Since taking over the $3.6-billion BMO Dividend Fund in April 2012, co-manager Philip Harrington has broadened its range of holdings. At the same time, he has retained the fund’s traditional emphasis on companies with growing dividends.
One of the few adjustments, says Harrington, was to add a few mid-cap names in energy infrastructure, “where we had a lot of experience. Real estate investment trusts (REITs) were another option for the portfolio.” As well, U.S. equities have been added, an asset class that was pretty much non-existent before Harrington was assigned to the fund.
An example of an infrastructure company added to the portfolio is Keyera Corp. (TSX:KEY), which has energy-related assets in Alberta. “It’s all hard assets,” says Harrington, “and hard assets we love. Like pension-like assets, they throw off a lot of free cash flow.”
Keyera’s assets include gas-processing plants, storage facilities and rail-offloading facilities. As well, for the most part, “they’re unregulated assets, so they have some pricing power.”
Harrington, a vice-president and portfolio manager, Canadian equities, at BMO Asset Management Inc. of Toronto, assumed responsibility for BMO Dividend Fund, along with co-manager Lutz Zeitler, when Michael Stanley retired. Stanley had managed the fund since its inception in October 1994. Harrington and Zeitler draw on a team of six analysts.
“Investors were loud and clear as we made our way across the country that they held dear the fact that it was a low-volatility portfolio,” says Harrington. “We’ve tried to maintain that get-rich-slowly, sleep-at-night type of approach.”
All of the current 52 holdings in BMO Dividend are income-paying, except for one promising U.S. holding, for which the managers expect dividends to materialize. No annual income yield is targeted for the portfolio but the managers generally favour securities that yield 2% or more. Harrington cites research that has shown that companies with growing dividends outperform non-dividend-paying stocks historically.
There are constraints on the sector exposure in BMO Dividend Fund. Normally, Harrington and Zeitler will keep the weights in any sector to within plus or minus 10 percentage points vs the S&P/TSX 60 benchmark.
To control security-specific risk, the managers generally limit individual holdings to no more than 3% of the fund’s assets under management. The exceptions are the major banks, for which the weightings in the portfolio are typically higher.
“We think the banks offer a pretty compelling story,” says Harrington. “We’re seeing regular dividend hikes, earnings are very stable, and generally the trend is nicely upwards relative to other sectors.”
Harrington considers the approximately 12% equity weighting in U.S. stocks to be beneficial in providing diversification across some of the sectors that are not well represented in Canada, such as technology.
Harrington says it is difficult for a large fund like BMO Dividend Fund to get exposure to certain themes in Canada, whereas the U.S. is a huge, diverse and very liquid market. The BMO fund’s mandate allows it to hold up to 20% in foreign content. Most of that is held in shares of U.S. companies.
Apart from the trading activity that occurred when he took over the fund, Harrington’s portfolio turnover tends to be low. He expects it to be in the 20% to 25% range.
Harrington, who began his investment career at BMO in fund sales in 1998, received a bachelor of commerce degree in 2000 from the University of Toronto’s Rotman School of Management. He also earned his CFA designation that year. He pursued further studies while working at BMO, and completed his master’s degree at Rotman in 2010.
In 2001, Harrington joined BMO’s private-banking division as a research associate in the income-trust area. Income trusts became very popular for a time, and Harrington began running a fund dedicated to income trusts in 2002. That mandate lasted until 2007, when the trust market was being wound up in response to federal tax changes.
Looking ahead, “we’re actually seeing a dividend renaissance again,” says Harrington. “It happens about every decade or so.” Despite nervous reaction in the markets over changes in the U.S. Federal Reserve’s monetary policy Harrington is encouraged by company fundamentals.
“A lot of companies have a lot of cash on the sheets,” he says. “I think we saw about 13% on average dividend increase last year, and we continue to see dividend growth.”