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When it comes to financial services, it would seem that the Dynamic Financial Services Fund has had a long-term lock on the marketplace, having topped the financial services equity fund category’s performance rankings over the 10-, 5- as well as 3-year periods ended Aug. 31, 2018 (at 7.8%, 14.9% and 15.6% respectively). The fund consistently rates a monthly FundGrade A Grade and has won the FundGrade A+® Award twice. While picking winners has been an essential element in its success, though, fund manager Yassen Dimitrov assigns equal credit to avoiding losers, an achievement borne out by the statistics.
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.
Notes and Disclaimers
© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual 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. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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