US/Canada Equity, Dividend Focus
Engagement at a glance
|Client Country/Type:||Canadian Foundation|
|Asset Class, geography:||Large / All Cap Equity, US / Canada|
|Mandate Size:||CAD 70 million US, CAD 70 million Canada|
|Service Provided:||Manager Selection||Investment Objective:||Outperform benchmark net of fees|
This investor sought to switch from passive strategies towards active management, with the primary driver being the inability to meet their ESG-related objectives through passive strategies.
Those ESG objectives included: implementing an exclusion list, reducing carbon footprint and achieving an overall climate target set out in their policy.
As well as strong ESG capabilities at both firm and strategy level, the investor sought strategies with a clear focus on dividends – motivated by the contribution that dividends can make to total return and the downside protection characteristics associated with dividend-focused strategies. Non-dividend-paying tech stocks had outperformed in recent years but were trading at relatively high valuations and experienced more significant drawdowns when inflation escalated.
- Balancing dividend income with dividend growth potential. The investor was keen to prioritise dividend growth ahead of dividend yield. Even in a rising inflation environment, companies that pay a sustainable and growing dividend would have the potential to grow their income to keep up with inflation. The bfinance team highlighted research indicating that second quintile dividend-yielding stocks provide the best balance of income with future earnings growth, while offering the highest total return and the lowest downside risk over the long term.
- Differentiating between ‘Dividend’ and ‘Value’ strategies. These two groups have many similarities—inasmuch as Value stocks can have a high dividend yield profile after a significant fall in share price—but they are fundamentally different. The research team’s analysis provided clarity on managers’ exposures and processes.
- Analysing strategy- and firm-level ESG. This client was strongly focused on ESG capabilities, including carbon and climate objectives. However, dividend-focused strategies are likely to overweight the Utility and Energy sectors for their higher dividend yield, which can typically result in a higher carbon profile. Detailed analysis provided clarity on carbon and climate aspects with this likely bias in mind. In addition, ESG resources, engagement and diversity all came under scrutiny.