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Global fund investing can offer a smoother ride

To avoid the highs and lows of the Canadian commodity cycle, consider a global dividend or income fund, portfolio manager Ramona Persaud says


Date: December 19,2014

Many Canadians have gotten the message that investing in dividend-paying companies is one of the most effective approaches for portfolio management.

Rather than counting on the price of stocks going up, or on the tiny returns from income investments such as bond funds or guaranteed investment certificates, dividend investing allows a steady payout, plus potential capital appreciation.

And there is also evidence that the discipline in maintaining a dividend payout leads companies to make the best possible decisions about their cash flow.

However some negative forces have been affecting the primary dividend-paying sectors of the Canadian market. The plunge in the price of oil has caused some energy companies to cut their dividend payout rates – and other firms are expected to follow suit. Bank stocks took a hit after their latest quarterly results showed a slowdown in some key parts of their businesses. And real-estate investment trusts (REITs) have been dogged by the prospect of rising interest rates.

So what is a Canadian dividend investor to do? The answer is to look internationally.

Even without the recent jolts to the Canadian market, it is a good idea for investors to diversify outside their borders, says Ramona Persaud, a portfolio manager for Fidelity Investments. She is responsible for the global dividend portfolios of the Fidelity Global Dividend Fund and Fidelity Global Monthly Income Fund.

She notes that three-quarters of Canada’s market is in deeply cyclical industries that she calls “lower quality.” By that she means industries that are capital intensive, highly volatile in nature, with a large swing in their fortunes from the peak of the cycle to the trough.

“Investing globally gets you away from the vagaries of the commodity cycle,” Ms. Persaud says. “Plus you have a much larger universe to choose from and find value. You don’t have to ‘chase yield’ like you may have to if you limit yourself to one country.”

Ms. Persaud follows three tenets for investing: value, quality and capital allocation. She looks for stocks with low expectations built into their stock price, but also is willing to buy high-quality companies that happen to be trading at a decent valuation. She also looks at what companies do with their free cash flow – primarily their dividend payouts, but also other positive techniques such as share buybacks.

The largest holdings in Ms. Persaud’s funds are well-known American names such as Johnson & Johnson, Apple Inc. and JPMorgan Chase & Co. That’s not surprising, considering the United States is by far the world’s largest securities market.

But Ms. Persaud also places a great deal of emphasis on markets outside North America. She also points to the competitive advantage of a large global research team such as the one at Fidelity.

Ms. Persaud notes that some parts of the world have special circumstances that favour dividend investing. Brazil has a law that requires most companies to pay out 25 per cent of their profits. Australia and New Zealand have tax regimes without “double taxation” – that is, taxing dividends at both the company and individual shareholder level. Britain and Chile have a tradition of pension fund ownership that encourages dividends, as the funds have a need for dividend streams to offset their liabilities and payouts.

Ms. Persaud is primarily a “bottom-up” investor, in that she analyzes companies based on their individual attributes, rather than first deciding on a country or region then looking for companies in that locale. However she does take into account what she calls “sovereign balance sheet analysis.” That is, analyzing a country like you would a company – its balance sheet, income statement and so on. That analysis then has some effect on her individual stock-picking.

One country where Ms. Persaud has been finding attractive firms is Japan. “We have a very good research team there, especially in mid to small caps,” she says. She is a supporter of the Japanese government’s ongoing program of structural reforms and economic stimulus.

As for the impact of the recent drop in the price of oil on her portfolio, she says it’s actually a positive – since she tends to be structurally underweight in commodity-based sectors such as energy. Also, reduced energy prices will mean lower costs for many companies she owns.

Ms. Persaud says her principles for stock picking lead to stronger risk-adjusted returns than comparable funds. As she says, “When you invest in quality companies, income becomes the natural outcome rather than something you chase.”

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