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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