Dividend-paying stocks have been in a sweet spot amid low interest rates, but Jennifer McClelland's agility in trading those names has also boosted her mutual fund's returns.
The $1.1-billion RBC Canadian Equity Income Fund earned a 2011 Lipper Award in the Canadian dividend-and-income group over one, three and five years. Over three years to last Oct. 31, a key period for award sponsor Lipper Inc., it posted an annualized return of 25.2 per cent.
"There have been no big home runs," says Ms. McClelland, lead manager on that fund at RBC Global Asset Management. "It's been a series of singles and doubles over the past five years … We've had great value from stock selection in energy and industrials."
Unlike many of its peers, the fund also owns smaller names, which may be under the radar, and "we manage the fund very actively," she said. "We probably have one of the higher turnover rates in this category."
Bank stocks are a staple in dividend funds, but she slashed her weighting to zero going into the 2008 financial crisis and market sell-off. "With concerns about structured products on the banks' balance sheets … we felt in this fund we didn't need to be there," she said.
As markets kept tumbling in early 2009, she began buying back bank stocks, and went bargain hunting among battered smaller-company names, too. "We got to experience the snap back [later that year]because the fund was fully invested," she said.
Amid wild market swings over the past couple of years, she and co-manager Brahm Spilfogel, who specializes in the natural resource and energy sectors, have taken profits in companies whose shares have risen sharply, and reinvested the cash in better opportunities.
"We have always, at the margin, tried to reduce positions of strength, and buy back on weakness," she said. "It sounds easy, but doing it consistently means keeping a close eye on the movements in the market."
Last year, income securities such as real estate investment trusts (REITs) outperformed the Canadian market because of demand from yield-hungry investors. Her winning names included Canadian Real Estate Investment Trust, Allied Properties REIT and also Brookfield Office Properties Inc., a commercial real estate company.
The midstream energy sector, which is involved in processing, storing and transporting oil and natural gas, has also been strong. The fund has profited from names such as Keyera Corp. and Provident Energy Ltd., which was acquired last month by Pembina Pipeline Corp.
The investment mandate of the fund, which was first launched in August, 2006, has broadened in recent years. It started as RBC Canadian Diversified Income Trust, and originally focused on buying income trusts although it could invest up to 20 per cent in dividend stocks.
The fund did not have an auspicious start. On Halloween night that same year, Finance Minister Jim Flaherty dealt a blow to the popular trust sector by announcing that Ottawa planned to tax them like corporations by 2011.
"The worry was out there for a long time, but the timing, of course, was a shock," recalled Ms. McClelland who began her career as a research analyst in 1993 at former Royal Trust after earning an economics degree from Western University.
"The trust sector fell about 15 to 20 per cent immediately after the announcement," she said. "We got hit along with everyone, but we were small then with around $20- to $30-million in assets. … The fact that the fund was invested in stocks as well as trusts, and had a healthy allocation to REITs, which were not impacted, did help."
Because the fund has ballooned in size, Ms. McClelland is now dogged by questions about whether she can still be nimble enough to maintain strong returns.
"I am not feeling any restrictions with the size right now," and it's still comfortable in the $1-2-billion ballpark, she said. Still, "if we take profits on a position, it'll be in smaller increments because it is a larger fund."
Ms. McClelland is "cautiously bullish," and would say only that she expects a positive return from the Canadian stock market this year after it shed 8.7 per cent in 2011.
"It's a mug's game to call the stock market," she said. "We are optimistic that we can still get some solid returns in the equity market, but there are so many things going on outside of Canada that are impacting how they react."
Returns for the RBC Canadian Equity Income Fund, compared with returns for the S&P/TSX:
One year: 13 per cent
Three years: 25.2 per cent
Five years: 12.6 per cent
S&P/TSX total return:
One year: -0.8 per cent
Three years: 11.1 per cent
Five years: 2.7 per cent
How the winners stacked up: