Many top-performing fund managers tend to be contrarian cowboys who shoot the lights out for a year or two with big and bold decisions. Longer term and consistent performance, however, sometimes requires the slow but steady approach, which is why Michael Stanley, who runs the BMO Dividend Fund, is our fund manager of the year.

Investment Executive each year examines the performance of all Canadian mutual funds with at least a 10-year record, in search of consistent outperformers. We choose one decade because it covers two average business cycles, which should provide fund managers with plenty of opportunity to demonstrate their skills in various market conditions. We favour consistency over outright returns on the basis that anyone can make a few lucky calls or brilliant trades that give him or her eye-popping short-term numbers. Most investors, however, want consistent positive returns over an extended period.

The IE fund manager rating system uses a point-scoring methodology. Funds are awarded points for each year of positive returns, for each year beating the average fund in their asset class and for their quartile ranking. We also factor in the cumulative 10-year return, the management expense ratio and the fund’s correlation to the index.

The latest data, supplied by Morningstar Canada in Toronto, reveals that, based on our criteria, the top performer in the past 10 years is the BMO Dividend Fund. For each of the 10 years (measured as 12-month periods ending Oct. 31), the fund has been first or second quartile. For six years it was in the top quartile. In each of the 10 years, it has both generated a positive return and beaten or matched its group average.

The consistency hasn’t come at the expense of outright returns, either. In the 10 years, the fund has generated a cumulative return of 335%, which puts it in the top 2% of all funds with 10-year records, including those sharp-shooting small-cap managers. It has also compiled the remarkable record at a relatively modest cost to unitholders — the MER is just 1.75%, which is below average for the category.

The secret to the fund’s stellar record, reveals Stanley, chief investment officer for Jones Heward Investment Counsel Inc. in Toronto, is disciplined stock picking. Stanley follows a good old-fashioned value strategy, focusing on common stocks with strong payouts.

“Value can mean different things to different people. Our value characteristics are driven more by yield than anything else,” Stanley says. “But we also want to look beneath the surface when we find companies that pay good dividends. We’re looking for companies that are relatively low risk, and have low variability of earnings and very consistent, safe dividends.”

Stanley’s ability to find companies that fit the profile is reflected in the track record of the fund, a remarkably consistent performer. “We’ve stuck to that process over the past 11 or 12 years or so, and we really haven’t been shaken off it,” he says.

His investment philosophy has been honed throughout a 25-year career in the financial services industry. After completing his MBA at University of Toronto in 1979, Stanley joined Crown Life Insurance Co. as a research analyst. He obtained his CFA designation, then he took a year off to travel around Asia and Australia with his wife, before settling back on Bay Street.

What followed were stints at Royal Trust and MT Associates Investment Counsel Inc. (a predecessor to Perigee Investment Counsel, which has since become Legg Mason Canada Inc.), before joining BMO Investment Counsel in 1994 as vice president of Canadian equities. He joined Jones Heward in 1996 when it merged with BMOIC.

In that time, Stanley has come to believe in the wisdom of finding the right names for the portfolio and sticking with them.

“We tend to focus on our best ideas,” he says. The fund, which has almost $4 billion in assets under management, generally has between 30 and 40 names in it, so each stock typically has an allocation of 1%-7%. To make it into the portfolio, a new addition generally has to beat out something that’s already there, which keeps the portfolio focused.

“There’s no hot money in here, no speculative money, no flyers — it’s nice and boring,” Stanley says. The fund doesn’t play around at the margins to get an edge over the other funds in its asset class. Rather, the secret of its success, Stanley says, is persistence: “It’s just a function of our process and our discipline, and maybe being a little lucky at times, too.”

@page_break@The fund’s latest portfolio disclosure shows such discipline has the fund top-heavy with financials. At Sept. 30, more than 50% of the portfolio was in the financial sector. Its second-biggest sector allocation is energy, at just 10%, followed by utilities, telecoms, industrials and consumer discretionary names.

The fund’s top holdings are Royal Bank of Canada, Bank of Nova Scotia, TD Bank Financial Group and Manulife Financial Corp. , which collectively represent 26.4% of the portfolio. Sun Life Financial Inc. and CIBC also appear among the fund’s top 10 holdings. The 10% exposure to the energy sector is due to just two names: Imperial Oil Ltd. and Shell Canada Ltd.

With such a focused roster, Stanley devotes most of his time to the companies that comprise the portfolio. “We don’t spend any time at all worrying about or thinking about the macro environment,” he says. “If I had a dollar in the fund for every time someone said that interest rates are going up, the fund would be even larger than it is now.”

Stanley tends not to move the portfolio around in response to interest rate movements, or in anticipation of them. “We’re always going to own dividend-paying stocks,” he says. “We tend to just focus on the companies, as opposed to trying to make a macro bet drive our view of a company.”

“Of course, the macro environment will have an impact in time, but we feel that if we have the right companies in place they’ll survive the cycle, and hopefully come out a little stronger,” he notes.

Stanley adds that the fund also maintains a strong “sell” discipline, so if a company’s results do get out of shape, whether that’s due to rising rates or some other reason, he is prepared to jettison it from the portfolio.

“We don’t run into a lot of financial problems with the companies [in the portfolio], but if we smell any sort of financial deterioration, we tend to get a little nervous. And we’d rather err on the side of caution. So if we do see any dividend policy at risk, we’ll probably scoot before doing anything else.”

Stanley also keeps a close eye on valuation. A hefty valuation, however, isn’t the same kind of sell trigger as looming financial trouble. “Just because a company falls below an average yield threshold, we won’t necessarily sell the company because it may have the capability of increasing the dividend or increasing the payout,” he says. “We don’t want to get whipsawed, so we’re kind of slow and sticky in terms of selling when the yields fall below average levels.”

Income trusts, red hot with retail investors, haven’t played much of a role in the fund. Stanley says there are a couple of trusts in the portfolio, and he keeps an eye on a few others. But there are other funds in the BMO lineup that focus on trusts. “We play the dividend game,” he says.

With that in mind, Stanley is cautiously supportive of the federal Finance Department’s decision to cut the dividend tax rate. He notes that the cut has yet to be passed, and it requires provincial cooperation if the playing field between trusts and dividend-paying corporations is to be levelled. Assuming that it goes ahead, he’s pleased that it makes dividends more competitive, yet he doesn’t see the change as driving companies to pay dividends if they haven’t done so in the past.

Some analysts predict that the proposed dividend tax cut will see already strong dividend payers become even stronger. Stanley will surely welcome that, but he doesn’t see it changing much about the way the fund works.

The challenge for any fund with an outstanding record is maintaining it. On that count, the fund’s unitholders will be pleased to hear that Stanley doesn’t expect to move on anytime soon.

He says that BMO is conscious of succession planning, and that there are a few people working with him who could step in and take the reins when the time comes. For now, he has no plans to leave.

“Even though we’ve had consistency over the past 12 years, I think the next 12 years will be just as consistent,” he says. IE