Fund in Focus: TD Global Low Volatility Fund

Some shelter from market storms

With the major stock market indices recently touching record highs, and with much uncertainty in the air, the prospect of a meaningful correction is very real. With that in mind, the TD Global Low Volatility Fund, a global equity offering from TD Asset Management, is a great way to stay invested while looking to protect capital in the event of a major drawdown.

While the absolute return numbers have not impressed, the risk-adjusted returns are much more compelling. Living up to its promise, over the past five years, the fund has delivered performance in line with the benchmark MSCI All Country World Index Net Dividend, but with much lower volatility, participating in much less of the downside than the index.

The fund is managed by a very well-staffed team headed by Jean Masson. Its go-anywhere mandate looks for stocks showing the least amount of volatility over the past 36 months. The managers also consider valuation when reviewing a potential opportunity.

The investment evaluation and portfolio construction process blends quantitative analysis with the judgment of the portfolio management team. In fact, the team will override the model in certain circumstances.

The portfolio is very well diversified with more than 250 names, and the top 10 making up less than 10% of the fund. It is built using an optimization process that aims for the best risk-adjusted return. The managers rebalance frequently, but balance risk reduction with trading costs, as they don’t want the friction from frequent trading to reduce the risk-reduction benefits.

Top holdings as of June 30 included Diageo plc, ITOCHU Corp., Sumitomo Corp., SECOM Co. Ltd., and Sysco Corp.

Given its low-volatility focus, the fund is overweight financial services, industrial services, and consumer goods, while it is underweight healthcare, industrial goods, and technology. One byproduct is the very respectable 3.2% dividend yield, well above the yield offered by the benchmark. Geographically, the fund is allocated about 34% in the U.S., 18% in the European Union, 18% in Asia/Pacific Rim, 11% in Canada, 10% Japan, and the rest in international equities.

Valuation metrics are very reasonable with a P/E ratio well below the broader market. With equity markets moving higher over the past few years, this more defensive positioning has been a significant headwind for performance. While this may be frustrating, it is what this and other low-volatility funds are designed to do. They will often trail markets on the way up, but outperform on the way down, resulting in very strong risk-adjusted returns over the long term, which I’d expect with this TD offering.

Cost is the biggest drawback for this fund, carrying a 2.45% MER for the advisor units, while fee-based units are reasonably priced, coming in at 1.00%.

TD Global Low Volatility Fund
Fund company: TD Asset Management
Fund type: Global Equity
FundGrade Rating: B (June)
Style: Large-Cap Value
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Jean Masson since Nov 2011; Wilcox Chan since Nov 2011
MER: 2.48%
Fund code: TDB2541 (Front-end 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.

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.