The Scotia Canadian Dividend Fund (NATTRDIV) has cut its bank holdings by 40 percent, the most among Canada’s 10 largest actively-managed mutual funds, on concern that lending is slowing as consumers retrench.
The fund has reduced bank stocks, including those of its its parent Bank of Nova Scotia, to about 12 percent of its C$3.42 billion ($3.37 billion) portfolio from 20 percent at the end of 2011, data compiled by Bloomberg show.
“There’s no question that things are going to slow down from where they’ve been in the past few years,” said Jason Gibbs, portfolio manager at GCIC Ltd, the Toronto-based money manager that runs the fund for Scotiabank. GCIC made a “strategic decision” to diversify assets when it took over management of the fund, the country’s sixth largest according to Bloomberg figures, in November 2011, Gibbs said.
Canada’s banks, ranked the world’s soundest for the past five years by the World Economic Forum, have said domestic banking profit is expected to slow this year amid record household debt. “With Canadian households deleveraging, consumer lending growth is slowing across the industry,” Toronto-Dominion Bank Chief Executive Officer Edmund Clark told investors Feb. 28.
Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal (BMO) posted higher net income in the fiscal first quarter, bolstered by gains from business loans and wealth management. That helped propel the 10-member Standard & Poor’s/TSX Banks Index to a record high of 2241.30 on Feb. 28. It is up 1.9 percent this year compared with 2.5 percent for the broad TSX Composite (SPTSX) index.
Standard & Poor’s said last week it expects revenue and loan growth for Canadian banks to reach “mid single-digit levels” this year from 9 percent and 10 percent in 2012, respectively.
“While not necessarily likely to revert, we do not believe that these issues will likely continue to aid earnings growth,” John Aiken, an analyst at Barclays Capital in Toronto said in a March 11 note to clients. Ongoing headwinds “will likely lead to significantly lower levels of earnings growth through the remainder of 2013,” the analyst said.
The ratio of Canadian household debt to disposable income rose to a record 165 percent in the last quarter of 2012 from 164.7 percent in the prior three-month period, Statistics Canada reported on March 15.
Scotiabank fund’s move echoes a reduction among its peers, albeit with relatively smaller declines. Fidelity Investments’s Fidelity True North Fund, the third-biggest actively managed fund in Canada according to data compiled by Bloomberg, has cut its bank investments to 14 percent from about 16 percent two years ago, while Toronto-Dominion’s TD Dividend Growth Fund (TDGDIVD), the second biggest, reduced banks to 41 percent from 42 percent.
Chris Pepper a spokesmen for Fidelity and Ali Duncan Martin, a Toronto-Dominion spokeswoman, declined to comment. Investors Dividend Fund, the largest actively managed fund in Canada with C$14.7 billion under management, raised its bank exposure to 34 percent from 31 percent at the end of 2011, according to Bloomberg data.
Other large funds, including the Beutel Goodman Canadian Equity Fund (BEUGOOCE) and Bank of Montreal’s BMO Dividend Fund, have kept bank holdings at roughly the same amount since the end of 2011. CI Financial Corp. (CIX)’s CI Canadian Investment Fund (CDNINVFL) increased its bank exposure to 17 percent from about 16 percent.
The financials category remains the largest sector allocation for the Scotia Canadian Dividend Fund at about 29 percent, with Scotiabank, Brookfield Asset Management Inc. (BAM/A), Toronto-Dominion Bank (TD) and insurer Intact Financial Corp. (IFC) among the top 10 holdings at the end of February.
Energy is the second-largest weighting in the fund, representing about 23 percent of the portfolio, followed by consumer discretionary, utilities and telecommunications services stocks.
The fund has returned 9.8 percent in the 12 months through yesterday including dividends, compared with 5.1 percent for the TSX Composite Index and 7.9 percent for Bloomberg’s Active Indices for Funds.
“It’s really looking at diversification, where we can find the best values,” Gibbs said. “We wanted to add to real estate, and part of that came from a reduction in the Canadian banks.”
The fund has bolstered its real estate holdings to 13 percent, up from about 8 percent at the end of 2011. That’s to diversify away from bank concentration while capitalizing on increased demand for commercial real estate in North America, particularly Canada, said Gibbs.
One company the fund has increased its weighting in is Toronto-based Brookfield Asset, whose shares have increased 15 percent in the last year. Today, the shares rose 1.7 percent to C$37.10 in 4 p.m. trading on the Toronto Stock Exchange.
“That’s a company I consider real estate and infrastructure,” said Gibbs. “It’s relatively simple. You don’t have a lot of supply, speaking generally. The demand for real estate remains enormous.”
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