How middle market research is fund’s secret sauce ahead of reopening

Conrad Dabiet, Senior Portfolio Manager at Manulife Investment Management, on how his team’s investment philosophy has enabled them to better navigate numerous market crises

How middle market research is fund’s secret sauce ahead of reopening
Conrad Dabiet

As the bond market flounders, the spotlight is increasingly focused on dividends as investors hunt the income they require. Identifying sustainable yield is Conrad Dabiet and his team’s forte, a skill and process honed over many years that has stood up to numerous market tests[1].

Dabiet, Senior Managing Director and Senior Portfolio Manager at Manulife Investment Management, is a member of its acclaimed Value Equity Team.

Started by Alan Wicks in 1996, the team has benefited from continuity and an established culture. Dabiet joined as a rotational intern about 16 years ago, working through the global financial crisis and, of course, the crash of March last year. Being given the chance to adapt, learn and grow through these periods was vital to his career development.

The bedrock of the team’s – and Dabiet’s - progress is its investment philosophy, which is rooted in gaining a deep and strong understanding of the companies it ultimately invests in. This historically involved about 500 company meetings a year, but that number has skyrocketed since the world went remote.

Dabiet explained: “We invest a tremendous amount of time in meeting companies, learning about their businesses, the management teams, and the cultures. That drives a deeper understanding of the businesses, and then we marry that with the process of risk control, valuation, and really waiting for opportunities to come to us.

“The team’s process and continuity gives us a lot of latitude and the benefit of timing so we can wait for these opportunities. That’s really been the secret sauce for 25 years; focusing on risk, downside, and then when there are opportunities, to really go for it.

“Real opportunities to be aggressive are few and far between. Being able to withstand volatility in the markets and take advantage of them, that’s what really drives good outcomes over time.”

The Value Equity Team manages the Manulife Dividend Income Fund, which has evolved over its nine-year history. At its inception, yields were still high and the team could easily find companies with durable businesses and an ability to grow dividends. Back then they were offering up to 6% yields but for the past decade, that type of return has become scarce as firms either became a victim of paying out too much, or succumbed to competition and technological advances.

Dabiet believes the team has done a good job of focusing on sustainable yield. He said: “In those early years, we were able to harvest a number of attractive yields from companies that still had the ability to grow either organically or through acquisitions.

“What happened over time is their yields actually fell, but not because the company cut their dividend, it was just the appreciation of their stock prices.

“We’re a dividend fund, and we really believe in the power of dividends and income, but you'll see we have a much more balanced approach to how we derive that income. We never stretch for yield. We prefer companies today that have much more sustainable payout ratios, and have the ability to take cash flow and invest in their businesses to make sure they can sustain themselves in the long run.”

Dabiet and the team have proved adept at being able to identify well-run businesses that get stronger during the tough times and can still take advantage of the good times by growing organically and/or through acquisitions.

The fund is positioned in an area Dabiet thinks has been almost forgotten about over the past six to eight months of extremes – the middle market. It’s a natural sweet spot for the fund made up of companies that fit the criteria described. They don’t take the headlines or live and die by the economic cycle, yet they can still drive good growth and opportunistically acquire over time.

That approach, and the speed with which the market works, means that the core of the companies in the fund have not changed much since the end of 2019. As the economy settles back into a more normal rate of expansion after the dark days of lockdown, Dabiet believes this will favour most of the fund’s core positions.

Dabiet highlighted waste collection firm Waste Connections, which operates in both Canada and the U.S., as a holding that epitomises the fund’s ethos. It was hit by COVID-19 and forced to scale back its operation and deal with supply disruption. Yet, its outlook is encouraging.

Dabiet explained: “As things return to a more normalized growth rate, they will see a pickup in the volumes of what they collect, which will be a benefit, and throughout this whole period the pricing environment stayed fairly stable for them. We’re seeing demand that can drive some nice pricing increases for them.

“It’s a very predictable, stable, well-run company and has some benefits from the economy accelerating. You’re not having to make a wild bet on how strong the economy is going to be in the next 12-24 months to understand they’re going to benefit nicely. The stock’s been in neutral for eight to 10 months, so that’s the perfect example of the type of company that would make up the core of our portfolio.”

Within its preferred middle market, diversification remains central to the team’s approach. Dabiet described the process as like having “tentacles out there” to determine whether there are specific areas that are strengthening versus others. As the vaccine program gathers pace, pent-up demand and economic reopening are factors that will come into play.

Dabiet said: “The markets really, in the past few years, have been playing more at the extremes, if you think about both value versus growth. Our strength is in the middle of the market; companies that have durable business models, sustainable recurring revenues, and can withstand economic shocks fairly well.

“We think the market, as we move into the reopening, will come back to these kind of durable businesses that have some upside to the economy doing better but aren't the most levered economically.”


[1] At the end of March, over a 5 year period Manulife Dividend Income Fund has outperformed 95% of funds in its peer group.