The search for yield could benefit from active management, says an expert panel that presented at the 6th annual Exchange Traded Forum.
The panel featured Derek Brown, vice-president and senior portfolio manager at Fiera Capital and Fiona Wilson, portfolio manager at Guardian Capital. Jaime Purvis of Horizons ETFs moderated. Brown spoke about fixed income, while Wilson delved into dividend stocks.
Live tweets from 6th Annual Exchange Traded Forum
Brown: for high yield, 55% of his analysis is risk analysis.
Brown: high yield has displayed negative correlation to interest rates over the past 20 years. Historically, it has outperformed other asset classes.
Brown: are interest rates going up because the economy is overheating? If so, that’s good news for corporate balance sheets @advisorca
High yield has outperformed equities on a risk-adjusted basis over the past 20 years. And, they’re largely liquid, says Brown.
The Sharpe ratio for BB bonds is 1.05. For Canadian government bonds, the ratio is 1.01. Are high-yield bonds that bad?
CCC bonds: 50% went bankrupt in 2008, says Brown.
When you buy passive bond ETFs, you’re often buying the most indebted companies, not necessarily the best. Brown is overweight BBBs.
Wilson: In 2011, dividends were the strongest performing factor in the market.
Wilson: Plus, globalization means country dispersion has decreased, so country diversification doesn’t work as much.
Wilson: we are top down sector diversified, everything else bottom up. Buy the best companies regardless of their domicile. Dividend growth is very important.
Wilson: highest return has come from dividend growers. Lowest from dividend cutters. Avoid volatility in dividend yields, since there is so much volatility in equities anyway
Wilson says to look at the rate of change in fundamentals to compare companies across currencies, sectors, etc. She looks for dividend payers and growers. Growers include McDonald’s and Nestle.
Wilson: quality hasn’t worked as a factor for awhile, but it’s coming back. Poor companies are borrowing at rates they never dreamed of. So balance sheet analysis going to be become more important. And, active management will be more important for finding dividend yields.
Quality is more defensive, which will help when volatility rises. What was defensive in past will not be in future in a rising rate environment (e.g., REITs, beta 0.67)
Tech firms are the new dividend-payers. They’re paying executives with stocks that get dividends, so incentive to pay dividends.
Purvis asked Brown and Wilson to talk about two names, with Brown speaking from a fixed income perspective, and Wilson from an equity perspective.
Q: talk about TD. Wilson: it’s one of our largest banks in Canadian mandate. Brown: 90% of its earnings come from retail. As debtholder we like that stability.
Q: talk about HSBC. A. Brown: it’s a stable, diversified bank with high tier-1 ratios. We own their BBB. Paying 5%, 4.5 years. It’s essentially a preferred share. Wilson: it’s a hold in our model. We have owned, but do not own now on equity side.
Brown: most BBB bonds in Canada trade less often than U.S. BBBs. I’d rather own a bond that is BB because it’s more liquid. Liquidity is most mispriced factor in the market.
Q. What is your best-performing mandate over last 10 years? A. Brown: High yield. Wilson: since 2007, my global mandate has earned 300 bps of alpha over MSCI World with a lower Sharpe ratio.