Dynamic Equity Income Fund is a defensive buy. Sector selection has let this top Canadian mutual fund hold up well in rough markets while paying attractive income.
Dynamic Equity Income Fund (Fund code: DYN029 (FE), DYN729 (DSC), DYN629 (LL), DYN7013 (LL2)) has held up well in difficult market conditions. For example, in the last half of 2015, the fund, which seeks to achieve high income and long-term growth of capital, suffered a loss of just 0.4 per cent. The S&P/TSX Composite Index, by contrast, lost 9.1 per cent of its value over the same period.
Dynamic Equity Income Fund’s portfolio managers, Oscar Belaiche and Jason Gibbs, attributed this outperformance to the fund’s overweight in telecommunications, underweight and security selection in materials, and security selection among health care and consumer discretionary sectors.
The fund had about a nine-per-cent weighting in telecommunications at the time. Since then, that weighting has come down to 8.7 per cent, which is still overweight compared to the 5.8-per-cent weighting the sector has in the S&P/TSX Composite Index. The portfolio’s top holding in the sector is Verizon Communications, one of the largest diversified telecom companies in the U.S. The stock pays a healthy dividend that yields 4.2 per cent. This is precisely the type of company in which the fund invests, as its objective is to invest primarily in equity securities that pay a dividend or distribution.
Investing heavily in defensive sectors such as telecommunications helps a fund limit its losses in periods of market turmoil. But the limitation of losses also depends on avoiding sectors that are not likely to hold up well in such turmoil. This is what Dynamic Equity Income Fund has done.
In the last half of 2015, the fund had just 2.3 per cent of its portfolio invested in materials stocks. This sector, along with energy stocks, accounted for much of the underperformance of the Canadian stock market compared to the world’s other major developed markets.
The fund continues to remain underweight in the materials sector. These stocks account for less than three per cent of the portfolio, compared to 11.1 per cent for the S&P/TSX.
Adept stock picking also helped the fund to outperform in late 2015. The fund benefitted from security selection in the health care and consumer discretionary sectors. These sectors included exposure to U.S. companies that performed well over the period.
With its fairly defensive portfolio that includes some foreign diversification into U.S. stocks, we think the fund should continue to hold up well if markets once again become more volatile. Meanwhile, you’ll receive a yield of about 4.7 per cent.
Dynamic fund facts
■ Dynamic Equity Income Fund seeks to achieve high income and long-term growth of capital by investing primarily in equity securities that pay a dividend or distribution.
■ The fund generally follows an investment approach that emphasizes a suitably diversified portfolio of different businesses that meet required investment objectives. Investments may be eliminated when original attributes, including valuation parameters, are no longer attractive, in the fund advisors’ opinion.
■ The fund has an experienced portfolio manager at the helm in Oscar Belaiche. He has managed the fund since July 2001, and has 34 years of business, operational and investment experience as a money manager, asset manager, developer and corporate banker.
■ This fund is less volatile than the overall market and most other funds in its category.
■ The fund’s management expense ratio is a reasonable 2.13 per cent.
Dynamic Equity Income Fund is a buy if you want high income, along with some growth potential, and you can tolerate low to medium investment risk.
Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846