Fund in Focus: Leith Wheeler Income Advantage Fund

FundGrade A+® Award winner

The Leith Wheeler Income Advantage Fund is a conservatively-positioned balanced offering with an emphasis on fixed income, from Vancouver-based Leith Wheeler Investment Counsel. While this FundGrade A+® Award-winning fund places in the top quartile for 3- and 5-year performance, its higher degree of interest rate sensitivity has weighed on shorter-term returns. But this hasn’t changed my favorable outlook for the fund.

As of Sept. 30, the portfolio was allocated 55% to investment-grade bonds, 35% in Canadian equity, and 8% in preferred shares.

The Leith Wheeler Canadian Dividend Fund Series A accounted for 35% of holdings, the Leith Wheeler Preferred Share Fund was the second-largest at 8%, while another 8% was allocated to the diversified Leith Wheeler Multi Credit Fund. There is some flexibility in the asset mix, and the managers will adjust the exposure based on the available opportunity set.

The investment process starts with a top-down analysis that sets the economic and interest rate outlook. This helps the managers establish targets for duration, sector, and credit quality factors. Security selection is bottom-up, as the managers use a fundamental credit analysis that looks for credits trading at reasonable levels, offering attractive yields for the risk.

On the equity side, the exposure comes from investing in the Leith Wheeler Canadian Dividend Fund, where the focus is on high-yielding, dividend-paying equities. The fund uses a fundamental, bottom-up, value-focused approach to find higher-yielding dividend stocks. Foreign exposure is limited to 20%, although given the focus on tax-advantaged income, most of the equity exposure is expected to be in Canada. At the end of February, less than 8% was invested abroad.

The equity sleeve looks much like what you’d expect from a Canadian dividend fund, with an overweight to the higher-yielding sectors such as financials, real estate, utilities, and industrials.

However, one drawback to the fund’s overall positioning is that it carries a higher degree of interest rate sensitivity, which has dampened returns in the recent volatile and rising-yield environment. This positioning also helps explain why the shorter-term performance numbers have lagged some of its peers.

Another potential drawback is that the fund has been more volatile than many of its fixed-income balanced peers. This is because it carries a modestly higher exposure to equities.

Still, all things considered, the strong, disciplined management team, repeatable investment process, and focus on risk management make this a very strong balanced fund offering.

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.