The CC&L Equity Income and Growth Fund aims to provide superior tax-efficient income while preserving investor capital in down markets. It has succeeded admirably on both of these fronts, beating its benchmark, the S&P TSX Composite Index since the end of 2018.
For the year to date at July 22, the $266 million fund showed loss of 4.93%, a top-decile performance that exceeded the Canadian Dividend and Income Equity category average by 6.19 points, although it lagged Morningstar’s benchmark index by 1.68 points. Longer-term performance has also been impressive, with the fund achieving a top-decile five-year average annual return of 5.81%, beating the category and its benchmark. The current yield on the five-star ranked fund is a healthy 4%.
“The goal is to deliver a higher yield than the index, with less volatility,” says Steve Vertes, Vancouver-based portfolio manager at Connor, Clark and Lunn Investment Management Ltd. and lead manager of the fund. “We focus on best ideas, and there is a wide variance versus the benchmark.”
Growing Payouts are Key
The fund’s management team seeks superior dividend-paying stocks with the potential to grow their payouts and avoids companies that don’t pay dividends or are in danger of cutting their dividends.
“Investors often focus on short-term fads or hot segments of the market such as marijuana, crypto-currencies or new technologies,” says Vertes. “But these types of companies tend to be volatile and are not usually good dividend-payers, so we don’t own them.”
Most Opportunities are at Home
CC&L Equity Income and Growth focuses primarily on Toronto Stock Exchange-listed companies, but currently holds 20% in U.S. equities to achieve exposure that’s hard to attain in Canada, in such sectors as technology, health care and consumer staples. Overall, the fund’s management team covers about 450 stocks on a continuous basis, and usually holds about 50 at any given time.
“A key differentiator versus peers is the depth of our team’s approach including continuous coverage of the entire Canadian market from small cap to large cap, and of the U.S. sectors that are underrepresented in the Canadian market,” says Tim Elliott, Toronto-based president CC & L Funds, an affiliate of CC & L Financial Group. “Our team has industry specialists in each sector, who have relationships with the companies and various industry experts. It’s a rigorous bottom-up approach with an emphasis on risk-adjusted returns.”
Still in Safe-Mode
Attention is also paid to big picture themes and general economic conditions. Due to economic uncertainty and unknowns surrounding the COVID-19 pandemic, the fund is focusing on defensive sectors. The biggest sector weighting is financials at about 27%, followed by consumer staples at 13% and communication services at 10%.
“We take an active view of risk management and are always more defensive than the broad market,” says Vertes. “As the pandemic gathered force we were defensively positioned in consumer staples, utilities and communications stocks. Overall, we have been emphasizing quality and liquidity, and that has served us well this year.”
The fund has close to a 9% weighting in energy stocks, but has moved away from energy producers to the more stable utilities and midstream energy companies that concentrate on activities such as processing, storage, transporting and marketing of oil and gas products.
For example, the team sold Suncor Energy Co. (SU) in the first quarter – before it cut its dividend -- and added to Pembina Pipeline Corp. (PPL), an energy infrastructure company in western Canada and North Dakota focusing on a regional pipeline network.
Along with the market, Pembina’s stock price dropped earlier this year despite the company’s defensive characteristics, providing an opportunity to buy more at attractive valuations.
CC&L Equity Income and Growth typically doesn’t hold materials or gold stocks, as these companies are not a strong source of sustainable and growing dividends. To be included in the fund, companies must have a dividend yield of 1.5% at the time of purchase.
“We like companies with growing free cash flow that gives them the potential to grow their dividends,” Vertes says. “Dividend sustainability is crucial, particularly in a recessionary economic period such as we are in now.”
Elliott says a key goal of the team’s analysis is to avoid companies vulnerable to dividend cuts, and there have been many this year, particularly in the energy sector. He cites 41 dividend cuts in Canada during the first half of the year, of which roughly half were in energy companies.
“Our team avoided all of the companies that cut dividends,” says Elliott. “A number of our holdings increased their dividends.”
Changing Norms at Home and Work
In terms of big-picture themes, the team views the societal shift to working from home as a lasting trend that will cut demand for office space and has shifted the fund’s emphasis in real estate to the residential sector and apartment-oriented REITs.
The explosion of e-commerce, shopping from home – and the growing demand for home internet services -- has led to increasing holdings in food retailer Empire Co. Ltd. (EMP.A) and Shaw Communications Inc. (SJR.B), a telecommunications company that provides telephone, Internet, television, and mobile services.
Empire operates a grocery retail business through ownership of such chains as Sobeys Inc., Steinberg Foods Ltd. and FreshCo. The company is investing in grocery e-commerce and delivery services, a trend that is accelerating due to COVID-19, Elliott says.
Another key holding is Element Fleet Management Corp. (EFN.PR.I), a global firm providing fleet management services for commercial vehicles as well as financing services. It is also benefitting from the rapid growth of online shopping and delivery, and Amazon.com Inc. (AMZN) is among its clients.
Big banks such as Royal Bank of Canada (RY), Toronto-Dominion Bank (TD) and Bank of Nova Scotia (BNS) make up about half the fund’s holdings in the financial sector. Non-banks such as Element Fleet, and stock exchange company TMX Group Ltd. (X) make up the other half.
“Canadian banks are resilient,” Vertes says. “They’re facing some headwinds from record low interest rates and rising credit risks, but they have strong credit policies and capital positions and their dividends are stable. As the economy recovers they will participate in the upside.”