Buy RBC O’Shaughnessy U.S. Value Fund for growth and income—if you have a high risk tolerance

U.S. equities markets have spawned some highly-specialized, successful investors over the years. One of these is James O’Shaughnessy, whose value approach to investing has been highly successful in the U.S.

The Canadian Mutual Fund Adviser includes a number of U.S. equity funds among the Top-40 funds in its monthly Mutual Fund Planning Guide. In general, they’re there for investors who want greater control over the weightings they allocate to U.S. equities versus non-North American equities.

But one of the funds is also there for its highly specialized, very successful approach to investing in U.S. equities, the RBC O’Shaughnessy U.S. Value Fund (RBF552(NL)).

This fund seeks capital growth and current income. It does so by investing in U.S. companies based on Strategy Indexing®, an investment portfolio management model developed in 1995 by James O’Shaughnessy. Strategy Indexing is a disciplined quantitative approach to stock picking based on characteristics associated with above-average returns over long periods of time. Stocks are bought and held over the course of each year, with no attempt to time the markets.

A key aspect of the Strategy Indexing value strategy is “shareholder yield”. Mr. O’Shaughnessy picks stocks with the highest shareholder yield, which measures both dividend yield and share repurchases by a company.

Add the two together

Shareholder yield is the sum of a stock’s dividend yield and its buyback yield. Its “buyback yield” is equal to the percentage reduction in shares outstanding over a year.

If, for example, a company starts out a year with 100 shares and ends with 98, the company has reduced its shares outstanding by two per cent. If the company’s dividend yield is three per cent, you add the buyback yield of two per cent to it and you then get the shareholder yield, which equals five per cent.

The use of shareholder yield and other investment criteria has paid off well for O’Shaughnessy U.S. Value Fund. Over the past 10 years, the fund’s 6.4 per cent compound annual growth rate ranks in the top quartile of the U.S. equity category. And its results for the past one-, three- and five-year periods are also in the top quartile.

Looked at another way, O’Shaughnessy Value has performed in the top half of the category in eight of the past 10 years. It was a top-quartile performer in seven years, a second-quartile performer in one year, and a bottom-quartile performer in two years.

But a drawback for most investors is the fund’s volatility. On a scale of one to 10, with 10 representing the highest volatility, O’Shaughnessy Value ranks a 10.

One way to illustrate what this might mean for you if you’re considering this fund is to recollect the events of 2008. During the market setback of that year, the S&P 500 Total Return Index CAD$ dropped by 23.1 per cent. But O’Shaughnessy Value did much worse, losing 44.0 per cent of its value.

But volatility cuts both ways, as the subsequent year proved. In 2009, the S&P 500 rose 9.3 per cent. Meanwhile, O’Shaughnessy Value recovered 24.8 per cent of its value.

Despite its volatility, O’Shaughnessy Value has delivered excellent results over time. And, of course, one factor that has contributed to the fund’s outperformance is its relatively low management expense ratio, or MER, of 1.55 per cent. This compares quite favorably to the category median of 2.57 per cent.

O’Shaughnessy Value’s winning investment approach and low MER has worked in its favor this past year. Over this time, the fund has once again performed in the top quartile with a gain of 30.3 per cent. What’s more, assuming the U.S. economy continues to recover, we think the fund is well positioned to capitalize on stronger growth through a portfolio that has about two-thirds of its assets invested in cyclical stocks.

The fund’s current industry-sector breakdown is as follows: consumer discretionary, 22.6 per cent; technology, 19.9 per cent; industrials, 13.2 per cent; health care, 9.9 per cent; consumer staples, 8.6 per cent; energy, 7.8 per cent; financials, 7.8 per cent; telecommunications, 6.2 per cent; and materials, 4.6 per cent.

Value approach gives fund an edge

The fund may even gain an extra advantage from the fact that it doesn’t generally invest in richly-valued stocks with the largest market capitalizations. Instead, it invests in relatively less-known large caps with more attractive valuations.

For example, the fund’s top holding is DirecTV, which markets satellite-based pay-TV. The company does not pay a dividend, but it’s expected to buy back about 44.3 million of its outstanding shares over the course of 2014, to end the year with 475 million shares. That gives the stock a shareholder yield of about 8.5 per cent. The stock also has a reasonable price/earnings valuation, trading as it does at 14.7 times estimated earnings for 2014.

RBC O’Shaughnessy Value is a long-term buy for growth and income if you have a high risk tolerance for volatility.


Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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