When building a portfolio of equity funds, we recommend the core of your holdings be comprised of two or three large-cap funds with different investment styles. A value fund, a growth fund and, if you’re the conservative type, a dividend fund make an excellent mix.
Among our recommendations, FRANKLIN BISSETT CANADIAN EQUITY FUND (TML (BE), TML202 (FE), TML5189 (LL)) makes an excellent core growth holding. The fund seeks long-term capital appreciation by investing primarily in a diversified portfolio of mid- to large-capitalization Canadian equities.
Mind you, Bissett Canadian Equity does not pursue growth at any price. Rather, it follows a Growth at a Reasonable Price, or GARP, investment approach that seeks to uncover growth-oriented companies that trade at reasonable valuations. This process, the people at Bissett believe, lets them find many quality Canadian companies overlooked by strict value and growth managers.
Using a GARP approach, the Bissett equity team seeks to identify high-quality, well-managed businesses that have a track record of success and exhibit a sustainable business model. Among the characteristics the team likes to see in a company are a superior return on equity, financial strength and attractive valuations, as well as consistent above-average revenue and full-cycle earnings and cash-flow growth.
Turnover is low
In applying a GARP approach to Bissett Canadian Equity Fund, management keeps portfolio turnover low. This means, rather than constantly buying and selling equities, the fund’s managers add to and subtract from positions gradually.
High turnover rates are commonly associated with riskier investments and greater volatility. They can also produce more frequent tax liabilities.
To sidestep this problem and avoid excessive risk, one rule of thumb suggests you look for funds with a turnover rate of 50 per cent or lower. Keep in mind, that a rate of 100 per cent is equivalent to a fund buying and selling all of the securities in a portfolio once in the course of a year.
Bissett Canadian Equity, by contrast, certainly has a low turnover rate. Over the past five years, its annual turnover has not exceeded 33 per cent.
If portfolio turnover has been low, the same can be said for portfolio management turnover. Garey Aitken has managed the fund since 2003. His co-manager, Tim Caulfield, joined him in 2011. Together, the two managers have a total of 35 years of investment industry experience. Mr. Aitken joined the Bissett team in 1998, and Mr. Caulfield joined it in 2007.
Fund is a top-quartile performer
Stable management appears to have paid off for the fund over the years. Over the past decade, for example, the fund’s compound annual growth rate is 8.7 per cent — a top-quartile performance in the Canadian equity category. Performances for the past five-, three- and one-year periods have also been in the top quartile.
On a year-by-year basis, the strongest performances have occurred in the past six years. Over this period, the fund has performed in the top quartile in each year. Prior to this, however, it performed in the bottom quartile in three years and the third quartile in one year. This goes to show that unit holders who held on during those underperforming years were well rewarded for their patience in recent years.
Volatility has been quite reasonable, too. Over the past three years, the fund’s standard deviation ranks in the bottom half of the Canadian equity category, making it less volatile than most of its peers.
Fund has a high-quality portfolio
If lower volatility cuts the fund’s risk, so does the high-quality nature of its portfolio, in our view. Compared to the S&P/TSX Composite Index, the fund is overweight in the industrials, consumer staples and financial sectors. It’s underweight in the materials, energy and telecommunications sector. And it has no exposure to health care or technology stocks.
The fund’s top holdings include all five of the big banks, Canadian National Railway, global alternative asset manager Brookfield Asset Management, energy pipelines companies Enbridge and TransCanada, as well as information services provider Thomson Reuters.
Management believes the fund’s holdings offer better overall fundamental strength and are more attractively priced than the overall market.
Franklin Bissett Canadian Equity is a long-term buy if you want a core Canadian growth-oriented fund and you can tolerate medium investment risk.
Canadian Mutual Fund Adviser, MPL Communications Inc.
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