National Post

Top Canada preferred fund eyes top value

Manager cites market efficienci­es

- Kristine Owram Bloomberg

The odds of a rate hike at the next Bank of Canada meeting more than doubled after a blockbuste­r December jobs report, but Canada’s bestperfor­ming preferred share fund isn’t rushing to adjust its strategy.

“We put less of a focus on interest- rate anticipati­on and more of a focus on selecting undervalue­d securities,” said Ryan Domsy, manager of the $ 167- million preferred share fund at Foyston, Gordon & Payne Inc., a Toronto-based investment manager with $ 13.3 billion under management. “It doesn’t matter whether they’re floaters, perpetuals or rate resets — if we’re constantly buying what’s undervalue­d, we will outperform.”

Preferred shares have had a great run as Canada’s economy picked up steam in 2017, culminatin­g in a plunge in the unemployme­nt rate to 5.7 per cent in December — the lowest in more than 40 years. The Bank of Canada raised interest rates twice and investors expect it do so at the next announceme­nt on Jan. 17, holding out the prospect of fatter dividends as rates on preferred shares tied to government bond yields reset higher.

The FGP Preferred Share Fund, which is also the subadviser for the Evolve Active Canadian Preferred Share ETF, returned 22 per cent in 2017. This makes it the bestperfor­ming preference fund in Canada, including mutual funds and ETFs. By comparison, the S& P/ TSX Preferred Total Return Index gained 14 per cent last year.

But Domsy said there are other factors besides interest rates that should go into investing decisions, including business risk, financial risk and structural risk. He believes this approach gives him an edge over other managers, who tend to measure value using more simplistic metrics like yield-to-reset or yield-to-call ratios.

“When you look at the financials, for example, people paint all banks with almost one brush, which is fairly ridiculous,” he said. “There’s huge difference­s between the risk levels of a TD Bank and a National Bank, and when you look at the fixedincom­e securities that they issue, it’s very rarely ever reflected in the pricing or the return characteri­stics.”

The fund’s small size gives it an advantage, Domsy said. “If you’re a $ 3- billion fund you literally have to hold everything, you don’t have a choice.”

By contrast, FGP’s fund can be “a lot more nimble than some of the big managers that have to buy every new i ssue that comes to market,” said Raj Lala, chief executive officer of Evolve Funds Group Inc., whose pref. ETF mirrors the FGP fund.

“The nice thing is right now preferreds have actually for the most part lagged the recent changes in interest rates,” Domsy said. “So even if the interest rate increases aren’t as aggressive as some people are expecting, I wouldn’t expect to see a problem with preferreds.”

The fund’s top five holdings as of Dec. 29 were as follows:

Canadian Western Bank, Pref. Series 5 Enbridge Inc., Pref. 4.00% Series D Intact Financial Corp., Pref. Series 1 Bank of Montreal, Pref. Series 31 BCE Inc., Pref. Series AA.

 ?? PETER J. THOMPSON / NATIONAL POST FILES ?? Preferred shares have had a great run as Canada’s economy picked up steam in 2017, culminatin­g in a plunge in the unemployme­nt rate to 5.7 per cent in December.
PETER J. THOMPSON / NATIONAL POST FILES Preferred shares have had a great run as Canada’s economy picked up steam in 2017, culminatin­g in a plunge in the unemployme­nt rate to 5.7 per cent in December.

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