Funds of Note from IA Clarington
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By Dave Paterson  | Wednesday, July 04, 2018


From time to time, readers of my Top Funds Report request my take on mutual funds they own or are considering investing in. This month, I look at two funds from IA Clarington, the IA Clarington U.S. Dividend Growth Fund and the IA Clarington Global Opportunities Fund.

IA Clarington U.S. Dividend Growth Fund

This U.S. Equity fund has been managed by Pierre Trottier since early 2013. With his unique way of looking at the U.S. market, he does basic due diligence, researching companies with good balance sheets and the ability to consistently grow both their cash flow and dividends. But the twist here is that he also looks for companies that are potential takeover targets. In most takeovers, there is a reasonable premium offered, which has the potential to increase returns.

His stock selection process has a value bias to it, which helps to explain some of the fund’s recent underperformance. However, over the long term, it has the potential to deliver stronger returns with slightly less volatility.

In addition to the fundamentally-driven, bottom-up stock selection process, Trottier also uses two additional components.

First is that the fund’s currency exposure is actively hedged, which means he will look to opportunistically manage the currency, not only to protect capital but also to enhance returns.

Second, he may use a covered call strategy, which can help increase the overall income generated by the fund, with the added potential for mitigating downside volatility. He uses the strategy only tactically, and sparingly, because he believes the strategy is not profitable in a rising market environment because many of the good stocks are called away, thereby reducing upside.

Performance has been somewhat disappointing on a relative basis. For the three years ending May 31, the fund gained an annualized 6.4%, while the S&P 500 gained 12.5% in Canadian dollar terms. There are two factors that may have caused this underperformance. The first is the value bias, and the second is the currency hedging strategy. Despite recent strength, the Canadian dollar has lost ground against the greenback, meaning any hedged currency exposure would detract from absolute returns.

Looking ahead, this is a fund that has a lot of potential. The focus on dividend growers, the enhanced income strategy, and the attractive portfolio valuation levels provide a strong foundation for growth. However, performance will all depend on the execution of the strategy. In most cases, investors looking to the U.S. market tend to be better rewarded through a passive index exposure.

IA Clarington Global Opportunities Fund

This Global/Small/Mid-Cap Equity fund is sub-advised by Radin Capital Partners, led by manager Brad Radin, who first made a name for himself managing the Templeton Global Smaller Companies Fund from April 2009 to February 2011. During that time, he posted extremely impressive results, posting positive returns in 10 of 11 years. After leaving Templeton, Mr. Radin set up his own shop, and started managing this IA Clarington offering.

This is a go-anywhere fund that scours the globe looking for mispriced stocks of companies of any size. Radin searches for stocks where the market has overreacted and sold off, allowing him to step in and pick up a quality company at an attractive price.

To find these companies, he and his team use a fundamentally-driven, bottom-up investment process that starts with a screen of the investment universe, looking at valuation, balance sheet strength, returns, and profitability. Once an investment candidate is found, Radin undertakes a detailed review, looking to understand the business, the management, and the outlook.

The fund typically holds between 30 and 60 names, and the country and sector mix will be the result of the security selection process, and not an index-tracking mandate. At the end of May, Radin held 49 names in the portfolio, with the top 10 making up just under a third of total assets. He remains true to the all-cap focus, with roughly 34% in large caps, about 27% in medium caps, and the balance in small- and micro-cap names.

Radin has a large overweight to consumer cyclicals and financials, which combined make up more than half the portfolio. He is significantly underweight tech and real estate.

The portfolio’s valuation is very attractive, trading at levels well below the benchmark and peer group. However, performance has been middle of the pack, with a 5-year average annual compounded rate of return of 9.6% as of May 31, compared with 10.6% for the Global Small/Mid Cap category average. Volatility has been in line with the index and peer group.

Much of the underperformance can be attributed to the value focus of the fund, with value and quality names lagging recently in favour of growth and higher beta names, which tend to outperform in momentum-driven markets.

Looking ahead, the portfolio’s valuation levels combined with the favourable growth outlook put this fund on track to outperform down the road. Given the solid investment process run by a management team with a history of top performance, this fund is a solid offering for those looking for all-cap global equity exposure.

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with 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. This article is for information purposes only and is not intended as personalized investment advice.


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