Bread and Butter Research Makes Manulife Canada’s Top Stock FundBy
‘We learned a lot about the sandwich business,’ manager says
Dividend income fund more than doubles index over 10 years
The managers of Canada’s best-performing large equity fund know their sandwiches.
That’s because they obsessively researched Premium Brands Holdings Corp., a British Columbia-based company that makes processed meats and packaged sandwiches, before buying it for the Manulife Dividend Income Fund.
The stock has helped drive returns at the C$3.3 billion ($2.7 billion) fund up 8.8 percent this year versus 4.3 percent for the S&P/TSX Composite Index. Over five years, the fund’s 93 percent return is almost double the index.
"We learned a lot about the sandwich business from that investment," said Chris Hensen, senior portfolio manager for equities at Manulife Asset Management in Toronto. In order to know their companies inside out, the four-person team focuses on revenue drivers, margins, capital allocation and cash flow. They’ve met with as many as six different management teams on a single day in order to unearth opportunities in unsung corners of the market.
The fund, which is invested 65 percent in Canadian equities, 15 percent in U.S. stocks and 20 percent in cash, was the top performing of 48 funds with assets of more than C$1 billion this year, according to data compiled by Bloomberg.
The fund’s research on Premium Brands set it up to pounce when another sandwich company with the odd name of AdvancePierre Foods Holdings Inc. filed to go public in mid-2016.
"We had brokers who were like, ‘How in the hell are you guys on this thing?’” Hensen said. “Well, if you did your work on Premium Brands you’d understand the sandwich business too."
In less than a year, AdvancePierre was acquired for $40.25 a share by Tyson Foods Inc., nearly double its $21 IPO price. Meanwhile, Premium Brands has advanced 344 percent including dividends in the three years the fund’s owned it.
"We’re looking for opportunities to gain some kind of insight that the market is either missing or not fully appreciating," said Conrad Dabiet, senior portfolio manager for equities at Manulife Asset Management. "It’s not as easy as going on the Bloomberg terminal and looking at the P/E and saying the stock is expensive or cheap."
The fund’s top holding, Waste Connections Inc., illustrates how this strategy can pay off. The fund had held both Waste Connections and competitor Progressive Waste Solutions Ltd. for several years and knew that Waste Connections had a strong track record of acquisitions, while Progressive Waste had good assets but a weak management team.
When Waste Connections bought Progressive Waste in 2016, the fund had insight into both companies, Dabiet said. "That day we were out buying more stock because of that confidence. Those opportunities are rare and they don’t last very long, but that’s why we need to be there to execute them."
The fund aims to have no more than 10 percent exposure to any given business risk -- for example, oil and gas producers or Canadian banks -- and credits this for forcing it to look in the "nooks and crannies" of the market to find under-appreciated stocks.
"We’re never satisfied," Dabiet said. "It takes us years to truly understand a business, but once we get to that level it really is powerful because everybody’s on the same page and we can execute very quickly."
|Top holdings at July 31, 2017||% of fund|
|Waste Connections Inc.||3.4|
|Canadian Pacific Railway Ltd.||3.3|
|Open Text Corp.||2.9|
|Pembina Pipeline Corp.||2.5|