Update on areas of risk and Cambridge Canadian Dividend Fund positioning

Stephen Groff's picture

We see a number of areas of potential risk in the market today including elevated valuations in some sectors and uncertainty in China. We have been concerned about China for years now and recent policy moves do little to appease us. We have made sure our portfolios are positioned accordingly.

Valuations and speculation in certain areas of the market is something we have been watching carefully. Below is a chart from Kailish concepts showing the percentage of unprofitable companies among the most expensive decile of stocks in the S&P 500 Index. It is interesting how it is nearing levels not seen since the tech bubble burst.

Source: Kailish Consulting

It is clear there have been elevated levels of speculation in parts of the market and, in such periods, we will often “miss out” on some of this fun (while it lasts). That being said, risk mitigation remains our first priority. We will continue to actively avoid areas of speculations which we believe is in the best, long term interest of our clients. While it doesn’t mean we don’t take risk, we aim to make sure we are being paid to do so and that it falls within the risk tolerance of each fund. We care about absolute and not relative returns. 

With the high level of sector concentration in Canada (commodities and banks represent over 50% of the TSX) and Canada's economic exposure to emerging markets (which are increasingly being questioned as a source of global growth), we think it’s a good time to highlight the Cambridge Canadian Dividend Fund.

Despite being a Canadian dividend fund, it looks nothing like the index or competing funds. It is currently over 20% cash, holds no Canadian banks and has minimal exposure to traditional commodity businesses where high levels of capex intensity make its business models less appropriate for an investor seeking stable income. But you must keep in mind that 20% cash still means 80% invested and we continue to like what we own.

It is impossible to have different results than an index or peers when the same names are owned. The table below illustrates how Cambridge Canadian Dividend Fund is different not only from the TSX Index, but also a couple of the largest dividend funds in Canada. 

Source: RBC, TD Asset Management, S&P 500 Index, CI Investment Consulting

While one year is a short time period, the chart below makes the point that being different can have an impact particularly during periods of volatility like we find ourselves in today.

1 Year Total Return (as of August 12, 2015)

Cambridge Canadian Dividend

12%

TSX Index

(3%)

Canadian Dividend Aristocrats

(5%)

   

Source: Bloomberg

 

Risk management is a top priority for Cambridge and this is particularly important in our lower risk mandates. When we see a lack of attractive investment opportunities, we will hold cash and be patient until it can be invested prudently. Consistently using this process should results in better upside / downside capture over the cycle.

The table below demonstrates that, compared to the TSX over the past three years, Cambridge Canadian Dividend Fund participated in approximately 80% of the upside on positive days, but only 10% on down days. This is a very different ratio vs. peer funds in the category. 

Investing is a marathon, not a sprint. We appreciate your continued support and will continue to work hard to protect and compound client capital over the long term. 

Comments

Submitted by Sherry Cavallin on

Thank you for your prudent approach with our clients' money. This is what we expect and appreciate!

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