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PH&N Dividend Income Fund
The Phillips, Hager & North Dividend Income Fund has come through the turmoil of the three years ended September 30th comparatively well, having gained an average of 14.3% annually over that period. This represents excellent performance compared to the 5.5% average annual loss of the S&P/TSX60. During the first nine months of the year, the fund lost 13.8% of its value due to low weightings in the energy, gold, and consumer staples sectors. However, this is still far better than the 22% loss experienced by the index. The fund is managed by a team of ten portfolio managers led by Dale Harrison. On average, the fund's managers have been with PH&N for about ten years. These managers usually invest in dividend paying common stocks of mature companies which are selected using a self-described 'quality growth' style based on company profitability, financial strength, and earnings growth. This is essentially a GARP or growth at a reasonable price style with the emphasis on growth. The fund's low portfolio turnover is a testament to the fund's long-term focus. Although preferred shares are explicitly mentioned in the fund's charter as potential investments, they have not been in favor with the fund's management for some time. Mr. Harrison and his colleagues feel that the potential for growth and capital appreciation is much more attractive for common shares. As a result, the current portfolio includes no preferred shares. Likewise, the fund holds no bonds other than short-term notes. At the end of the third quarter, the fund's portfolio included 37 stocks. Of these, only CISCO systems did not pay a dividend, and six reported negative earnings. Taken as an aggregate, the fund's portfolio is somewhat expensive. It's earnings yield of 5.1% is higher than the 2% offered by the S&P/TSX60 index and represents good relative value. The portfolio's dividend yield of 2.7% is higher than the yield of the index (about 2.3%), but it is not as high as it could be which demonstrates a preference for dividend growth. From a value perspective, the portfolio's price/book ratio of 1.7 is also a bit on the high side, but on par with the index. Canadian equities make up 83.2% of the portfolio's total assets, while 16.3% is invested in U.S. equities; the fund's cash position is modest at 0.5% of total assets, up from 0.1% at the end of the previous quarter. Financial stocks represent 45.6% of the portfolio, down from 47.3% at the end of the second quarter. Financials are followed by industrials and telecommunications which make up 12.8% and 11.7%, respectively, of the fund's holdings. The fund's telecommunications exposure is up from 9.8%, while industrials are down from 13%. During the third quarter the fund was active and reduced its total number of holdings from 40 to 37. Positions in Encana, Fording, Toromont, Canadian Pacific Railways, and Fairmont Hotels and Resorts were eliminated. At the same time new positions in Alcan and George Weston Ltd. were added, and an existing position in CP Ships was substantially increased. With an average annual return of 12.3% over the past 15 years, the PH&N Dividend Income fund is first among Canadian dividend funds over the long term. Although the $25,000 minimum investment likely puts the fund beyond the reach of smaller investors, a low 1.16% MER for this kind of performance is a bargain for those with the means. Excellent long-term performance and an attractive MER makes this fund our top pick for frugal investors seeking growing dividend income. FF: Q3 2002 |
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