Steady Wins the Race - Cambridge Canadian Dividend Fund. We're Also Hiring!

Stephen Groff's picture

open pdf versionIn the world we live in, where sentiment can turn on a dime (or a tweet), we thought it was time to comment on Cambridge Canadian Dividend Fund by reiterating the fund’s objective, reflecting on the past and offering an update on how the fund is positioned.

The goal of Cambridge Canadian Dividend Fund is simple: compound value over the long term while managing risk. In simple terms, we believe that “steady wins the race.” We aim to accomplish this by:

  1. Owning a collection of high-quality businesses               
  2. Owning these businesses at a reasonable price                                              
  3. Owning our best ideas while ensuring we remain adequately diversified

Reflection on the Past Five Years

One of our goals is delivering long-term investment excellence for our clients. The S&P/TSX Composite Index has seen both ups and downs over that time horizon. When we step back, here are the numbers:

  YTD 1 Year 3 Years 5 Years 10 Years
Cambridge Canadian Dividend Fund, Class F 11.7% 5.1% 7.9% 9.4% 10.5%
Category: Canadian Dividend & Income Equity 16.1% 5.8% 5.9% 4.5% 7.0%
S&P/TSX Composite Index (Total Return) 19.1% 7.1% 7.4% 5.3% 7.0%

Note: These are trailing returns.
Source: Morningstar Research Inc., as at September 30, 2019.

growth of $10,000

Note: These are trailing returns.
Source: Morningstar Research Inc., as at September 30, 2019.

Cambridge Global Asset Management’s investment philosophy demonstrates our time-tested approach to delivering strong long-term investment returns. Most importantly, these results have been achieved in the way you would hope for – by sticking to our investment discipline.​

1. Owning a collection of high-quality businesses

  Cambridge Canadian Dividend Fund,
Class F
S&P/TSX
% of companies which are profitable 100.0%* 90.7%
ROE 16.1 13.6

* Hydro One took a one-time restructuring charge in Q4 2018 that impacted trailing income.
Source: FactSet Research Systems Inc., as at September 30, 2019.
ROE as at September 30, 2019, over trailing 12 months.

The fund, in aggregate, owns a collection of businesses that are considered higher in quality than those of the index at large.

2. Owning these businesses at a reasonable price       

  Cambridge Canadian Dividend Fund,
Class F
S&P/TSX
Forward Price/Earnings 13.4 14.4
Dividend Yield 3.9% 3.0%

Source: FactSet Research systems Inc., as at September 30, 2019.

Despite owning higher-quality companies, we are actually paying a discount for them.

3. Owning our best ideas while ensuring we remain adequately diversified

  Cambridge Canadian Dividend Fund,
Class F
S&P/TSX
Number of holdings 38 233
Weight of largest sector 18.8% (Energy) 32.9% (Financials)

Sources: S&P Dow Jones Indices description and Cambridge Global Asset Management.

The combination of adequate diversification combined with owning quality businesses at attractive prices has resulted in lower volatility as measured by standard deviation of returns over time. While we view true risk as the impairment of capital versus short-term fluctuations in price, we understand clients would prefer a ‘smoother ride’ all else being equal.

  Cambridge Canadian Dividend Fund,
Class F
S&P/TSX
Max Drawdown -5.9% -14.3%
Volatility (Std. Deviation) 7.1% 8.7%
Sharpe Ratio 1.36 0.68

* Over the past five years.
Source: Morningstar Research Inc., as at September 30, 2019.

  • Standard deviation: Standard deviation is widely used to measure risk in terms of the volatility of returns. It represents the historical level of volatility in returns over set periods. A lower standard deviation means the returns have historically been less volatile and vice-versa. Historical volatility may not be indicative of future volatility. There are other types of risks associated with the investments presented. Please read each fund’s prospectus for further information on the specific risks related to the fund.
  • Sharpe Ratio: The Sharpe Ratio is a risk-adjusted return measure developed by Nobel Laureate William Sharpe. It is calculated by using standard deviation and excess return to determine reward per unit risk. The higher the Sharpe Ratio, the better the portfolio’s historical risk-adjusted performance.​

While we are pleased how the fund has performed over the long term, there will be times when it will trail benchmarks. In 2019 for example, despite a respectable 11.7% absolute return year-to-date, the fund is behind the S&P/TSX Composite Index’s 19.1% return. On the surface this is disappointing; however, it is important to understand that owning a portfolio of high-quality compounding businesses should be less volatile than the overall market on the downside as well as the upside – steady wins the race. In the challenging period of the fourth quarter of 2018, the fund’s portfolio held in better, at -5.9% versus -10.1% for the benchmark. This explains the large difference between YTD and one-year performance.

What We See Today

As present, we see considerable opportunity in the fact there is a very wide dispersion between the ‘have’ and ‘have nots’ in Canada. This dispersion is what enables us to add value through a cycle, even if it can result in shorter-term underperformance. As an investor in the fund, I get excited during times such as these, and I will be making a meaningful additional investment into the fund in the coming days.

Below are two examples of the types of companies we like to hold in the fund. The first is Emera Inc., a business we still like but is no longer as attractive a risk/reward opportunity as at the time of initial purchase. The latter is Canadian Natural Resources Ltd., which we believe has attractive risk/reward prospects today. As we are bottom-up fundamental investors, we have made changes in the fund’s portfolio to invest in the most attractive opportunities.

Emera Inc. 1.1% of fund
As of October 28, 2019

Emera is a diversified regulated utility company with generation, transmission and distribution assets in Florida, Nova Scotia, Maine and the Caribbean. Early in 2018, the company’s stock was under pressure as concerns around leverage, sources of funding and rising interest rates weighed on sentiment. We initiated a fund position in Emera in January 2018, as we viewed the company’s valuation was appropriately discounting these risks and believed that the funding risks would be mitigated by significant cash flow growth and asset sale potential. Since then, the company has benefited from the sale of its Florida assets, continuing balance-sheet deleveraging and articulation of its longer-term plan. Interest rates have also retraced, improving sentiment in the sector overall. We have been reducing the fund’s position in Emera as the company’s shares have appreciated and the risk/reward opportunity has become less attractive.

Canadian Natural Resources Ltd. 5.2% of fund
As of October 28, 2019

Further to my previous blog, we have been finding a number of attractive opportunities in the Canadian energy sector. One such example is Canadian Natural Resources, which is an oil and gas exploration, development and production company. The company’s stock has been depressed due to volatile commodity prices and political uncertainty, which affected the energy sector more broadly. While there are evident headwinds, management is allocating the strong free cash flow the company generates to strategically and financially attractive uses (including the purchase of Devon Energy Corp., deleveraging and share repurchases). We believe this business is well positioned under various reasonable scenarios and presents an attractive risk/reward opportunity at the current valuation. While many investors are waiting for the ‘catalyst,’ we are being paid well to wait (4.4% dividend plus approximately 4% buyback), while at the same time the underlying business is compounding intrinsic value.

Steady wins the race.

We have taken the opportunity to reposition the portfolio and reduce our weights in companies where the risk/reward is less attractive, while adding to some companies where we are finding better opportunities. We will continue to apply our investment process, remaining patient and ready to act when compelling opportunities present themselves.

We Are Further Investing in Our Team!

We are currently looking to hire an Analyst to join the Canadian Team. This individual will be working closely with myself, Brandon, Bob and Authi. If you are or know someone who would be an exceptional candidate for the position, feel free to pass along this link to them.

We thank you for your support, and we will continue to work hard to compound your hard-earned savings.

Stephen Groff

 

IMPORTANT INFORMATION

Stephen Groff is a Portfolio Manager to certain Cambridge funds. He does not have a material interest in the securities discussed herein; however, he is an investor in certain Cambridge funds which may hold these securities.

This commentary is published by CI Investments Inc. The contents of this piece are intended for informational purposes only and not to be used or construed as an endorsement or recommendation of any entity or security discussed. The information should not be construed as investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor. Some conditions apply.

Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Investments Inc. has taken reasonable steps to ensure their accuracy.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Investments Inc. and the portfolio manager believe to be reasonable assumptions, neither CI Investments Inc. nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compound total returns net of fees (except for figures of one year or less, which are simple total returns), including changes in security value and reinvestment of all distributions, and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The “Growth of $ 100,000 invested” chart shows the final value of a hypothetical $ 100,000 investment in securities in the specified class of the fund as at the end of the investment period indicated and is not intended to reflect future values or returns on investment in such securities.

© 2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

CI Investments, the CI Investments design and Cambridge are registered trademarks of CI Investments Inc. Cambridge Global Asset Management is a division of CI Investments Inc. Certain funds associated with Cambridge Global Asset Management are sub-advised by CI Global Investments Inc., a firm registered with the U.S. Securities and Exchange Commission and an affiliate of CI Investments Inc. Certain portfolio managers of CI Global Investments Inc. are associated with Cambridge Global Asset Management.

Published November 4, 2019.

Add new comment

We welcome your comments and questions for the Cambridge team and will respond as soon as possible. Please note that all comments are reviewed for their relevance to the topics discussed in the blog, and that comments may be edited.