Jennifer McClelland Jennifer McClelland | Vice-president and senior portfolio manager, North American equities, RBC Global Asset Management Inc.
Jennifer McClelland’s RBC Canadian Equity Income Fund got off to a rough start when it launched in 2006 to invest in high-yielding income trusts. Three months later, Ottawa dropped a bombshell by announcing plans to tax trusts like corporations by 2011. Although the news was a shock, McClelland and co-manager Brahm Spilfogel easily retooled the strategy to focus on dividend stocks, in addition to real estate investment trusts (REITs). The fund has grown to $3.3 billion in assets and has outpaced the S&P/TSX Composite Index, including dividends, since inception. We asked the 51-year-old portfolio manager why she’s bullish on some retail REITs and likes fertilizer giant Nutrien.
How has your fund managed to outperform the index?
We try to keep our cool—whether it was the blow dealt to income trusts, the 2008 financial crisis or the pandemic. With the big sell-off in March 2020, REITs were down about 50%, and the price of oil fell to zero. Sentiment was horrible. However, an ongoing dialogue with management teams and our analysts trying to figure out worst-case scenarios helped our outperformance last year. Retail REITs, for example, were hit hard, but we had added to our exposure, and the sector rebounded. Markets can be irrational in difficult times, but trying to manage that noise has paid off long term.
You also run the $2.3-billion RBC Canadian Equity Fund. What’s your outlook for the domestic market?
We are positive on financials, particularly Canadian banks, given a rising interest rate environment and a pick-up in loan growth. We also like the energy sector, where there are companies with strong balance sheets and disciplined production growth. We see a tightness in oil supply, so the commodity price, which has been around US$80 per barrel, should remain strong. Everybody expected demand to fall off the cliff with COVID-19, but that hasn’t happened. We own Canadian Natural Resources, which has exposure to the oil sands. It’s a low-cost operator with a strong balance sheet and is run by managers who have made smart acquisitions.
Why do you like some retail REITs?
These REITs have been hurt by COVID shutdowns and capacity restrictions, but there’s another side to the story. We like mall operator RioCan REIT because it also has a large portfolio of development growth that’s not reflected in its unit price. With its mixed-use properties, including apartments and condos, it’s well positioned to benefit from population growth and immigration, which has been held back by the pandemic. We also own First Capital and Choice Properties REITs, which have residential developments, too. As house prices keep rising, there’s increased demand for rentals and affordable housing. We’re positive on seniors’ housing, too, particularly Chartwell Retirement Residences, which will get a tailwind from population growth and aging demographics.
Nutrien has seen two CEOs resign in less than a year. Why do you still like this stock?
This global leader in fertilizer production has been a core name for us, particularly after the merger of PotashCorp, the commodity producer, and retailer Agrium. We like Nutrien because the commodity price environment is extremely strong, and the business strategy hasn’t changed despite the CEO turmoil. Crop prices are rising, so demand for fertilizer and various nutrients is high. Given global supply constraints, Nutrien—which has excess capacity—is well positioned as a swing producer of potash and can influence prices.
High-yielding dividend stocks can get hurt by rising interest rates. How have you repositioned your equity income fund?
The biggest risk for an income portfolio is the impact of inflation. I try to ensure there’s a balance between cyclical names or those with commodity exposure, to offset interest-sensitive stocks. We had anticipated this bottoming of interest rates for a while. We’re also slightly more focused on companies with a visible dividend growth trajectory. For instance, we own pipeline operators Enbridge and TC Energy, which should show modest dividend growth over time.