This Canadian Equity Fund Has Cash Flow Finesse

While the Canadian stock market has proven unpredictable these past few years, this fund achieved consistency by focusing on a company's cash situation.

Michael Dobson 31 May, 2024 | 4:09AM
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Michael Dobson: The last six years threw a lot at fund managers. A chaotic 2018, a calm 2019, a pandemic in 2020, a bear market in 2022 and a rebound in 2023. As a result, many different styles had their time in the sun but also some time in the rain. In fact, only one Canadian focus equity strategy beat the category average every year from 2018 to 2023. That fund is Manulife Fundamental Equity. Demonstrated consistency of the team's quality growth philosophy earns the fund a Bronze Morningstar Medalist rating. Patrick Blais and the Fundamental Equity team at Manulife have clear definitions of quality and valuation which feeds into their portfolio. These definitions are forward-looking variants of more common metrics portfolio managers use. And so while we don't know exactly how quality, or reasonably priced, Manulife Fundamental Equity is, we can run a few tests to see if they're walking the walk.

The first test looks at an estimate for the team's preferred metric for valuation, free cash flow yield. This looks at how much cash a company produces over 12 months per share and divides that by the stock price. The inverse of that metric, price to free cash flow, can be found on a trailing 12-month basis. Let's look to see how Manulife Fundamental Equity looks against category peers. Since the start of 2018 through April 2024, Manulife Fundamental Equity's price to free cash flow ratio was lower than the category median peer 88% of the time and ranked in the cheapest quartile 37% of the time. This metric increased in 2022, briefly exceeding the category median, but quickly retreated in 2023.

But while valuations can fluctuate, quality should move at a slower and smoother pace. For that, the Manulife Fundamental Equity team uses a modified version of return on invested capital looking instead at how much cash the company can produce per dollar it invests. We'll use the more common backwards looking metric to evaluate quality here. The portfolio was consistently one of the more quality Canadian focus strategies, with a higher than median return on invested capital 100% of the time between January 2018 and April 2024. It also ranked in the top quartile 89% of the time and in the top decile 44% of the time. Consistency across these two characteristics is reflected in the fund's steady performance. Manulife Fundamental Equity's F-Share class return ranks in the top 5% over the last five years through May 23rd with lower volatility than that of the category average.

From Morningstar, I'm Michael Dobson.

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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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