Scott Lysakowski- PH&N Investment Management

Manager seeks reasonable yield with below-market volatility.

Michael Ryval 5 April, 2013 | 6:00PM
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Scott Lysakowski believes that after four years of positive returns, equity markets could be vulnerable.

"We're still constructive on the economy, but we have a concern that we could see a correction," says Lysakowski, manager of PH&N Canadian Income. Based in Vancouver, Lysakowski is a vice-president and senior portfolio manager at Phillips, Hager & North Investment Management, a unit of RBC Global Asset Management Inc.

Notwithstanding the current environment, Lysakowski argues that attractive investment opportunities still exist. "In the context of a slowly recovering economy, there are lots of businesses that are generating a lot of free cash flow. Their balance sheets are in very good shape, they're growing their dividends and returning that free cash flow to shareholders," says Lysakowski, a growth-at-a-reasonable-price (GARP) investor. "Despite the macro concerns, lots of businesses are ticking along nicely."

Lysakowski, who is also co-manager of PH&N Monthly Income, seeks companies that demonstrate prudent use of capital and a competitive advantage that will generate profits through the economic cycle. "We take a multi-disciplined approach and focus on high-quality, well managed businesses that are growing," says Lysakowski, adding that his team overlays fundamental research with quantitative and technical analysis to determine various outcomes for stocks and their industries.

The objective of the fund, and of the equity portion of PH&N Monthly Income, is to generate reasonable yield with less volatility than the broad market. About 50% of the assets are devoted to banks and pipelines, and a smaller portion tends to be opportunistic and comprised of cyclical stocks. "When we try to generate yield, and performance, we want to be very careful in how we expose the portfolio to sectors that are more volatile," Lysakowski says.

Single holdings are limited to about 8% of fund assets. Portfolio turnover in 2011 was very high, at 267%. This is attributable to a tactical shift in 2010, as Lysakowski reduced the fund's cyclical exposure and raised it again in the fall of 2011 when valuations were attractive. Today, he's been moderately paring it back to reflect a change in the risk-reward relationship.

One defensive core holding in the 50-name fund is TransCanada Corp., TRP, a leading owner and operator of pipelines. "The company is very well positioned to participate in the potential for export of liquefied natural gas off the west coast," says Lysakowski. "They've also spent a significant amount of capital to grow their asset base, building pipelines in the U.S. Those projects are in service and generate significant free cash flow."

Scott Lysakowski

The stock has a 3.8% dividend, but Lysakowski believes there is growth potential. "Once these pipelines come on, the free-cash-flow stream should grow. They will be able to increase the dividend."

A native of Welland, Ont., Lysakowski has been with the RBC organization since he graduated in 2002 with a BSc in economics and statistics from the University of Toronto. He worked in fund accounting, and then moved to the trading desk, where he was a trading assistant for a year.

In 2004, Lysakowski became an associate analyst working on RBC Monthly Income and RBC Canadian Dividend. "That's where I built up a focus on dividend and income type portfolios," says Lysakowski, who received his CFA designation in 2005.

In June 2009, Lysakowski seized an opportunity to join the PH&N team in Vancouver. Since the launch of PH&N Monthly Income in January 2010, he has managed the equity portion.

That fund, which has a 4-star rating, returned 8.1% for the 12 months ended Feb. 28, versus 5.8% for the median fund in the Canadian Neutral Balanced category. On a two- and three-year basis, it has been a top-quartile performer. "In this low-interest-rate environment and volatile markets, we've done a reasonably good job of doing what we set out to do," Lysakowski says.

PH&N Canadian Income has a 3-star Morningstar Rating. "It's the five-year number that hurt," says Lysakowski, acknowledging that the fund tumbled 39.4% in 2008. Over five years, the fund had an annualized 4.3% return, compared with the median return of 4.4%. Under Lysakowski's watch, the fund has rebounded and returned 12.3% for the 12 months ended Feb. 28, compared with to 7.8% for the median return in the Canadian Dividend & Income Equity category.

The key performance driver was the tactical exposure to cyclical stocks, which Lysakowski increased in late 2011. "We also benefitted from a focus on high-quality dividend-paying stocks. In this environment, the market is seeking yield and rewarding companies that are paying dividends and growing their dividends," says Lysakowski.

"The market is less focused on 'what's the yield?' and more on, 'Is the free cash flow growing?' That's the theme we've been building up for some time."

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Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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