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Against the possibility of increasing market volatility later this year, the RBC Qube Low Volatility Canadian Equity Fund, managed by Bill Tilford and his team at RBC, is a great way to get more defensive in the market while still having equity exposure. Like all low-volatility funds, it is designed to protect capital in a falling market environment, while providing reasonable gains in other environments. The fund garnered the FundGrade A+ Award in 2017.
The manager’s investment process is disciplined, rules-based, and quantitative. Each potential stock holding is first rated and ranked on several fundamental criteria designed to measure stability, growth, quality, and value. These criteria include both backward- and forward-looking factors. Managing valuation is critical because it will help preserve value better in market drawdown.
Once the stocks have been screened and scored, the team generates an internal risk forecast for each stock, which serves as an input in the optimization process. The manager then runs the first portfolio optimization to create the lower-risk portfolio that focuses only on risk. Once this has been determined, the manager will then run a second optimization that looks to create the portfolio with the highest risk-adjusted return.
The result is a diversified portfolio that looks much different than the index. It consists of fewer than 75 names, with the top 10 making up just over 40%. Not surprisingly with its low-volatility focus, it is overweight financial services, technology, industrial services, real estate, and consumer staples, while maintaining significant underweights to energy, materials, healthcare, and consumer discretionary.
Top holdings as of May 31 were Royal Bank of Canada (TSX: RY), Bank of Nova Scotia (TSX: BNS), Bank of Montreal (TSX: BMO), The Toronto-Dominion Bank (TSX: TD), and Hydro One Ltd. (TSX: H).
Given the focus on fundamentals, the portfolio appears to have more favourable valuation numbers than the index, while delivering a reasonable level of earnings growth. With a 3-year average standard deviation of 8.1 as of May 31, volatility has been well below the index.
Shorter-term performance has struggled, with a year-to-date gain of 7.2% to May 31, compared with 8.2% for the benchmark, and 8.7% for the category average. But the longer-term numbers are very strong, with a 5-year average annual compounded rate of return of 10.9% compared with 10.2% for the benchmark and 8.6% for the category average. The defensive positioning has been a headwind in the past several quarters. However, as the market focus returns to fundamentals, relative performance should improve. This is not out of character for a fund with a focus on downside protection. I fully expect that it will trail the market in a sharp rally.
Costs are reasonable, with an MER of 1.03% for the Series D units, and 0.77% for the Series F units. In the Low Volatility Canadian equity space, this fund rates at or near the top of my list.
RBC Qube Low Volatility Canadian Equity Fund
Fund company: RBC Global Asset Management
Fund type: Canadian Equity
FundGrade rating: B (May)
FundGrade A+ Award: 2017
Style: Systematic Quantitative
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Bill Tilford since November 2012
MER: 1.03% (Series D units)
Fund code: RBF1089 (Series D units)
Minimum investment: $500
Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.
Notes and Disclaimer
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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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