Nortel selloff welcome relief for active managers

Young has been a bear on Nortel for some time, and recent trading has vindicated his call. Nortel dropped more than 7% today to close at $88.70 in very heavy trading. It is now off about 30% from its 52-week high earlier this year, sloughing off billions in market cap. The selling action took the entire TSE 300 down more than 2% today alone.

Time will tell if this selloff is climactic, or if there’s more selling ahead. Recent heavy selloffs in popular stocks like Nortel have been followed up with bargain hunting rallies in the ensuing sessions. Opinions on Nortel’s future come down to fundamental calls on the stock. Young has consistently maintained that it is overvalued and that investors have been overpaying for unsustainable growth.

Today’s selloff was not precipitated by anything specifically related to Nortel per se, although Corning’s deal for Pirelli’s fibre optic unit disappointed traders still hoping for a Nortel-Corning mega deal. A general distaste for tech stocks in the wake of earnings warnings from Intel and today, Priceline.com, has hurt techs, too. The selling accelerated through the day as investor sentiment worsened, but in what is generally perceived as a good sign, Nortel, and techs in general, rallied a little at the close.

The sure winners in this though are Canadian fund managers, according to Young. “A Nortel selloff is a welcome relief for active managers,” says Young.

Active fund managers have taken a beating over the past year with Nortel powering remorselessly from about $35 all the way up to $124.50. They have watched helplessly, constrained by concentration restrictions that capped their Nortel holdings at !0%, while it spiraled up to account for about 30% of the TSE 300. On the way down active managers have been cushioned by those same investment restrictions,too.

It also gives active managers a chance to step back into the spotlight. Young says he believes strongly in active management and expects managers to enjoy a renaissance as the auto-pilot strategy of banging money into index funds or ETFs falters on the back of gravity-bound Nortel.