brookfield has been delivering internal rates of return (IRR) in the mid
to high teens for a few years now,” Dimitrov adds. “They’re continuing to
get an increased allocation from us going forward. They keep performing
well, so we keep buying more.”
Olev Edur
is an experienced financial and business journalist and a frequent
contributor to the Fund Library.
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