Fund in Focus: Dynamic Equity Income Fund
FundGrade A+® Award winner
As interest rates are likely to remain on the low side for some time, income from equity investments continues to be top of mind of many investors. With a focus on high-quality companies that pay a dividend and a stable monthly income stream, Dynamic Equity Income Fund has been a strong option for the past few years. It’s a consistent annual FundGrade A+ Award winner and currently has a monthly FundGrade of A.
Manager Oscar Belaiche heads a team that uses an investment process they call “Quality at a Reasonable Price” (QUARP). It’s a blend of top-down macro analysis and bottom-up security selection. They look for companies that have best-in-class management teams, that are dominant in their industry, and that have a history of increasing cash flows and strong balance sheets. Once identified, these high-quality companies are subject to an in-depth valuation analysis to ensure the managers are not overpaying. They will then look at valuation through a few different lenses depending on the company, using a more private-equity-type of approach.
The fund is focused in Canada but can also invest in some U.S. names. At the end of July, 56% of assets were allocated to Canada and 33% to the U.S. The portfolio is somewhat defensively positioned, holding 10% in cash. From a sector perspective, it is overweight the more traditionally defensive sectors, including financials, healthcare, and utilities. It is underweight energy, real estate, and financials.
Top holdings as of July 31 included Toronto-Dominion Bank (TSX: TD), Royal Bank of Canada (TSX: RY), Microsoft Corp. (NSD: MSFT), Canadian National Railway Co. (TSX CNR), and Enbridge Inc. (TSX: ENB).
Performance has been solid, particularly over the long term. The fund’s 5-year average annual compounded rate of return to the end of July was 5.4%, outpacing the Canadian Dividend & Income Equity category average of 3.1%. And over the past 10 years, it has delivered an annualized 7.8%, while the S&P/TSX Capped Composite Index has returned 6.5%.
The fund has also shown less overall volatility with a 3-year annualized standard deviation of 11.7 compared with 13.5 for the peer group and has done a good job of protecting capital in down markets, participating in about 60% of market declines over the past five years.
Costs are reasonable, with an MER of 2.15% for the Series A units that includes embedded dealer compensation. And the fund also pays a monthly distribution of $0.07 per month, which works out to an annualized yield of approximately 4.2%, at the recent NAV. The fund checks all the right boxes and is well worth considering for diversified income portfolios.
Dynamic Equity Income Fund
Fund company: Dynamic Funds
Fund type: Canadian Dividend & Equity Income
FundGrade A+ Awards: 2015-2019
Style: Bottom-up quality
Risk level: Medium
Load status: Optional
RRSP/RRIF Suitability Excellent
Managers: Oscar Belaiche since July 2001; Tom Dicker since January 2018
Fund Codes: DYN029 (Front-end load); DYN7013 (Low-load)
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.
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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. Dave Paterson is employed as an advising representative (portfolio manager) by Empire Life Investments Inc. (ELII), a subsidiary of Empire Life Insurance Company. ELII is the investment fund manager and portfolio manager of the Empire Life Mutual Funds and the portfolio manager of the Empire Life Segregated Funds (collectively, the Empire Funds). As such, his employment and his compensation may be connected to the success of ELII and the Empire Funds. From time to time, the Empire Funds may buy, sell, hold, or otherwise have an interest in securities that may be discussed in this report.