While dividend funds have generally been holding their own in a very tough environment, one fund with a less conventional approach has done much better than that.
The $40.3-million Mavrix Dividend & Income, the flagship fund at one of the smallest and newest fund firms, Toronto-based Mavrix Funds Ltd., returned 5.8 per cent for the six months ended Jan. 31. That compared with an average gain of 0.07 per cent for the group and a loss of 0.16 per cent for the benchmark S&P/TSX 60 index.
That made it the top performer in its category. It was also the second-best performing fund on a one-year basis, returning 7.5 per cent, compared with an average 3.4-per-cent loss for the group and a 15.6-per-cent decline for the index. (The one-year leader was GGOF Monthly Dividend Fund Class at 8 per cent.)
It also led on a three-year basis, with an average annual compound return of 19.4 per cent, compared wirh an average gain of 7.8 per cent for the category and a loss of 9.4 per cent for the benchmark.
Credit fund manager William Shaw's value-oriented style of picking stocks and income trusts.
"I'm a value investor and the value style has been in favour for the past few years," says Mr. Shaw, a 42-year-old vice-president at Mavrix Funds Ltd., which was spun out of YMG Capital Management Inc., in August, 2001.
His heavy emphasis on income trusts has also paid off. He's held up to 50 per cent of the fund in income trusts, which are instruments that offer investors steady cash flow from a resource, such as oil or coal, real estate or a traditional business. Trusts deliver capital gains, like a stock, and income, like a bond.
"The fund is also very actively traded," says Mr. Shaw, who assumed the helm in September, 1998, when it was called YMG Income. Previously a laggard, the renamed fund has been a consistent top-quartile performer since 2000.
With portfolio turnover at about 200 per cent a year, he adds "it's not a buy-hold-and-prosper fund."
Nor is it a run-of-the-mill dividend fund. Most dividend funds fall into one of two camps: either they are conservative equity funds that emphasize high-yielding common stocks or they hold a mix of equities, income trusts and preferred shares.
Mr. Shaw owns none of the latter, since he argues that they are not as tax-efficient as income trusts. And when he buys common shares, he is looking to boost the fund's total return through some modest capital appreciation.
Aiming to provide investors with a monthly distribution of 6.5 cents a unit, which translates into an annual yield of about 8 per cent, Mr. Shaw runs a portfolio of higher-yielding common equities, income trusts, real estate trusts, bonds and cash.
He tends to have 20 to 30 individual names since he believes that he can only make money through meaningful positions. Depending on his perception of where the best values occur, Mr. Shaw will favour one asset class over another.
He runs a variety of quantitative screens to identify low-priced securities, does additional legwork on management, cash flows and balance-sheet strength, and moves in. When a security reaches his target price, he tends to sell it. That process could take a few weeks, or several years.
For example, in late October, he bought Hudson's Bay Co. shares at about $6.80. When they hit his target of $9 in early December, he sold his position.
Conversely, he's been accumulating RioCan Real Estate Investment Trust for several years "because I like the fundamentals of the business," he says, adding that he is pleased with management and the range of properties. "I find it very attractive even at today's price" of about $12.95, says Mr. Shaw, who three years ago set a target of $13.50.
As a value investor, he seeks out companies whose stocks are trading at a deep discount to their intrinsic value. More often than not, they are beaten up.
A classic example was Bombardier Inc., at one point the second-largest position in the fund.
The beleagured transportation equipment maker's stock was trading at an approximate 60-per-cent discount to its intrinsic value when he initially acquired it in early December.
While Mr. Shaw's average cost was about $4.63, he took advantage of price swings to buy more on dips. However, after re-assessing the firm's prospects, he concluded there was further weakness in the aircraft division. He decided to close out his position by early January and took profits when the price reached a short-term target of about $6.
Mr. Shaw considers the fund a hybrid product. Typically, if he thinks equities are cheaper, then he holds more stocks; conversely, if he thinks income trusts are cheaper, he will emphasize those.
Early this year, equities were the cheaper choice, so he boosted that side of the portfolio and cut trusts. Combined with REITs, trusts account for about 43.5 per cent of the fund. But, given his bias to equities, they represent 48 per cent. The balance of the fully invested fund is in convertible bonds.
Noting the rise in the number of income trusts he says "you have to be extremely selective and apply traditional valuation metrics. Once you do that, you can find some value in the sector."
Mr. Shaws prefers income trusts where the underlying business is protected by high barriers to entry, such as dominant market share or a monopoly-like control of a product or services, and has strong management.
One of his recent favourites is Gateway Casinos Income Trust Fund, which has a yield of 12 per cent. Family-controlled, it operates six casinos in British Columbia and Alberta, where gambling licences are difficult to obtain.
Going forward, he takes a conservative outlook and expects the fund will return 8 to 10 per cent a year in the long term. "Over time, single-digit returns will be more prevalent in Canada," he says.
Analysts think highly of the fund. "Performance has been excellent," says James Gauthier, fund analyst at Toronto-based Dundee Securities Inc.
Although some media observers have raised concerns about the plethora of new income trusts, Mr. Gauthier is confident that Mr. Shaw has the ability "to weed the good from the bad."
From a risk perspective, he believes the fund is positioned between pure income trust funds and conventional equity funds. "It's very much a hybrid. There really isn't anything like it."
While also impressed with the recent performance, Ranga Chand, author of Top 50 Mutual Funds, cautions that the fund's returns have seen ups and downs. He observes that over any 12-month period since Mr. Shaw took over the fund, annual returns have ranged from a loss of 2.3 per cent to a gain of 42.9 per cent. There were only two negative 12-month periods, however.
"The fund has done well because of the bull market in income trusts," says Mr. Chand.
"But this fund is not without some volatility.
"Investors need a time horizon of at least five years to smooth out the bumps."
© 2007 The Globe and Mail. All rights reserved.
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