The Consistent All-Weather Canadian Focused Fund

This fund is the only Canadian-focused equity strategy to consistently beat the category over the past five years.

Michael Dobson 24 May, 2024 | 4:59AM
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Fund managers have seen a lot in the last six years: a turbulent 2018, a calm 2019, a pandemic in 2020, a bear market in 2022, and a growth rebound in 2023. The rapid changes exposed many funds’ flaws and weaknesses. Only one of 80 Canadian Focused Equity strategies with records of six or more years beat its category average in each calendar year from 2018 to 2023: Manulife Fundamental Equity. The consistent focus on cash flow generation earns the fund an Above Average People and Process pillar rating.

 

Lead manager Patrick Blais’s actuarial background informs the seven-person team’s process, which looks for quality stocks at good valuations. Blais and squad use a quantitative screen to shake out unprofitable or otherwise unattractive companies, then dig into at least 10 years of financial statements of the surviving candidates to better gauge how much cash they can generate.

They use their refined cash flow estimates to determine stock valuations and quality. Free cash flow yield quantifies how much cash a company produces for each dollar of its share price. Cash flow return on invested capital tells the managers how well a company uses their cash.

Fund Has a Cash Flow Finesse

The team’s free cash flow focus is apparent in the portfolio.

Since the start of 2018 through April 2024, Manulife Fundamental Equity’s price-to-free cash flow ratio, which is the inverse of free cash flow yield, was lower than the category median peer 88% of the time and ranked in the group’s cheapest quartile 37% of the time. This metric increased in 2022 but quickly retreated in 2023. As of April 2024, the fund’s 22.9 price-to-free cash flow ranked in the third cheapest decile.

Top Quartile or Close

The portfolio’s average holding also was more profitable than that of its typical peer during that time. It had a higher-than-median return on invested capital 100% of the time between January 2018 and April 2024, ranked in the top quartile 89% of the time, and in the top decile 44% of the time. More recent holdings data shows that the portfolio ranks just outside the top quartile as of April 2024.

These characteristics have helped the fund post attractive results. This year has been no different; Manulife Fundamental Equity F was up 7.3% for the year through April 2024, beating the category average by 2.1 percentage points and ranking in its peer group’s top quartile.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Manulife Fundamental Equity F23.59 CAD0.32Rating

About Author

Michael Dobson  is a Manager Research Analyst at Morningstar Canada.

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