The Manulife Dividend Income Fund and its sibling, Manulife Dividend Income Plus Fund took a hit recently.Fred Lum/the Globe and Mail
With the benefit of hindsight, December’s blow-up in the shares of payment processor Nuvei Corp. NVEI-T makes sense. Expensive tech stocks like Nuvei were in a downdraft as investors turned from high-growth names. Most importantly, it was targeted by a short-seller that had previously taken aim at Lightspeed, another Canadian company in Nuvei’s industry. The stock fell 40 per cent on the day of the short report, wiping out more than $7-billion in market value, and hasn’t fully recovered.
What may be more surprising, however, is the identity of two Canadian mutual funds that likely took a big hit on the shares: the Manulife Dividend Income Fund MMF4141.CF and its sibling, Manulife Dividend Income Plus Fund.
The names suggest stability: Mature companies generating boatloads of cash and passing it along to shareholders who want regular income from their investments. Indeed, In the “Why invest?” section of the “Know Your Fund” document for the Manulife Dividend Income Fund, Manulife says the fund “is ideal for clients looking for a fixed monthly income source.”
They also add, almost as an afterthought, that the ideal investor in this fund also seeks “growth.” Perhaps investors might think this means growth in the dividend payments.
But the funds’ portfolios suggest something else entirely: A look under the hood reveals many holdings that pay no dividend, are unprofitable, have exceptionally high valuations, or some combination of the three characteristics.
That shows the secret sauce for the funds’ performance comes, in part, from high-growth stocks that have recently fallen out of favour with investors – and suggests they may have trouble repeating their peer-beating performance.
Nuvei is the big-name example. As of June 30, the most recent disclosure of the funds’ full holdings, the two held nearly $160-million worth of Nuvei shares in their $10.5-billion portfolios, which works out to a weighting of about 1.5 per cent. If the funds continued to hold the shares, they rose to nearly $280-million at their September high and dipped to just less than $85-million at their Dec. 8 low before rebounding to about $132-million on Tuesday. Fund documents show they began to buy Nuvei some time after the company’s initial public offering in September, 2020.
The shares are now again worth more than what Manulife paid for them so, congratulations, I guess? But the fact the two dividend funds held so much of the volatile Nuvei – only recently profitable, no dividend, no payout seemingly forthcoming – is another example of unusual choices for funds with “dividend” in their name.
In 2019, Manulife’s funds sharply increased their holdings of CannTrust Holdings Inc. CNTTQ stock in the second quarter – just before the company’s surprise disclosure that it was growing cannabis without a licence and the commensurate collapse of the shares. At the time, Manulife’s mutual funds had stepped into CannTrust, and several other high-priced stocks of unprofitable cannabis companies, to a greater degree than most Canadian institutional investors. And per disclosures, the bulk of Manulife’s cannabis shares were held in the Manulife Dividend Income Plus Fund.
This love for buzzy growth has paid off for some time: The two Manulife dividend funds have five-star ratings from Morningstar and have frequently ranked in the top quartile of Canadian equity fund performance.
However, the holdings disclosure of June 30, 2021, suggests the funds’ past performance may not continue.
There were about 170 holdings in the Manulife Dividend Income Fund, according to analysis performed with the screening tools in S&P Global Market Intelligence. About 100 of them did not pay a dividend, and about three dozen were unprofitable on the basis of EBITDA, or earnings before interest, depreciation and amortization. In addition to those three dozen, for which no price-to-earnings multiple can be calculated, another 31 traded at about more than 40 times their trailing EBITDA.
Slightly more than half the 135 holdings in the Manulife Dividend Income Plus Fund pay dividends, and there’s more profitability among the companies: Fewer than 10 have negative EBITDA. But there are plenty of stocks at a dear price: More than 40 had price-to-EBITDA ratios of 40 or more.
“These funds have demonstrated superior profitability versus their benchmarks,” spokeswoman Gillian Earle responded by e-mail when The Globe and Mail inquired about the numbers. “While over ninety per cent of the Manulife Dividend Income Fund equity weight currently pay dividends, the fund mandates give us the flexibility to build diversified portfolios that will meet our customers’ needs over time, including holding non-dividend paying stocks.”
Ms. Earle’s statement is both a defence and a kind of acknowledgment: Indeed, many of the stocks that are unprofitable or expensive are in small positions, making up tiny portions of the funds. Rather than doing a strict head count, when you weight the stocks by the size of their positions, the vast majority of the funds are indeed dividend-payers.
What that also means, however, is the listings of “top holdings” contained in the “Fund Facts” document – typically the only document an investor reads – names lots of big, stable income-oriented stocks, and omits the junk floating around at the bottom of the fund like detritus.
While the big names have done well, the Manulife Dividend Income Fund had 28 stocks as of June 30 that are now down 20 per cent or more in the past year; 10 are down 50 per cent or more. Manulife Dividend Income Plus Fund has 23 companies down 20 per cent or more, with six down by half or more.
These returns reflect a turn in the markets: While broader equity indexes have continued to hit all-time highs, many high-priced, unprofitable growth stocks have tumbled since the beginning of November. These stocks that performed so well for so long are souring.
And they’re taking the Manulife funds with them – the two are down more than 4 per cent since Halloween, according to data from Morningstar, while the S&P/TSX Composite has been flat and the Morningstar-calculated Canadian equity-focused fund peer group is up by 1 per cent. A flight to quality in the equity markets is hurting the Manulife dividend funds, not helping them.
Know your fund, indeed.
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