A nose for stocks leads the way

Co-operators’ internal investment portfolio manager, Addenda Capital Inc., is primarily a value manager. Co-operators’ external portfolio managers, bottom-up stock-pickers Mawer Investment Management Ltd. of Calgary and Toronto-based Fidelity Canada Asset Management ULC, ranked first and second in mutual fund family performance for 2015, with 100% and 89.7%, respectively, of their AUM in the top two performance quartiles. (See the February 2016 issue of IE.)

Kingston, Ont.-based Empire Life Co.’s seg fund family placed second, with 76% of its long-term AUM in the first or second performance quartiles. Empire’s portfolio-management team is focused on stock-picking.

Empire Life’s seg funds were underweighted in resources in general. However, says Gaelen Morphet, the firm’s senior vice president and chief investment officer in Toronto, the few resources stocks held in Empire’s funds were good ones, including Canadian energy companies Suncor Energy Inc. and Imperial Oil Ltd., and forest product firm Stella-Jones Inc.

Empire Life’s portfolio managers maximized their seg funds’ exposure to foreign and U.S. equities, for which returns were enhanced in Canadian dollars because of the big drop in the loonie vs the U.S. dollar, Morphet notes.

Meanwhile, asset allocation was most important for the fourth- place seg fund family, sponsored by Quebec City-based Industrial Alliance Investment Management Inc. (IA), according to Pierre Payeur, IA’s director of fund management. He credits Clément Gignac, senior vice president, chief economist and chairman of IA’s asset-allocation team, with providing asset guidelines concerning overweighting and underweighting sectors and geographical areas.

IA’s strong asset allocation was accompanied by good stock-picking, Payeur says, adding that it wasn’t just about which sectors, geographical areas and stocks to overweight, but also about those to underweight or avoid.

For example, most of IA’s seg funds were underweighted in energy and materials; none of IA’s funds held shares in Volkswagen AG, whose stock collapsed last September after the firm admitted cheating on emissions tests. IA’s funds also held less than their peers did in Valeant Pharmaceuticals International Inc., a stock that plunged in October amid accusations of price gouging.

One of the interesting features in the seg fund family data for 2015 was that funds with significant AUM tended to do better than funds with smaller AUM. Given that many seg fund families are dominated by large funds, those families had at least 50% of AUM in above-performing funds. (Morningstar ranks seg funds on the basis of return, while IE’s analysis focuses on the amount of long-term AUM in the first or second performance quartiles.)

A dramatic example of quartile-rated performance can be seen in Canadian equity seg funds: 88.8% of long-term AUM was in the first or second performance quartiles. Funds in this category include two London Life Canadian equity funds (combined AUM of $2.1 billion); IA Canadian Equity Growth Fund, with $617.6 million in AUM; and GWL Canadian Equity Fund, with $543.6 million in AUM. The biggest Canadian equities seg fund ranked in the third or fourth performance quartiles was IA Canadian Equity Index Fund, with $257.1 million in AUM.

As these numbers suggest, London, Ont.-based London Life Insurance Co.’s seg fund family did well in 2015, with 56.1% of AUM in above-average performing funds – up substantially from 35% in 2014 and 34% in 2013.

The strong performance of London Life Canadian Equity Fund ($1.6 billion AUM) last year certainly helped, as that seg fund had been in the fourth performance quartile in 2014, says George Turpie, senior vice president, investment funds, products and market development, wealth management, for London Life as well as the other two firms in Winnipeg-based Great-West Lifeco Inc.’s (GWL) seg fund families: Great-West Lifeco Assurance Co. and Canada Life Assurance Co.

Indeed, Turpie was very pleased with the performance of all three seg fund families’ Canadian equity funds, noting that all three internal management teams – GWL Investment Management (GWLIM), Laketon Investment Management Ltd. and London Capital Management Ltd. – achieved above-average performance despite being independent of each other and having different investment styles. (GWLIM is a top-down all-capitalization growth portfolio manager. Laketon is a bottom-up, large-cap portfolio manager with concentrated holdings. London Capital is a bottom-up, growth at a reasonable price, large-cap portfolio manager.)

GWLIM’s Canadian mid-cap funds – there’s one in each of the three GWL seg fund lineups – did particularly well, Turpie notes, because they were “driven not just by good stock selection, but also avoidance of ‘torpedo’ stocks.”

Another factor that helped bond and balanced funds in GWL’s three seg fund families was a bias toward higher-quality corporate bonds. “With high yield not doing so well in 2015, we benefited from this bias,” Turpie says

On the other hand, there was some drag last year, notably in London Life Dividend Fund ($2 billion in AUM), which remained in the fourth performance quartile. As this fund is a “pure” fund – no non-Canadian holdings – it ranked below peers that held up to 30% in foreign equities.

The other big seg fund family is sponsored by Waterloo Ont.-based Manufacturers Life Insurance Co. (Manulife), now the biggest family, with $49.5 billion in AUM following the acquisition of London, U.K.-based Standard Life PLC’s Canadian operations in 2015.

“We gained access to some excellent [seg] funds and [portfolio] managers,” says Brent Wilson, manager of investment research and analysis with Manulife’s investment-management services. In particular, he points to Standard Life Canadian Dividend Growth Fund, now used in Manulife’s conservative and moderate portfolios.

In addition, Standard Life Ideal Global Dividend Growth Fund now is part of Manulife’s seg fund lineup even though the fund is a “third party” fund managed by the now unrelated Standard Life.

The seg funds retaining the Standard Life brand had excellent performance in 2015, with 84.2% of AUM in the first or second performance quartiles. In contrast, only 47.7% of pre-existing Manulife seg funds were above-average performers.

A major drag for Manulife’s seg funds was the massive Manulife High Income Fund ($8.1 billion in AUM), which had below-average performance last year vs first quartile performance in 2014. Last year wasn’t a good one for that fund in terms of market trends, Wilson says. That is, the fund is managed with a value style and favours corporate bonds – and 2015 was a year in which growth stocks and government bonds did better. In addition, the fund had less foreign equities exposure than its peers.

Still, this fund has been so popular that no new purchases have been allowed since August 2015. Investors looking for a similar seg fund can look at Standard Life Ideal Monthly Income Fund.

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