Manager: Bob Haber, Canoe Financial
Fund: EnerVest Diversified Income Trust (EIT.UN/TSX)
Description: Actively managed, diversified portfolio of primarily North American equities, and a focus on providing monthly income
Net asset value: .3-billion
Many investors who remain extremely hungry for yield have found this source of income in what Bob Haber labels bond surrogates — high-yielding equities in sectors such as pipelines, utilities, telecoms and REITs — but this strategy has huge capital risks.
“They’ve been spectacular investments, but we think it is an overcrowded space,” the Canoe Financial portfolio manager said. “We don’t know the timing, but if rates back up a couple of per cent, these bond surrogates will not be safe.”
As a result, he has been slowly reducing exposure to these sectors in the EnerVest Diversified Income Trust. For the same reason, the portfolio doesn’t hold government bonds, has very little provincial debt and a limited amount of high-grade corporate bonds.
That eliminates a lot of asset categories Haber considers overvalued, but means the manager has to get creative to achieve the 8.5% yield goal for the portfolio.
Stock dividends account for about a 5% yield, writing options another 2% and bond holdings make up the rest.
If rates back up a couple of per cent, these bond surrogates will not be safe
Canoe has committed to maintaining its 10¢ per unit distribution throughout 2012, which Haber notes comes predominantly from income generated by the portfolio.
“We look to dividend payers that we believe will have high dividend growth,” he said. “We supplement that dividend stream by writing a limited amount of call options on those securities.”
For example, each month he writes call options on Imperial Oil Ltd. that are equivalent to roughly 15% to 20% of his position in the stock, then opportunistically trades these options.
The portfolio holds a few oil services companies because they offer high dividend yields and several Canadian banks, but has exposure to every TSX sector. It also has about 20% foreign content including some REITs.
IMPERIAL OIL LTD. (IMO/TSX)
SUNCOR ENERGY INC. (SU/TSX)
The position: Approximately 10% of portfolio combined
Why do you like them? Haber owns many oil companies and believes the best place to invest for incremental oil assets is the Canadian Western Sedimentary Basin, but companies such as Imperial Oil and Suncor offer attractive dividends and value. “Emerging market demand, plus really easy money coming out of the developed world, simply creates the need for more and more oil,” he said.
Biggest risk: Temporary problems such as operational challenges and price differentials due to North American pipeline dynamics
WHISTLER BLACKCOMB HOLDINGS INC. (WB/TSX)
The position: Roughly 1% of portfolio
Why do you like it? This ski resort operator has been public since late in 2010 and offers a dividend yield above 9%. “We think people will arbitrage away that yield; it doesn’t have to be that high,” said Haber, who also anticipates some capital gains. “I don’t think it is very well understood company and it’s had a great season.”
Biggest risk: Warm weather would reduce snow levels and visitors
AMERICAN CAPITAL AGENCY CORP. (AGNC/NASDAQ)
The position: Among the fund’s largest U.S. holdings at about 3%
Why do you like it? American Capital is the largest of the three U.S. agency mortgage REITs that Haber owns. Much like a bank, this REIT borrows money to buy mortgages guaranteed by the U.S. government and the spread creates the value that is paid out to shareholders. The stock has one of the sector’s highest dividend yields at roughly 16%, but Haber explains this is because American Capital is in growth mode. “Fannie Mae and Freddie Mac are now wards of the state, so they will at some point exit the market,” he said. “Companies like this are coming in to fill that void.”
Biggest risk: If and when the Fed starts raising interest rates
BOARDWALK REIT (BEI.UN/TSX)
The position: Exited position
Why don’t you like it? Haber has only good things to say about the company’s execution and management, but feels the stock is now ahead of itself. “The 3.2% yield is actually too low to help us in delivering what our unitholders want,” the manager said. “We don’t expect a lot of capital growth and we think it is a bit of a bond surrogate.”
Potential positives: If investors continue to pile into bonds and bond surrogates; a big oil and gas boom would positively impact its Alberta properties