Dividend investing has always been a core strategy that we’ve stood behind here at Purpose. Purpose Core Dividend Fund (PDF) was one of the first products we launched because we believe a smart, income-oriented strategy is key to any investor’s long-term success. The importance of dividend-payers has only grown over time, especially as central banks have kept interest rates low. Markets change, testing traditional beliefs – something our CEO, Som Seif, discussed in a podcast on dividend investing. And our strategies have to reflect these new realities.
We’ve always said PDF is the optimally designed dividend fund for Canadian investors. While its strategy has evolved, its foundation hasn’t changed:
- Intelligent portfolio construction, built first with Canadian equities and complemented with US exposures where our domestic market lacks depth (for example, health care and information technology)
- Superior risk management through broader sector diversification, reducing reliance on traditional income-oriented sectors
- Smart equity selection through disciplined quantitative techniques
- Tax efficiency through a corporate class structure
It’s a blue-chip strategy, but we are always looking for exciting ways to improve on the tried and tested. Most recently, we’ve made some changes to address the fact that quant models inherently struggle to anticipate massive regime changes, like the one we’re witnessing as a result of the COVID-19 pandemic.
Since the crisis hit, we have begun leveraging our access to the large, fundamental analyst team at Neuberger Berman to forecast the specific impact on buyback yield and dividend sustainability in the Fund’s investable universe. Our models now incorporate forward-looking data, making it easier to anticipate and avoid companies which are more likely to cut or eliminate dividend payments.
The benefit of this enhancement was seen very early on, as we removed Suncor Energy from the portfolio in the weeks before the company slashed its dividend. We also added robust businesses on the consumer side, such as CVS Health, where our research indicates dividends are likely safe. And we have moderately increased our exposure to Canada’s banking sector, which has lagged the early stages of this bounce, but shows continued strength in dividend coverage.Source: Bloomberg, as of August 24, 2020.
The key here, as always, is enhancing risk management to avoid the false positives – the companies paying high dividend yields that look solid on a backward-looking basis, but are destined to struggle. We knew that putting our best foot forward in this new environment required another re-think of the specifics of our approach. We believe smart security selection is more critical than ever.
Of even greater importance than what we have done, is what we haven’t done. From a yield perspective, a quick glance suggests there are a ton of great deals to be had. But with an informed forward-looking view, we know that many of those yields are at serious risk.
The addition of this important fundamental analysis builds on the previous enhancements we’ve made to the Fund. Back in mid-2018, we made the security-selection process more stringent and multi-dimensional by tightening up our quality screens and broadening our ranking methodology to incorporate dividend coverage, momentum and low-risk characteristics. We also increased the number of holdings to 60, reducing exposure to any single point of failure. In 2019, we added ESG as a factor to reflect our belief that sustainable business practices benefit investors over the long-term.
All of these changes are consistent with our discipline of risk management. We have now seen our efforts proven time and again. PDF has built a robust, long-term track record. The Fund not only has delivered in good times, but has especially outperformed when markets correct.Source: Bloomberg, as of August 26, 2020.
At the end of the day, we believe that the extraordinary monetary policies deployed by the world’s central banks will push investors further out the risk curve for income and ultimately into dividend equities. This will provide a tailwind to the asset class relative to the broad market, but outcomes will differ materially across businesses. Chasing yield or historical growth is a poor strategy to avoid the fallout. Visit our fund page to learn more.
— Graeme Cooper is Vice President of Product at Purpose Investments
All data sourced to Bloomberg unless otherwise noted.
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