Manager Monitor: Value manager seeks ‘slow and steady’ returns

In December, the firm launched Manulife U.S. Monthly High Income Fund, which uses the same investment approach as the flagship product, a 4-star rated fund within the Canadian Neutral Balanced category.

“One of the differences (of our products) is that both our Canadian and U.S. funds are balanced funds that generate income, and not income funds that are balanced,” says Wicks, who shares duties with Jonathan Popper, senior managing director, and Conrad Dabiet, managing director.

“People may say, ‘What’s the difference?’ The difference is (evident in) what happened last fall, when rates spiked a bit and many interest-sensitive stocks were hit relatively hard. But our process had already moved us away from a lot of those names,” says Wicks, a bottom-up value manager.

“Our goal is creating a return profile that is slow and steady,” he says. “Sometimes that means the portfolio’s yield could be lower to get a cheaper valuation, but we have that flexibility.”

Wicks and his team focus on companies that will deliver sufficiently attractive returns, which they refer to as the equity-risk premium. “We’re trying to buy durable business models that generate high returns, and get them at the right price. There is no point getting the first two if you get the third one wrong,” he says. The equity-risk premium is comprised of the operating risk of the business, the quality of the management and the capital structure.

Manulife Monthly High Income recently held 36% in Canadian equities, 23% fixed income, 10.5% cash and 30.4% U.S. equities. The U.S. position reflects a decided shift since about 2009, and is now at the maximum mandated level.

“The U.S. gives us an opportunity to diversify our names within the portfolio,” says Wicks, adding that annual turnover has been moderate at 29%. “We can do it at valuations that are cheaper and profitability that is greater (than in Canada).”

Take, for instance, IBM Corp. (NYSE:IBM). The global information-technology provider generates about 50% of its revenues from services, which means a high degree of consistency. “They might not be at the forefront of new technology, but its service revenue spins off a tremendous amount of free cash flow.”

While the 2.1% dividend yield may not seem high, Wicks points out that over the years IBM has bought back half of its shares, thus raising the average annual pay-out to almost 7%. “Remember, this is a balanced fund that generates income, not necessarily an income fund that finds the absolute highest dividend-payer and has no growth,” says Wicks. “By creating a portfolio that has attractive valuations and durable business models, we can work our way through a lot of difficult environments.”

Next: A 26-year industry veteran
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A 26-year industry veteran

A native of Sault Ste. Marie, Ont., Wicks is a 26-year industry veteran who began at Aetna Canada in 1987, after he graduated with a bachelor of arts in economics from the University of Toronto. He worked in plan administration, and in 1991 he became a financial analyst in the group-life division. Three years later, he was supervisor of pension accounting.

In 1996, Wicks was hired as an analyst at Elliott & Page Ltd. and was involved in managing Elliott & Page Monthly High Income from its inception in September 1997. He was appointed lead manager in May 2000.

In 2002, the fund was renamed Manulife Monthly High Income and Elliott & Page’s asset-management arm was rebranded as MFC Global Investment Management. In 2010, MFC Global Investment became known as Manulife Asset Management Ltd. All told, Wicks and his team oversee about $12 billion in assets.

In the 12 months ended Jan. 31, Manulife Monthly High Income returned 13%, versus 9.7% for the median fund in the Canadian Neutral Balanced category. Over five, 10 and 15 years, it had annualized returns of 11.4%, 6.8% and 10%, respectively. The median fund averaged 8.9%, 5% and 4.7% respectively in the same periods.

Wicks credits the top-quartile performance to the team approach and picking stocks with strong upside and low volatility. “We’re not trying to shoot the lights out, whether it’s individual stocks or the asset allocation,” says Wicks, who limits individual holdings to 4.5% of fund assets. Moreover, the team uses different metrics for each industry. For instance, a bank’s required rate of return is more than 10%, while that of a consumer-staples company may be one-third lower.

“We are willing to pay more for a firm like Saputo Inc. (TSX:SAP) for instance,” says Wicks, referring to the addition last year of the cheese and dairy products maker. “We like its business model more than a bank, in terms of its risk, stability and competitive advantage.”