Montreal firm Heward Investment Management recently celebrated half a decade of outperformance of its Canadian dividend fund, which has consistently beat the TSX while boasting remarkably low levels of volatility—any advisor looking for a solid, stable investment for retiring boomers will have to be impressed.
The numbers: While the S&P/TSX Total Return Index returned 11.01% between June 30, 2009 and June 30, 2014, the Heward fund returned 13.15%, beating the index by more than 2%. In an interview with WP, Renato Anzovino CFA, vice-president and portfolio manager at Heward, relates the good story around the fund.
According to Anzovino there is a very specific, laser-like focus to the fund —find companies that are not just paying dividends, but that are actively increasing dividend payments. “We focus on companies where dividends are not just being paid, but the dividend payouts are increasing--this is key," says Anzovino. "If Management indicates are they talking about wanting to increase dividends...that is where we want to be. Our picks have to be in an industry where business is increasing.
The company doesn't look at companies that may pay dividends but are in declining or mature industries. "These companies don't increase dividends, and could be vulnerable to dividend cuts," says Anzovino. Avoiding the sharp drops that come with a dividend cut is key to performance. “That's something we keep close eye on. Every quarter we go through this stuff. If we are worried management is going to stop or cut, we cut the stock from the fund," he says.
In the financial sector Heward picked up Canada Western Bank rather than the big Canadian banks, which are mature. "Western Canada is booming," says Anzovino. "That stock more than doubled."
The result of the disciplined, focused approach is found in the positive returns, but also the impressive 'beta' on the fund. As any advisor knows, 'beta' is a standardized calculation of systematic risk, based on fluctuation of returns relative to the overall market. For the five-year period ending June 30, 2014, the Fund's beta was 0.49, which compares very favourably to the TSX Index's beta was 1.00. "The idea makes a lot of sense. We had a theory, it worked out. It makes sense," says Anzovino.
The company had a third-party, RBC, back test the fund 25 years and found a similar performance. The fund is recommended for clients seeking tax-efficiency--the dividend tax break is key here--but the lower volatility and long-term growth is appealing. "For boomers looking for conservative investments, this is important. We're not major traders. By adhering to proven principles of value investing with rigorous discipline, we beat the Index," he says. The low volatility, is "increasingly relevant to Canadian investors."
Company literature suggests that by 2036 a quarter of Canadians will be over 65 years of age. These aging investors are expected to have a reduced appetite for risk and an increased interest in capital preservation. "A lot of people are finicky. They are 66 or 67. They want stability. Speculative commodities might do well for a while. But then the sector craters. This fund might underperform commodities for a while...when everyone wants commodities stocks...but that sector is cyclical.Over the long term companies that are increasing dividends are doing well. Over time, this works," he says. The proof is in the stats.