This under-followed ETF might be the Rodney Dangerfield of dividend ETFs. It doesn’t get any respect. Yet Horizons Canadian Dividend ETF HAL is leading the pack of existing Canadian Dividend ETFs. What will be surprising to some is that the fund is actively managed. At the core of the fund is machine learning – AI or artificial intelligence. Of course, that human intelligence and perspective also enters the mix.
It is smarter than your average dividend ETF. And then some. We’ll start with the out-performance, and then we’ll get to the how and why.
Here is the link to Horizons Dividend ETF page.
Horizons Dividend ETF HAL crushes the funds that chase higher yield.
- Portfolio 1 is Horizons HAL.
- Portfolio 2 is iShares XEI.
- Portfolio 3 is BMO ZDV.
The chart is courtesy of portfoliovisualizer.com. The period is the beginning of February 2012 to end of February 2020. Of course this is pre-COVID.
We see incredible out-performance and much more manageable draw down in the minor corrections. HAL is delivering greater total returns with much less volatility.
Shine in market declines.
As we can see Horizons HAL starts to shine during periods of market declines. HAL holds up a little better and then accelerates during the recovery. It’s finding greater quality and what the market sees as financial health. The market has more trust in the companies that find their way into HAL.
The Canadian Dividend ETF that gave it the best go was Invesco’s Dividend ETF PDC.
You may remember that fund from my post –
- Portfolio 1 is Horizons HAL.
- Portfolio 2 is Invesco’s PDC.
And yes, both of those Dividend ETFs beat the total market index funds such as iShares XIC. They also beat the Canadian Dividend Aristocrats.
Here’s HAL as Portfolio 1 vs iShares XIC from January of 2012 to end of 2019.
Who is HAL? What is artificial intelligence?
The fund has a sub-advisor. As you may know an ETF provider will at times, outsource the management of a fund. In the case of HAL the sub-advisor is Guardian Capital.
For keeners, you can start with this 56 minute webinar. It is very good.
I had the pleasure of chatting with Srikanth Iyer, Managing Director, Head of Systematic Strategies, for Guardian Capital LP. Srikanth is the human brain behind the fund, he also manages the AI team that provides the investment analysis and recommendations.
AI working with Human Intelligence.
As Sri will stress that the process is a combination of AI and HI. The human intelligence must be part of the equation. But the bigger brain in all of this might be the AI. Sri is confident that the future of successful active management includes AI.
The approach for HAL.
The fund certainly does not seek income for income sake, it seeks dividend growth. And the fund seeks dividend health. It wants growing dividends to help propel total returns. It wants to increase the odds that the dividends are first ‘safe’ and that the dividends will keep increasing. The fund seeks growth and financial health. Generous total return can follow dividend growth. Or we might look at it that the robust dividend growth finds the kinds of companies that deliver greater total returns.
Predicting dividend growth rates.
The task of the AI is to predict dividend growth rates. Quite simply, the AI technology has that down to a science. And it was in school for quite some time. The AI ‘brain’ was trained for some 14 years, it was then turned loose for the last 7 years. It certainly learned how to walk and then run in a hurry. Of course artificial intelligence is the process of teaching a machine to think. It is machine learning.
Sri offers it is a symbiotic relationship, between Artificial Intelligence AI and Human Intelligence HI.
Predicting dividend growth rates.
The AI technology has a 90% success rate in predicting dividend growth rates. That is, in determining which decile a company will fall into in the following year. For example the decile 1-10 would be the lowest dividend growth rate. The decile 90-100 would be the highest growth rate. The projection is based on the dividend growth rate year over year.
That AI looks at 2000 nodes every day. It then takes an average of the ‘predictions’. It is the wisdom of the crowd – the node crowd. Only the node knows. 🙂
And once again that success rate is an impressive 90%.
It is a GPS for dividend income.
Horizons Canadian Dividend ETF HAL will then only select from the 9th and 10th decile.
The AI has delivered on predicting dividend cuts as well. No Canadian company in the fund has experienced a dividend cut since the AI has been in operation from 2018. Over the last 30 months the AI caught 4 companies previous to their dividend cuts. The companies were removed from the fund previous to price declines.
For example, Suncor (an index staple) was removed from HAL on September 24th. On that day Suncor traded in the area of $42. We can see that recently Suncor is trading in the low $20’s after reaching the $16 range in March.
I asked Sri how the AI would have performed in ‘catching’ US bank stocks heading into financial crisis. He offered that in a back test, the AI caught all of the US banks before the dividend cuts.
Guardian has been managing the fund from 2012. The management strategy has always been to seek that sustainable dividend growth and long term financial stability. The AI is simply a robust addition to that long term systematic process. It’s an evolution. But again, AI may be a revolution in the active management space.
In the current crisis HAL has not experienced a dividend cut. And of course there have been many dividend cuts in the Canadian space. Here’s a list of Canadian dividend cuts courtesy of Mat Litalien at stocktrades.ca.
There has been ample dividend disruption, far surpassing the financial crisis. The pandemic crisis is ‘leading’ 84 to 48.
Credit risk and equity duration risk. One-two punch.
And here’s the broad stroke methodology for creating better risk adjusted returns.
Credit risk: Credit risk in terms of Dividends speaks to payout of dividends and the probability of a dividend cut. The quality of a company’s capital structure and its exposure to cyclical components of the market dictate the risk to its dividends.
While Equity Duration risk represents the sustainability of cash flow over the long term to allow a company to grow its dividends. Ultimately longer the duration, greater the chance of recovering all the cash flow and terminal value of a company in the form of dividends, buybacks, or valuation. Duration risk is a function of secular trends and competitive strength of companies over its life cycle.
Essentially, with each stock holding HAL wants you to make your money back as soon as possible.
The portfolio overview.
Canada’s best performing dividend ETF has yet to attract significant assets. There is just under $58 million invested.
The estimated annual yield is in the area of 3.4%. It pays a quarterly dividend. But keep in mind this is a total return vehicle.
The asset allocation is much more sensible compared to the (more concentrated) broader market indices. Here’s how HAL entered 2020.
It’s interesting to see that the AI finds total return and dividend growth potential in the Canadian utilities. Energy is well represented. But the energy constituents are pipelines, not producers. Like me, HAL is a toll taker. Others can take the risk of getting the oil and gas out of the ground.
IT is well represented and Sri is really excited about the prospect for Canadian tech. 3 names that make Sri talk a little faster are Enghouse, Open Text and Constellation Software.
Here is the recent top 10. We see those tech companies work their way to the top. They are surrounded by some familiar names.
We also see very good exposure to the REIT sector. That is lacking from the XIUs and XICs of course.
From the Canadian banking sector the fund holds Royal Bank, TD and BMO. Only one insurance company is present by way of Intact. The AI (and Sri) is not a big fan of Canadian consumer discretionary. That was a good ‘call’.
Currently there are 40 names in the portfolio. It is certainly a more concentrated portfolio. The fund carries an MER of .67%. That’s a very reasonable fee for an actively managed fund.
Here’s the top 25 from the June 2019 update.
The dividend growth history.
Let’s have a look at that dividend growth and that dividend sustainability.
- 2011 $.2734
- 2012 $.32763
- 2013 $.433555
- 2014 $.420
- 2015 $.432
- 2016 $.456
- 2017 $.518
- 2018 $.510
- 2019 $.533
That’s a very impressive record. There was considerable dividend disruption in 2014-2016 in many Canadian funds. None of the HAL holdings experienced a dividend cut. The dividend reduction was a result of the fund removing holdings and replacing with lower yielding dividend payers.
Winning can come from not losing. Defense wins championships.
Is HAL ready to take on COVID-19?
As we know we had to kill much of the economy in the name of self-isolation and social distancing. A recession is here. Certain sectors will be crushed. Especially the energy producers thanks to Canadian oil prices that had moved to the $10/barrel range. Prices now sit near $30. Consumer discretionary and REITs face incredible pressure in the new normal as we attempt that economic restart. Anything in the hospitality and travel and entertainment areas face even greater challenges.
Recent sector allocation.
Sri stated that he loves how Canadian tech is situated. And he feels that the tech sector should get much more respect, and weighting in funds. We see that Horizons Canadian Dividend ETF HAL offers a much more healthy 15% allocation compared to the traditional Canadian core cap weighted indices. Again that tech basket is concentrated in that 3-pack of Enghouse Systems, Constellation Software and Open Text. Those stocks have been major contributors to the total returns.
Enter – the new normal.
I like how Horizons Dividend ETF was set up, entering 2020. Moving into the second half of 2020 and into 2021 HAL appears to be more than well positioned.
The fund price recently took a sizable hit as did most Canadian dividend ETFs. That said, HAL was top of the Canadian Dividend ETF in a June comparison post that gauged performance over a one-year period.
Over the next several months, the actual dividends, earnings and other financials will dictate the performance numbers for the Canadian ETFs. The market will reward financial health. We will soon have more clarity on what companies and sectors are best-positioned to thrive or survive in the new normal.
Thanks for reading. We’ll see you in the comment section. Offer your thoughts on Horizons Canadian Dividend ETF. What’s your take on AI?
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