“Value, momentum and quality are also factors that play into the names that we’ll own in the portfolio,” he says, likening the funds’ active management to laying out puzzle pieces. “We want to make sure all the puzzle pieces fit together in a coherent and diverse pattern. That makes sense from a total portfolio standpoint, in addition to providing you an attractive dividend.”
Because of the active managed nature of the funds and the unique modeling Manulife does to build these portfolios, both funds deviate significantly from some established benchmarks such as income and cap weighted benchmarks. “Our portfolio has a reasonable amount of tracking error, it has a reasonably high active share, which is what we’re targeting,” Kelley says. “We want it to be distinguished from some of the established benchmarks.”
Another element of this activeness is how Manulife evolves its models over time. These are not static models. They morph as more research comes to light or more resources are added, bringing new ideas to the fore. “Those folks bring new ideas, new areas to explore and research, not just on factors, but on modeling techniques and a lot of things so that we’ll continue to evolve,” Kelley says.
According to Kelley the models for both funds are largely the same. The only real difference is that in the U.S., the market is broad and there are more names to choose from, whereas Canada is a much smaller market. In UDIV’s case, there are 650 names in its universe, of which the fund owns 145. “In the U.S., we’re looking in the large and mid-cap space and all of the names, for the most part, are liquid enough for us to feel comfortable investing in them,” he says. “If you look at the TSX Composite, not every name is liquid. So, we do have to put a liquidity adjustment and filter out the less liquid names.”
Both funds look for such measures as good margins, changes in margins over time, return on investments, return on equities, and debt to equity ratios. The funds also take into account factors such as dividend yield, payout ratios and dividend growth.