After resuming his role as the lead manager of the $1.5-billion Standard Life Canadian Dividend Growth a year ago, Neil Matheson restructured the portfolio to boost its dividend yield.
"The aim was to re-balance between dividend income and dividend growth," says Matheson. "You'll get a portfolio that is materially less volatile, especially in Canada, and over the long term performs in line with the indices or outperforms them. So you get a win-win situation."
Matheson is a senior vice-president, investment strategy, at Standard Life Investments Inc. in Montreal. He was the architect and original manager of the Canadian dividend-growth mandate in 1994, the largest of the Standard Life mutual funds. After running the fund for its first decade, he moved in 2004 to other roles at Standard Life that were of a more purely strategic nature.
A graduate of Oxford University in the UK, Matheson received an MA in 1979, and another master's degree from Carleton University in Ottawa in 1981. He worked for Alcan Aluminum in Montreal for seven years before joining Standard Life Investments in 1989 as an analyst covering banks, utilities and telecom companies. He also served as an economist. While at Standard Life, he received the CFA designation in 1991, and in 1999 he earned an MBA from McGill University.
Matheson is primarily responsible for the asset mix and sector strategy of Standard Life Canadian Dividend Growth. Portfolio managers Steve Belisle and Marie-Eve Savard are responsible for company-specific analysis. The portfolio-manager team draws on an extensive in-house network that includes the Canadian equity team of sector specialists, as well as a global team of 65 analysts.
Since his return to the fund in November 2010, Matheson has reduced its exposure to energy companies with low dividend yields, and rebalanced the weights between individual bank stocks. He also boosted the overall dividend yield with new positions in pipelines, utilities, telecommunications companies and real estate investment trusts (REITs).
 |
|
 |
|
| Neil Matheson | |
|
|
|
|
|
The end result is a current dividend yield of 3.7%, compared with 3% before the restructuring began. In addition, as of June of this year, Matheson has been given the flexibility to further diversify by holding up to 30% of the portfolio in non-Canadian securities.
While the historical track record of paying dividends is important, the team is "more forward looking than that," Matheson says. His criteria include how much cash flow the company is generating, and the strength of its balance sheet. Also considered essential is the management's willingness to pay regular dividends and increase them over time.
Matheson says many of the approximately 40 holdings in the fund have been there since inception. These include banks and telecom companies. The fund has generally been weighted about 30% in the financial sector since inception. Currently it is weighted 24% in energy-related stocks, of which about a third consists of pipelines.
Portfolio turnover was an unusually high 63% over the past year, reflecting the restructuring undertaken by Matheson. Historically, annual turnover ranges "between 10 and 30%," he says.
For a stock-picking example, "I won't go into the large banks and telecoms," says Matheson, "because that's probably a more familiar story to any reader." He chose to illustrate his investment process with Brookfield Infrastructure Partners LP BIP.UN, an infrastructure play in the Brookfield family. Its activities include pipelines, electricity transmission, rails and toll roads.
The company recently purchased a toll road in Chile and is increasing its Australian rail capacity significantly, having negotiated inflation-protected, long-term contracts. "The thing we all look for in infrastructure is nice, steady cash, and a bit of growth over time," says Matheson. "This is a company that yields 5.4%, and has increased its dividend three times over the last 12 months."
Included in the fund's REITs holdings is Primaris Retail Real Estate Investment Trust PMZ.UN. Matheson likes the company's high-quality shopping malls.
He says Primaris tends to get returns in the 7% to 12% range on its investments and they're careful not to overpay. "The yield is almost 6% from the security and we like the growth story."
Matheson says that in positioning the fund generally, "what I bring to the game is an understanding of the risk/return trade-off. It's a combination of understanding the bottom-up, but also the overall market background, how you moderate risk as you go through the cycle."
:quality(80)/cloudfront-us-east-1.images.arcpublishing.com/morningstar/54RIEB5NTVG73FNGCTH6TGQMWU.png)
