Philip Wootten, vice-president and portfolio manager at Laketon Investment Management Ltd., has achieved market-beating returns by conducting painstaking bottom-up research of every security held in his funds, as well as weighing top-down factors such as economic strength and the direction of interest rates.
"Sometimes top-down analysis may throw up areas that I want to look at from a bottom-up point of view," says the manager of the $462.4-million Canada Life Enhanced Dividend, which comes in aFlex version and aGenerations version. "And I don't mind holding cash if I can't find anything to invest in. Investors in my fund are looking for a steady stream of income and they don't want bad surprises." Canada Life Enhanced Dividend, which Wootten has managed since December 1997, is one of the best performers in the Canadian Dividend category. Its five-year compound annual return at May 31 is 15%, handily beating the category's median return of 8.5% for segregated funds.
This places Wootten's fund second among all 68 Canadian dividend funds with a five-year record, and tops among segregated funds. He also manages the $17.1-millionCanada Life Generations Canadian Equity Value (Laketon).
Wootten may hold up to 30% of assets in cash in Canada Life Enhanced Dividend, up to 30% in income trusts and up to 30% in preferred shares. He will hold at least 50% in Canadian common equities, but no foreign content.
There are no restrictions on the size of companies that Wootten can hold. But since the stocks he chooses must pay dividends, he's effectively limited to mid-to-large capitalizations.
Wootten limits his risk by investing no more than 7% of assets in any one stock, and usually holds 30 to 35 stocks, although there's no hard and fast limit. He says the smaller cap income trusts can be attractive, but he likes to own many of them to spread risk and provide liquidity. Currently he owns about 26 income trusts.
His top-down analysis will lead him to make shifts in industry sectors. He has recently been taking some profits in energy stocks after a strong upward move, and is building up his position in financials. He expects that the U.S. Federal Reserve Board will soon stop raising interest rates, which will be positive for growth and for the financials stocks.
Overall, portfolio turnover is about 50% a year. "It's important to take profits," says Wootten, who always has a target price on his holdings. "When a holding reaches its target, we ask ourselves if the target should be increased. If we can't justify a higher price we'll sell."
Wootten describes himself as a "growth at a reasonable price" investor. He seeks companies that have strong management, are dominant in their field and have growth potential.
"I like to meet the managers and get a feel for their strategy and their management style. I get a sense of where they see the company going and whether they're hedging on anything."
He says there is some psychology involved, and it helps to be a veteran in the business. Wootten entered the investment business in 1965 after graduating from the University of British Columbia with a bachelor of commerce. He began as a research analyst for Canada Permanent Trust Co., and after a few years moved into portfolio management for pensions and pooled funds.
In 1979 he moved to Sterling Trust Co., which later became General Trust of Canada, managing money for trusts, estates and a small mutual fund. He joined Canada Life Investment Management in 1994, which was later renamed Indago Capital Management and subsequently merged with Laketon. Based in Toronto, Laketon is a subsidiary of Canada Life Assurance Co., which is in turn owned by Great-West Life Assurance Co.
Wootten says a significant contributor to his above-average returns is the ability to hang on to the fund's gains after market declines. He frequently writes call options on his holdings to earn premium income.
Wootten's returns may lag when the stock market gets frothy, since that's when he gets cautious and starts building up cash. But the cash also cushions the portfolio. "I pick up my advantage when markets are going down, and end up further ahead on the long run," he says.
"Protecting the downside is not always easy, but it makes a huge difference," says Wootten. "Writing options, carrying cash and moving into more defensive or attractively priced areas can provide support."
