New fund aims to provide retirement income solution

Liquid alt offers low correlation to major indices, investing mainly in dividend-paying or distribution-paying equity securities

New fund aims to provide retirement income solution

Interest-rate policy and the aging baby boomer demographic have combined to present advisors with their most pressing quandary – making sure retirees don’t outlive their savings.

Dynamic Funds has stepped up with what it believes is a fitting solution by launching the Dynamic Retirement Income+ Fund, a liquid alternative created for investors nearing or in retirement who are seeking income and the opportunity for capital appreciation.

Targeting a yield of 5.1% for the F Series (based on the Fund’s launch price), the Fund seeks to provide total returns that have lower correlations to major indices in the form of income and long-term capital appreciation by investing primarily in dividend-paying or distribution-paying equity securities.

Managed by Oscar Belaiche, Senior Vice President & Portfolio Manager, the Fund also uses leverage, mainly through borrowing and to a lesser extent through derivatives and short selling.

Belaiche told WP there is significant need for retirement income for investors, and the environment for dividend or distribution paying securities is attractive. With about half the baby boomers retired and the other half set to retire over the next decade, the need to replace wages and salaries with an income stream from their investments is paramount.

The unprecedented monetary intervention spurred by the global health crisis has driven down short-term interest rates. With cash typically earning around 0.25%, the Canadian 10-year bond at 0.88%, and a Canadian corporate bond portfolio offering somewhere in the vicinity of 1.8% these are all very low historically.

Belaiche said: "The spread between the average dividend yield for the TSX and 10-year Government of Canada bond is close to all-time highs, and in the US, [the S&P 500 vs. 10-year Treasury yield] is close to levels not seen since the late 1950s in terms of that spread. If you're looking to retire, how do you create that retirement income stream? It's important to get a yield from your investments."

The Fund’s manager believes the underlying investments, the companies, offer that “sustainable yield” to provide that source of income. Dynamic Funds’ Equity Income Team, which Belaiche heads, targets dividend paying or distribution paying securities through two types of funds – “milk” and “milk +”.

The analogy refers to a cow’s ability to keep producing milk – or in this case income – as opposed to other products that offer one-off “meat” offerings. The “milk +” takes it further and includes income and capital appreciation, while “milk” offers pure income to form part of a retirement income solution. 

“Another way to look at it is it's a low turnover ‘dividend bond fund’, which pays an income stream,” Belaiche said. “If the price of the Fund goes up, then the yield will go down just like a bond. And if the price of the Fund goes down, then the yield will go up. We're fixing a monthly distribution at a particular yield that we think we can earn.”

For advisors looking to construct a retirement income strategy, that typically starts with the client’s CPP and OAS, along with an allocation of cash to draw down on. Then there is fixed income, but if the yield is insufficient, you require an equity income solution, which can include the “milk” and “milk +” funds. On top of that, a client may then want some value or growth exposure.

Belaiche said: “The advisor has to create that income stream for the retiree and we believe this Fund can fit beautifully as part of a solution.”

“There is an expression called cross-asset investing, which is the ability to invest in stocks or bonds, or futures or derivatives or currency. But in this case, I call it ‘cross-asset equity income investing’, where we can invest in Canada, the US and internationally, and in emerging and developed markets.”

He added: “We have the expertise because we have a lot of different type of funds in our lineup that do all or parts of [those things]. We can draw on our 23-member investment team that covers not only Canada, U.S. and international but also all 11 GICS sectors, which we have expertise in from a bottom-up perspective.”

Within that, the team invests in equities, preferred shares, closed-end funds, and business development corporations that all pay dividends, REITs that pay distributions, as well as options strategies including put writing that create income.