Equity funds with substantial cyclical exposure should do well provided that global economies continue to improve. Here’s an aggressive Canadian fund with cyclical exposure that makes a good complement to some of our more conservative funds we recommend.
As the global and U.S. economies improve, we expect cyclical stocks, and the funds that invest in them, to do well. DYNAMIC VALUE FUND OF CANADA (DYN3544(BE), DYN040(FE), DYN3444(LL)) is one such offering.
The fund seeks long-term capital growth from mispriced Canadian stocks by following a deep-value, contrarian approach. Using a rigorous stock selection process, the fund’s portfolio manager identifies companies with solid business fundamentals, but that are misunderstood by the general marketplace. These companies trade at less-than-intrinsic value and offer substantial reward potential against an acceptable level of risk.
Historically, Dynamic Value Fund has been a strong performer. Over the past 10 years, the fund’s compound annual growth rate is 10.9 per cent, which ranks in the top quartile of the Canadian focused equity category.
In 2011, however, the fund lost its star manager, David Taylor. In the same year, it performed dismally, losing 19.4 per cent of its value. Meanwhile, the S&P/TSX Composite Total Return Index declined by 8.7 per in 2011.
The new manager is equal to the old
But Mr. Taylor’s successor, Cecilia Mo, was more than equal to the task. Ms. Mo assumed her portfolio duties in late 2011, and after the underperformance of that year, the fund posted top-quartile performances in both 2012 and 2013. So far this year, the fund has gained 5.1 per cent — a second-quartile rank.
The fund’s 2011 setback was not unexpected given its aggressive investment style. Results have typically been quite volatile. On a scale of one to 10, the fund’s volatility ranks an eight. Funds in the Canadian focused equity category typically have a volatility rating of six or seven.
Despite the fund’s high volatility, Ms. Mo’s focus is on consistent, strong performance, along with downside protection. She began to form her value investment approach in 1996, when she joined Neuberger Berman, a New York institutional money manager, as a beverage, hotel and gaming analyst.
Since Ms. Mo has taken over Dynamic Value Fund she has improved its diversification. In mid-2011, more than half the portfolio was invested in resource stocks. Today, it has just about a fifth of its weight in these stocks.
The fund is also well diversified by geography. Its prospectus lets it invest up to 49 per cent of its assets in foreign securities. And right now, it has close to this amount invested in foreign stocks. The geographical breakdown of the portfolio is as follows: Canada, 47.7 per cent; the U.S., 40.6 per cent; cash and short-term investments, 7.5 per cent; and Ireland, 4.2 per cent.
As for industry-sector diversification, the fund is diversified over nine sectors. The largest of these is industrials, which makes up 22.0 per cent of the portfolio — up from about half this level a year ago. This increase reflects Ms. Mo’s view that industrial stocks stand to benefit from improving economic growth.
So far, the overweight in industrials has paid off. Over the past year, the fund has enjoyed a return of 23.2-per cent, compared with the 16.0-per cent total return of the S&P/TSX Index. The fund’s outperformance was due in large part to its overweight in industrials, as well superior stock selection in the sector. Among the fund’s top performers in the sector were Macdonald, Dettwiler and Associates, a global communications and information company; and Canadian National Railway.
Dynamic Value’s second-largest industry sector has also contributed to its outperformance. At 21.5 per cent, the fund has a large overweight position in health care. But it didn’t benefit from this overweighting alone. It also did well due to strong stock selection in the sector. Indeed, of the fund’s top-10 contributing stocks, four were in health care. They include Mednax, a provider of physician-management services; Hologic, a manufacturer of diagnostic and medical-imaging systems; Perkinelmer, a health and safety company; and Valeant Pharmaceuticals, Canada’s largest drugmaker.
Fund does not follow the Index
The fund’s heavy weighting in the industrials and energy sectors make it a good complement to more conservative Canadian stock funds whose weightings are similar to the S&P/TSX Index. This benchmark has just a 10-per cent weighting in industrials and health care.
Meanwhile, the Index is relatively top-heavy with financial, energy and materials stocks, which account for more than 70 per cent of its overall weight. Dynamic Value, by contrast, has just a quarter of its weight in these sectors: 15.7 per cent in energy, 5.3 per cent in financials, and 3.9 per cent in materials.
The fund, then, makes a good complement to the Conservative and Very Conservative Canadian Stock Funds in our monthly Mutual Fund Planning Guide, if you can accept its higher risk.
Dynamic Value Fund of Canada is a buy for investors seeking an aggressive Canadian stock fund for above-average long-term growth.
Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846