Fund in Focus: Leith Wheeler Canadian Dividend Fund

A 3- to 5-year time horizon

Over time, dividends have consistently been responsible for a significant portion of the equity market’s overall return. Studies have shown that this has ranged between 65% and nearly 80% of the return, depending on the market and period reviewed. The Leith Wheeler Canadian Dividend Fund from Vancouver-based Leith Wheeler Investment Counsel is designed to capitalize on this principle. It invests in high-quality companies that can grow dividends through higher prices or organic growth.

Bill Dye, Leith Wheeler’s Head of Canadian Equity, leads the fund management team that looks for companies with quality management, stable earnings, and a business model they are comfortable with. The portfolio is built on a bottom-up basis, and potential investment candidates are put through a fundamental, value-focused process that emphasizes return on equity, free cash flow, and earnings growth. The managers take a longer-term outlook, estimating how the business is likely to evolve over the next three to five years.

While dividend yield is important, the managers focus more on the total return potential of a stock, rather than the absolute yield. The result is a concentrated portfolio of around 30 names. The portfolio looks somewhat similar to other dividend funds, yet has enough unique characteristics to markedly differentiate it from its peers. It has a significant overweight in financial services, which made up roughly 43% of the fund at Jan. 31. It also carries a higher weight in industrials at 17% of assets. Where it differs is in its big underweight in telecom and energy stocks, each representing only about 9% of total holdings.

Top holdings as of Jan. 31 included Bank of Nova Scotia (TSX: BNS), Toronto-Dominion Bank (TSX: TD), Canadian Natural Resources Ltd. (TSX: CNQ), Canadian Imperial Bank of Commerce (TSX: CM), and Canadian National Railway Co. (TSX: CNR).

Performance has generally been good, but like most equity funds, the fund took a hit as markets corrected in late 2018, with the Series F units posting a 3-year average annual compounded rate of return of 10.1% ending Jan. 31. Still, that beat the 9.8% for the S&P/TSX Composite Index.

One potential drawback is that at 9.6%, the fund has higher average 3-year standard deviation than the index and peer group. Still, even with the higher volatility, it has delivered solid risk-adjusted returns, outperforming in both up markets and down markets.

The fund is well positioned, with a valuation level well below the index and a yield that is higher. Component holdings have all delivered earnings growth superior to both the index and the peer group.

Costs are very reasonable, with an MER of 1.03% for the fee-based Series F units, available from dealers (1.50% for the do-it-yourself B Series). These metrics, combined with the disciplined management approach, lead me to conclude that the fund will continue to deliver excellent risk-adjusted returns.

Leith Wheeler Canadian Dividend Fund, Series F
Fund company: Leith Wheeler Investment Counsel
Fund category: Canadian Dividend & Equity Income
FundGrade Rating: C (January)
Style: Large-Cap Value
Risk level: Blend
Load status: No load (fee based)
RRSP/RRIF suitability: Excellent
Managers: Bill Dye and the Leith Wheeler equity team since December 2012
MER: 1.03% (F Series); 1.50% (B Series)
Fund code: LWF031 (F Series, available through dealers); LWF019 (B Series, DIY)
Minimum investment: $5,000

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

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.