In January, Michael met with Jennifer McClelland, CFA to chat about her investment management insights. Jennifer is the Managing Director & Senior Portfolio Manager for North American Equities at RBC Global Asset Management and has over $10 billion in direct assets under management. Amongst other Canadian equity mandates, she is the lead manager of the RBC Canadian Equity Income Separately Managed Account (SMA), which is a core holding for Michael's clients investing through the A+ Program.
Q: Given the current uncertainty and concern over a recession in 2024, can you comment on how your dividend strategy may change over the next year?
A: Uncertainty tends to lead to choppiness in the market, meaning that stocks get more volatile. Because the uncertainty has been related to interest rates, it’s caused a lot more volatility across dividend stocks – which are typically more insulated from this sort of price action.
Looking forward, the market now expects that interest rates have peaked and may start to come down through 2024. As this begins to occur, it should bring more clarity around path of rates in the future. More certainty on this front would typically be positive for dividend strategies.
It’s likely dividend stability will remain a priority, especially as scenarios are adjusted to account for more earnings volatility. At this point we feel the portfolio is well positioned for this emphasis.
Q: Are there any concerns of a change in dividend growth in any of your portfolio sectors?
A: Our focus through the volatility has been on companies that have strong balance sheets and access to capital to help fund any opportunities that may come their way through periods of volatility. This helps us remain comfortable as it allows us to focus on companies that can continue to pay and grow their dividends, while also growing their business.
There have been some adjustments to dividend growth targets for a few of our names over the last year, driven by pressure on returns from higher rates and inflation. We tend to encourage more conservatism in these targets, despite the negative reaction that can result when this is announced. We get concerned over the pressure of having to maintain a lofty dividend growth target as it sometimes leads to less efficient decisions, can create a financing overhang to achieve these targets and can sometimes be reached for at the expense of balance sheet strength. That’s why we regularly update our scenarios and maintain an ongoing dialogue with management on this topic to ensure these payouts are realistic even in more difficult times.
Q: You have managed portfolios now for two decades. Do you see anything different today in the market that you haven’t seen before?
A: Years ago the dividend yield on a company would typically be somewhat of a backstop. You would know that the price action is unlikely to fall too much more because the dividend yield meant that returns are that much more attractive at a certain level.
More and more transactions are now a result of machine trading, meaning that markets can be more volatile and there’s less of a focus on fundamental levels as a backstop.
For active investors, this can mean that the market may blow through what would otherwise be points of stabilization, and can make decision points more difficult. At the same time, it can be very advantageous, because it opens up opportunities for active investors to buy at very attractive levels, particularly when the long-term growth prospects for these companies appear very positive.
Q: Looking over the next decade, can you comment on how you might think the Canadian market might perform relative to the US Market?
A: There are a lot of positives for both markets. In Canada, valuations - especially relative to the U.S. - are quite attractive. In addition, there are a lot of positives for the economy, including the amount of immigration we’re experiencing that should fuel a considerable amount of economic growth. At the same time, affordability remains a concern, and we’d like to see more concrete measures to address this as it’s hard to see the consumer really surge when affordability is so poor.
Meanwhile, the U.S. market is more expensive on the surface, though less so when you look beyond some of the largest names. Many of these companies generate attractive levels of free cash flow and also have multi-year growth prospects. In addition, they have a number of additional industries that are very under-represented in Canada, like health care and technology.
From a portfolio perspective, it would make sense to have exposure to both markets, as they both offer attractive long-term prospects for growth in a variety of different industries.
Q: Can you comment on the current dividend yield in the portfolio? In terms of price vs dividend yield, have there been certain points in market cycles where the dividend is attractive & a relatively good entry level to your portfolio? Do you feel this is an appropriate time?
A: More clarity around the path for interest rates should help stabilize some of the areas of the market that have been hit quite hard by rising rates. There are some areas of the market that are now quite attractive, and we’ve taken the opportunity to pick away at some of these areas during periods of weakness.
Q: What is currently your strongest conviction about your portfolio?
A: The ability for the underlying companies to maintain their dividend stream. The value of these dividends can ebb and flow in the stock market given various factors, but our focus on sustainability of the dividend given the resilience and visibility of the underlying cash flows under various scenarios gives us lots of comfort.
Q: What are some of the best lessons you have learned in managing portfolios through the years?
A: A lot of value can be added by paying close attention to the details and nuances surrounding a story and really listening closely to what’s being said. Sometimes the real story gets lost in the numbers and headlines.
Also always be willing to pay attention to alternative views. This business is very humbling and we will be wrong a lot – it pays to keep an open mind and not get anchored to one specific view.
