Looking for gains in equities

North American gross domestic product growth will hover around 2% in 2012, Carlin believes, and global growth will be around 3%. But Europe’s is likely to be flat, if not in recession. “The European crisis is real,” says Carlin, “and it has caused people to re-evaluate the growth prospects for the global economy.”

Still, Carlin believes that European policy-makers are working to solve the crisis and also recapitalize their banks. “The devil is in the details,” he says. “Tell us where the money will come from, and the market will settle down.”

Meanwhile, he notes, the U.S. will remain weak and its prospects look dim, as the country must find US$2 trillion in 2013 to deal with budget demands. Says Carlin: “We are in a sustained period of subpar growth.”

Because GDP growth will be anemic, Carlin sees potential total market return of about 5%-6%, including dividends, in 2012. However, he favours stocks — they account for 77% of the imaxx fund’s assets under management, followed by bonds (20%) and cash (3%). The fixed-income component’s average duration is 6.6 years, equal to that of benchmark DEX universe bond index.

About 28% of the imaxx fund’s AUM is in energy and pipeline stocks, 16% is in REITs, 15% is in banks and smaller weightings are in sectors such as utilities. One of the top holdings in the equities component of 35 names is Bank of Montreal. “The banks have positive earnings growth and are trading at reasonable valuations,” says Carlin. “My objective is to generate a dividend yield that’s 50% higher than the market’s. If the dividend yield is 2.8%, then I’m looking for 4.2% or better. A number of banks fall into that category.”

BMO stock, which has a 5% dividend yield, is trading at 9.6 times earnings. Carlin believes the stock, which is trading at about $57 a share, could reach $65 within 12 months.

Another favourite is Crescent Point Energy Corp. “[It has] dominant land positions in Western Canada, and production volume growth at 8% a year,” says Carlin, noting the firm currently produces about 80,000 barrels of oil equivalent. “With the combination of a flat commodities price environment, coupled with [Crescent Point’s] intended capital expenditures in 2012, we see outperformance for this name.”

Crescent Point’s stock, which has a 6% yield, is trading at about $46.20 a share. Carlin’s 12-month target is $50.

while the sovereign-debt crisis in Europe grinds on, corporations are in relatively good shape, says Peter Frost, vice president with Toronto-based AGF Management Ltd. and co-manager of AGF Monthly Income Fund.

“[European companies are] in better shape than they have been since the early 1990s. If you can get companies with attractive dividend yields, you will have to be patient with [the debt crisis],” says Frost, who believes that a resolution to the crisis is likely in 2012. “But the problems reside mostly on the government side. It’s not a corporate issue. That’s why we’re favouring corporate bonds — and equities, too.”

Although markets would like a quicker resolution, says Tristan Sones, vice president of AGF and co-manager of the fund, “We are gradually seeing more steps being taken in the right direction. Uncertainty is not a good thing. But it’s not an easy path when you have so many countries involved. It’s difficult. And they’re learning as they go along, because they haven’t had the framework. There will be a resolution. But it’s going to be a difficult for those countries that have a bigger adjustment to make.”

Canada is better positioned than most developed countries, says Frost, because it restructured in the 1990s. “We’re probably viewed as a safe haven,” he says, “certainly for foreign bond investors. And on the equities side, there are pockets of attractive opportunities. But there are some better values outside Canada, such as on the telecommunications side.”

About 69% of the AGF fund’s AUM is in stocks, including 22% in U.S. names. There is also 22% of AUM in bonds, which is heavily weighted to high-yield securities, and about 9% in cash. The average duration for the bond portfolio is 3.9 years.

“Currently, spreads for high-yield are about 750 basis points over U.S. treasuries,” says Sones, who looks after the fixed-income component of the AGF fund. “Yes, spreads could go wider in the short term. But, ultimately, these are pretty attractive levels. They are wider than historical norms.”

Among the 75 names in the bond portfolio is a Ford Credit Canada bond that matures in 2015 and yields 5%.

On the equities side, Frost likes U.S. telecom firms such as Windstream Corp. This small-cap firm has been shifting from a reliance on land-line revenue to higher-growth areas such as high-speed Internet and “voice over Internet protocol” technology.

“[Windstream] continues to focus on its business segment, which will drive revenue going forward,” says Frost. “And [it has been an] acquirer of other players, so it can provide some growth in a slow-growth environment.”

Windstream stock is trading at about US$11.67 ($11.50) a share and yields 8.5%. Frost’s target is US$13.50 in 12 to 24 months.

Another favourite in the AGF fund’s portfolio is GENIVAR Inc., an engineering firm that has expanded rapidly beyond its Quebec base. “[GENIVAR is] very well diversified by type of projects. And in the past few years [it has] grown through acquisition by adding about 50 smaller firms,” says Frost, adding that the firm plans to generate 50% of its revenue outside of Canada by 2014. “[Management’s] skill is acquiring other companies and integrating them into their business.”

GENIVAR stock is trading at about $26.30 a share and yields 5.7%. Frost’s target is $30-$32 within 12 to 18 months.

 

Although Rory Ronan, vice president with Toronto-based Invesco Canada Ltd. and lead manager of Trimark Diversified Income Class fund, is reluctant to make forecasts, he acknowledges that Canada faces major challenges, thanks in part to its weaker trading partners.

“Europe is flat, and the U.S. is still growing, albeit at a slow rate,” Ronan points out. “And even though growth in emerging markets is slowing, it’s still at healthy levels. But the fact that Europe’s growth will slow because of de-leveraging will have a drag on global GDP. Our own GDP growth will be positive but sluggish.”

Despite falling price/earnings multiples in Canada’s stock markets, Ronan believes there are enough attractive ideas in various industries to warrant interest.

About 69% of the Trimark fund’s AUM is in stocks, 22% is in fixed-income and the 9% balance in cash. About 60% of the bond component is in corporate bonds and 40% is in Canadian government bonds; the average duration is four years, reflecting the defensive positioning of the fixed-income team, which includes portfolio manager Alfred Samson and Anthony Imbesi, vice president of Invesco.

“Our team sees hardly any value in government bonds — where yields are extremely low,” says Ronan, “but a little better value in corporate bonds.”

The equities exposure for the Trimark fund is at the higher end of the range, Ronan admits: “That’s because we see a lot of opportunities. But we’re looking out at least three to five years.” Ronan looks for companies that have staying power, balance sheet strength and are mispriced by the market.

Ronan, seeking to improve sector and geographical diversification, has put about 28% of the Trimark fund’s AUM in foreign stocks.

One name at the top of his list is Unilever NV, the global maker of consumer products ranging from Dove soap to Ben & Jerry’s ice cream. The Trimark fund acquired Unilever stock about three years ago, when Unilever’s new CEO Paul Polman (formerly CFO at Nestlé SA) restructured the company. “He’s done a great job turning [Unilever] around,” says Ronan, noting that the company has introduced new products and increased its share in the fast-growing emerging markets.

Unilever stock is trading at about 26.60 euros ($33.92) and pays a 3.3% dividend yield. Although the stock is trading at a relatively high P/E multiple of 16, says Ronan, “it’s attractively valued because it can grow its earnings per share north of 10% a year.” There is no stated share-price target.

Within Canada, Ronan likes Ensign Energy Services Inc., an oil and gas services provider that generates sales in both Canada and the U.S. The company is the second-largest O&G services provider in Canada (after Precision Drilling Corp.) and, says Ronan, it has “conservative management that has a significant stake in the company and focuses on return on invested capital. [Management has] a great track record of increasing dividends. Over the past 10 years, [Ensign Energy has] increased the dividend by 15% compounded annually.”

The bulk of Ensign’s revenue comes from oil services, Ronan adds, which are benefiting from crude oil prices of around US$102 a barrel.

“The stock trades at around nine times forward earnings, which is low,” says Ronan. “People are uncertain, from a macroeconomic perspective, and the market is worried there could be a pullback. But we think the stock is attractively valued. The fundamentals remain very strong.”

Ensign stock is trading at about $17.05 a share and yields 2.6%  IE