RBC reveals its best ideas among Canadian diversified financial stocks

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The best performers among Canadian diversified financial stocks are likely to be those with defensive attributes and a decent amount of exposure to the U.S. market, RBC Dominion Securities said in a note.

Both of those qualities are apparent among RBC's best ideas for the subsector, which the bank provided in advance of first-quarter earnings results.

Those top picks include Onex Corp., DH Corp., and Tricon Capital Group Inc.

Canadian asset managers, meanwhile, are best avoided, with the space garnering no buy recommendations from RBC's analysts.

"Despite asset manager share prices underperforming in 2014, 2015 and 2016 year to date, we remain cautious as we see multiple headwinds," the analysts wrote.

Those headwinds include regulatory uncertainty, given the potential ban on trailer fees being considered; pressure on fees in general; and a challenging macro backdrop in equity markets, the report said.

"From a timing perspective, for investors looking to invest in the fundco sector, we would prefer waiting until regulators provide an update on potential changes to embedded compensation. We believe on the balance of probabilities that trailer fees/sales commissions will be banned," RBC said.

Onex, on the other hand, represents a "core holding," the note said, with high exposure to the U.S. and European markets, a strong long-term investment record, and a substantial stockpile of cash, which could be used to buy back shares on weakness.

DH Corp., meanwhile, is cheaply priced compared to its peers in the U.S., where it generates about 60 per cent of its business. It's an "attractive fintech play exposed to the receovery in U.S. bank capex spending," RBC said.

And Tricon is almost entirely focused on U.S. housing, which is trending toward a positive spring housing season.

Aside from its top picks, RBC also has "overweight" recommendations on Element Financial Corp., Intact Financial Corp., and Genworth MI Canada Inc.