Trade higher yield for lower volatility
For CC&L Core Income and Growth, the goal is to outperform a typical benchmark-focused balanced portfolio while achieving less volatility. Not easy, especially today.
The fundamental equity team, co-led by Andrew Zimcik, portfolio manager and director, and Gary Baker, portfolio manager and director, at Vancouver Connor, Clark and Lunn Investment Management Ltd., more than met these targets on most medium and long periods. Additionally, according to recent numbers from Morningstar, the fund has posted impressive first-quartile returns for a variety of time periods ranging from three months to 10 years.
The $135 million silver-winning fund, which is part of Morningstar’s Tactical Balanced category, had a 10-year average annual return of 7.4% as of September 20, 2022, well ahead of the category average of 4 .8% and the 6.0% of the Morningstar benchmark.
In the shorter term, for the eventful year to date ended September 20, the fund lost 7.5% while the category average posted a larger loss of 10.2% and the comparable Morningstar Index lost 12.0%.
On average, the equity component of the balanced fund has outperformed the S&P/TSX Composite Index by about 15% with about 20% lower volatility over the past 10 years, said Tim Elliott, Toronto President of CC&L Funds, an affiliate of the CC&L Financial Group.
Income must last
The team focuses on companies that pay “sustainable dividends,” which could mean avoiding entire sectors of the TSX where dividends are unreliable, as well as individual companies that lack stability and prospects. steady growth.
“Non-dividend payers and unsustainable dividend payers can have a very negative impact on risk-adjusted returns, and avoiding them is an important part of our investment process,” says Zimcik. “We steer clear of high-flying startups and do not chase flavor du jour.”
Given that certain sectors of the Canadian market such as healthcare, consumer products and technology do not contain an abundance of reliable dividend-paying companies, the team is looking to the United States for opportunities in certain sectors to improve portfolio diversification. For example, holdings include Constellation Brands Inc. Coca-Cola Co, Texas Instruments and Microsoft Inc. The fund’s foreign content weighting is around 20%, made up of reliable US-based dividend payers.
In Canada, the investment universe on the equity side is made up of 400 securities that can be large, mid or small capitalization. The CC&L team performs rigorous analyzes to select those that are best suited to the portfolio at any given time. Currently, there are about 50 holdings on the equity side. The turnover rate is around 40% per year, which is more active than some balanced portfolios, as the team adjusts the portfolio to changing circumstances.
Betting on big pictures
“We spend a lot of time analyzing what might happen in the economy and what kinds of businesses will benefit,” Zimcik says. “The big picture helps dictate the type of stocks we buy or sell, as well as our fixed income exposure. It is the lens through which we evaluate companies and determine our asset mix. »
Within fixed income, the portfolio focuses on high quality corporate bonds issued by blue chip Canadian companies. Fixed income securities currently represent just under 20% of the fund’s assets and are generally between 10% and 25%.
Earlier this year, the team reduced the fixed income weighting by a few percentage points when it became clear that inflation was heating up and interest rates would be raised by central banks.
“It has been a difficult time for fixed income, but we still consider it an important diversifier as it provides exposure to a different asset class and can add stability” , says Zimcik.
A series of interest rate hikes by the Bank of Canada and other central banks around the world in a short period of time has unsettled investors, and there may be more hikes to come.
The team expects greater volatility in the economy and stock market. While a recession isn’t a foregone conclusion and isn’t yet reflected in the stock market, “many indicators are flashing yellow or red,” Zimcik said.
Historically, the Canadian stock market has sold 30% to 35% from peak to trough during recessions, says
Zimcick. With the S&P/TSX Composite Index down just under 10% this year at the end of September, a further sell-off is likely if a recession occurs.
“The market typically bottoms out when central bankers go from hawkish to dovish, and we’re probably a long way from that,” Zimcik said. “We are still fully invested but we are quite defensively positioned. If we see things changing, such as an economic rebound or a stock market bottom, we will reposition. »
With the market looking vulnerable to further declines if corporate earnings disappoint investors, the fund focuses on stable, low-risk stocks that can withstand a cyclical downturn.
The team recently added to the fund’s position in Hydro One Ltd. (H), an electric transmission and distribution utility serving Ontario. Stakes were also increased in Element Fleet Management Corp. (EFN), a provider of commercial vehicle fleet management services whose leasing business is benefiting as more companies outsource fleet transportation.
“We expect inflation to stay elevated for some time,” Zimcik said. “We like companies whose revenues are tied to inflationary factors or who can pass cost increases on to customers by raising prices. We stay away from companies whose margins could be reduced.
Another recently added position is Tourmaline Oil Corp. (TOU), an energy company with a strong natural gas focus. It has generated impressive earnings growth as well as an attractive dividend payout record.
Renewable energy is a portfolio theme, with holdings set to benefit as the world shifts to cleaner energy sources. Holdings include Northland Power Inc. (NPI), Indo Borax & Chemicals Ltd. (524342) and Brookfield Renewable Partners LP (BEP.UN).
Canadian banks make up a large portion of the fund, due to consistent growth and healthy dividends. Royal Bank of Canada (RY) and Toronto Dominion Bank (TD) are the top holdings, and financial stocks are the sector’s largest weighting at 23%.