GLC’s Brad Cann, vice-president and portfolio manager, joins Ashike Akbar on the Fund Manager Podcast to discuss the Canadian Concentrated Pure Dividend portfolio and the approach that Laketon Investment Management takes when managing this mandate.
Christine: Hello, I’m Christine Wellenreiter, Vice-President of Marketing and Communications at GLC Asset Management Group. On today’s podcast, we’re going to bring you a recent interview that was recorded in August 2018 with one of GLC’s senior portfolio managers, Brad Cann. Hear Brad appear on Great-West Life’s Ashike Akbar’s fund manager podcast talking about the Laketon Canadian Dividend portfolio Brad manages. We hope you enjoy it!
Ashike: Hi everyone. This is Ashike Akbar welcoming you to the Wealth Sales Strategy fund manager podcasts.
Today we have with us Bradford Cann from GLC’s Laketon. Brad has more than 28 years of investment experience, has earned a bachelor’s degree from Wilfrid Laurier and an MBA from Queen's University. He’s also a CFA charter holder.
In this podcast we’ll talk about the Canadian concentrated pure dividend equity mandate by Laketon.
This mandate is available on the Canada Life shelf as the enhanced dividend fund and on the Great West Life and Quadrus shelf as the Canadian dividend fund and Canadian dividend class, respectively. This fund has delivered strong outperformance over the long term while sticking to its mandate of pure Canadian dividend paying equity. As of June 2018, even after a challenging second quarter, this is one of the top-performing funds on the shelf and has outperformed the benchmark, on a gross of fees and net of fees basis, over all the long-term timeframes one, three, five and ten years, as well as being a first quartile fund against its peers for those same timeframes.
Hi Brad, thanks for taking the time to talk to us today.
Brad: Happy to.
Ashike: To start off, can you shed some light on what is fundamental to Laketon’s investment philosophy?
Brad: Our belief here at Laketon is that through studying the industry and company fundamentals, we can add value through security selection and active management for the long-term benefit of our clients’ investments.
So deep fundamental stock analysis is at the core of our investment approach. What you will also find with the funds that GLC’s Laketon investment division manages is that we believe in high-conviction, concentrated portfolios. I generally hold between 25-35 large-cap stocks with significant active weights, versus the index’s 246 stocks.
Now, to take it one step further, I’ve been managing this Canadian dividend fund for more than 11 years at Laketon. Before that, I was also focused on a dividend portfolio. The key to investing in a dividend fund is appreciating the benefit of the compound impact of the income earned through the dividends. If you look at short-term returns, you often don’t see that large a difference between the price-only return of the S&P/TSX and the total return, but over time, the
compounding effect of that additional income makes a substantial difference. Today the TSX kicks off about a 2.8% dividend yield. So appreciating the value of dividend income compounding over time is fundamental to my belief in the benefits of investing in a dividend fund.
Ashike: The power of compounding is definitely more visible in the long term. Now, can you tell us what this mandate is trying to achieve?
Brad: We’re looking to put together a portfolio of securities, which, over the longer term, has a better risk-reward proposition compared to the overall market. So, we’re not just trying to help clients reap the rewards of the compounding effect of dividend income, but to build on that through selecting high-quality companies with capital growth potential – and that’s what, over time, the portfolio I manage has been able to do.
I know the portfolio I manage is likely only a portion of the investment solution for clients, but we believe (and feel like we’re achieving) an important contribution to enhancing our clients’ purchasing power over time through strong long-term investment performance. Ultimately, those long-term results are what I’m trying to achieve when I come into work every day to manage this fund.
Ashike: What characteristics are you looking for in a stock?
Brad: I’m looking for high-quality Canadian companies that are paying (and ideally poised to grow) their dividend payout. So, I want to see a solid corporate balance sheet – I look at debt/equity ratios to make sure the companies aren’t over-extended. I want to see strong cash flows and good earnings. I also get to know the management team and learn if they have proven their merit with good decisions and strategic focus for the company’s short- and long-term wellbeing. Of course, I want to see adequate market liquidity – so that leads me to larger-cap stocks, which I can easily move in and out of and execute an efficient trade.
Finally, I want to see a stock that’s attractively priced for the reward opportunity it presents. When these attributes line up, that’s a company I’m going to want in my portfolio, and it’s likely going to be a core, longer-term holding of the fund. But occasionally, as an active portfolio manager – doing that deep fundamental analysis on stocks also allows us to be opportunistic in selecting holdings, which, wouldn’t have been on our radar and wouldn’t have presented with an attractive return opportunity had the near-term market conditions not been just so.
Ashike: The portfolio is made up primarily of what you call core holdings and at times opportunistic holdings. You just told us what qualifies as a core holding. Can you explain how an opportunistic holding differs from that?
Brad: You know Ashike, it’s been said there are good companies and good stocks and they are not always one and the same thing. What I mean by that is that stock valuation plays a big part in what we’re trying to achieve. We do look for companies that are well managed, have strong
balance sheets to weather the inevitable industry downturns and businesses that have a history of strong cash flows, enabling the payment of a dividend.
Companies with all those characteristics I just spoke of would ideally make up our entire portfolio. But life isn’t that simple. Sometimes these great businesses are already well recognized in the stock market such that their valuation is expensive and we simply no longer consider them to have a good risk-reward scenario – in other words, you’d still be getting all the risks associated with that company, but the reward we think should be commensurate with that risk has already been priced into the higher stock price.
Because we’re always watching the markets, our holdings and their competitors or peer companies, we occasionally spot an under-valued stock, where, maybe not all of the business metrics measure up to our ideals, but when added to our diversified portfolio – these holdings can really enhance the portfolios returns. I call these our “opportunistic” holdings. Because they are added to the portfolio only under unique and very specific circumstances, on a company-by-company basis, sometimes I’ll hold very few of what I call ‘opportunistic holdings’, but by and large, they are unlikely to make up much more than 20% of our funds.
Ashike: These opportunistic holdings are essentially giving the portfolio that extra push for higher returns.
Brad: Yes. And/or to mitigate risk by adding more diversity.
Ashike: Can you tell us about your buy and sell discipline?
Brad: Sure. Buying a new position for us only occurs after deep fundamental, nose-to-the-grindstone (or rather nose-in-the-numbers) research to determine if they meet many of the characteristics we spoke of earlier. Again, valuation forms a big part of our decision-making.
Selling a position usually occurs because of one of three reasons. One—the stock reaches our target price and we see no reason to adjust it to a higher level.
Two—something changes so that our original thesis on the stock is no longer valid.
Or, three—the management of the company isn’t executing on or changes its strategy, or a new, unproven, management is established.
Because we do such extensive research into our holdings, we expect a holding being added will be a good, long-term performer for the portfolio, but it’s never been a ‘set it and forget it’ portfolio. We’re constantly reviewing, researching and comparing to maintain our conviction that the diversified set of companies we own are the most optimal combination of companies to deliver that strong long-term investment performance we talked about earlier.
Ashike: That’s great information, Brad. Coming to my next question, what are some of the key characteristics of this mandate you’d like to highlight?
Brad: We hold 100% Canadian securities, and all of our holdings are dividend-paying stocks and have been so historically. This isn’t the case for all dividend mandates. So, for Canadian investors, our returns have little (as in no) foreign exchange risk. That sets us apart from many broader dividend mandates. This is how we’re sticking to our knitting, so to speak, where we feel we have a history of expertise in following the Canadian companies and management teams. And from that standpoint, I think you’ll find the portfolio to be ‘as advertised’ –a concentrated portfolio of high-quality large cap stocks that we expect will outperform over time. I think the long-term performance of the fund bears witness to having stuck to those key characteristics and being focused on strong, high-conviction stock selection.
Ashike: The consensus in the industry is that we’re closer to the end of the business cycle. In this context, have you taken up any defensive positions?
Brad: Well, first off, many investors and analysts have called for the end of the cycle a few times since this cycle began in 2009. Forecasting is a tough endeavor.
That being said, we feel our conservative approach to equities in this mandate fits in for sure for a long-term approach to investing, but also for the latter stages of the cycle, as we don’t invest in unproven, concept stocks. Recent examples would include the latest “craze” such as pot stocks or crypto currencies that characterize some investor picks in the late cycle.
But I think it’s also important to note that for investors who are concerned about how not to over-reach with aggressive positioning when we’re in the later stages of a business cycle, that a dividend fund is a conservative equity fund. It’s still an equity fund, so if markets continue to run, this fund will participate in those gains, but when volatility increases, or when risk sentiment turns less positive – the compounding benefit of the dividend income will serve to both mute volatility and provide more capital growth over time.
Ashike: Agreed…Over the long term, the fund has proven itself with respect to delivering strong performances as a first quartile fund for one, three, five and 10-year periods…but are there any short-term conditions in which the fund is likely to underperform?
Brad: Absolutely; there are short-term conditions that can exist in the stock market – such as periods where “story stocks”, IPOs, momentum stocks outperform for a while, and we just don’t play many of those sorts of investments. They don’t fit our mandate and, if for a certain period, enough of the market returns are made up of these, our fund might lag for a bit – we saw that during the second quarter of 2018, and we’ve seen those types of conditions materialize from time to time. However, these conditions don’t persist indefinitely and to date have been a relatively small price to pay when compared to the strong risk-adjusted performance over the longer time horizon – which is ultimately my goal when managing this portfolio.
Ashike: In other words, focus on the horizon and ignore short-term distractions.
Ashike: Thanks Brad, for your time and for the valuable information you shared about a top-performing fund on our shelf.
Brad: My pleasure.
Ashike: To our listeners, we hope you enjoyed listening to this podcast and now have a much better understanding of this Canadian dividend Fund. Do join us on the next episode of fund manager podcasts. Thank you.
Copyright 2018 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).
This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.