After a brutal year of double-digit losses, it’s hard to be upbeat about Canadian equities. Yet some fund managers see attractive opportunities, even though they are divided over when markets will recover.

One of those in the bullish camp is Pierre Bernard, manager of IA Clarington Canadian Leaders Fund and vice president of Canadian stocks with Montreal-based IA Investment Management Ltd.

“The good news is that [the sell-off] was very quick on the way down,” says Bernard. “We didn’t have to suffer for three years, as we did in 2000-2002. I believe that the way up will be just as quick.”

First, he argues, there is a great deal of cash on the sidelines waiting to be deployed.

“For old-timers like me,” Bernard says, “we were used to seeing cash parked by U.S. investors in the U.S. This time, foreign investors from Asia, the Middle East and Latin America have been pouring cash into the U.S.”

Foreigners have bought U.S. treasuries with recycled petrodollars and massive Asian savings. “All these sovereign wealth funds were pouring money into the U.S.,” he says. “But then, last fall, they stopped buying U.S. assets.”

That move, Bernard argues, was driven by foreign investors concerned that high-profile investors such as Warren Buffett were too hasty in plowing billions of dollars into Goldman Sachs Group Inc. and Citigroup Inc., for example.

The second reason for Bernard’s optimism is the deep, irrational fear that is driving the direction of securities markets. “I could tell you about a cheap stock with strong growth and dominant market share,” he says. “And you would say: ‘I don’t care. All I want is security; I don’t have any confidence.’

“This lack of confidence has created irrational behaviour in many investors,” he continues. “This is all about emotions. It’s usually when you’re in the dark that it’s the best time to redeploy your capital.”

Finally, Bernard is a firm believer in common equities as the most attractive asset class for the next business cycle.

“This asset class is a window on what the capital markets will bring to investors for the next three to five years,” he says. “This is based on the growth of the population in many countries. I look around and ask: ‘Where is the population growing and striving for the American dream of consuming, and owning a car and a house?’ In Asia, Eastern Europe, Russia, South America and South Africa.”

In short, Bernard argues, the emerging markets’ quest for higher living standards will drive demand for goods and services and inevitably push stock markets back up.

Running a concentrated portfolio of 30 names, Bernard favours blue-chip, industry leaders. This past May, concerned about valuations, Bernard — who takes a top-down approach — reduced the IA fund’s energy exposure to 5% of assets under management, down from around 30% of AUM, and invested a total of 25% of AUM in Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia. He also moved about 15% of AUM into Barrick Gold Corp. and Goldcorp. Inc. because they are negatively correlated to the banks.

In October, however, Bernard exited from Goldcorp, Manulife Financial Inc. and Potash Corp. of Saskatchewan Inc. He invested the proceeds in Agnico-Eagle Mines Ltd., Husky Energy Inc. and Imperial Oil Ltd.

These moves leave 25% of the fund’s AUM in the three Canadian banks, 16% in gold, 16% in energy, 5% in materials, 16% in industrials, 10% in consumer discretionary, smaller holdings in areas such as consumer staples and 9% in cash.

“Staying with the quality banks, gold stocks and consumer names is the best way to go through this crisis,” Bernard says. “We are focusing on risk management.”

He notes that Agnico-Eagle has mines in Quebec, Finland and Mexico and produces about 200,000 ounces of gold and 70,000 tons of zinc a year. The stock was recently trading at $40.25 a share. Bernard has a 12-month target of $50 a share.

He also likes Imperial Oil because it has a well-diversified portfolio: “And, who knows, one day its parent company [U.S.-based Exxon Mobil Corp.] may buy it out.”

Imperial Oil shares were recently trading at $38 a share; Bernard’s 12-month target is $45 a share.



There could be an interim bear-market rally, but it may only last until around February, says Ted Macklin, manager of BMO Guardian Canadian Large Cap Equity Fund, offered by Guardian Group of Funds Ltd., and managing director of Toronto-based Guardian Capital LP. The reason for his concern is the state of the U.S. and global economies.

@page_break@“Policy-makers around the world are aggressively providing stimulation measures,” he says. “But these measures take a while to work through the system.”

Despite the billions of dollars in bailout money lavished on some companies in the global financial services industry, Macklin expresses concern about the U.S. Federal Reserve Board’s ad hoc approach to rescuing troubled institutions.

“We don’t know how bad it’s going to get,” he says. “The banks and insurance companies are going through a necessary process of re-capitalizing their balance sheets, on a global basis.

“But Canadian financial institutions are very healthy,” Macklin adds, noting that some Canadian insurers have sold assets, while others have raised capital. “But we don’t know, as we go further into the recession, the extent of the loan losses and their impact on the balance sheets. It’s a big question mark.”

Although Macklin has been cautious for the past two years, he admits he has not been cautious enough. He underweighted the materials sector, for instance, but he had still enough exposure that it hurt the BMO Guardian fund.

“There [has] been nowhere to hide,” says Macklin.

He has been concerned about the U.S. housing market and, at home, the frothy valuations in the base metals sector.

Focusing on large-cap stocks, and tending to keep cash at around 6% of AUM, Macklin runs a 38-name fund. He has 21% of AUM in energy stocks, vs 27% in the benchmark S&P/TSX 60 index, 23% in financial services (vs 29.7% in the index), 11.8% in telecommunication services (vs 8.6%), 11.4% in consumer discretionary (vs 4.5%), 12.5% in materials (vs 16.3%), 6% in industrials (vs 5.4%) and 6.2% in consumer staples (vs 2.3%).

Pursuing a largely defensive strategy, Macklin has overweighted telecommunications and industrials and reduced the fund’s exposure to commodities. “But lately I have been picking away at the commodities sector,” he admits, “although we’re still underweighted.” The fund has 17.4% of AUM in oil and gas names, plus 3.6% in pipelines and uranium.

One of the top holdings is TD Bank, a position that Macklin has recently expanded. “We are comfortable with TD’s capital position and added to our holding,” he says, noting that the stock has a 7.4% dividend yield. Although TD is heavily exposed to the U.S., Macklin adds: “It is managing its exposure in the U.S. very well.”

TD stock was recently trading at $40.90 a share, or 7.4 times 2009 estimated earnings. Macklin has no stated target.

Gildan Activewear Inc., the maker of T-shirts, socks and underwear, is another favourite and Macklin has beefed up the fund’s holding in this company, as well.

Macklin recently visited Gildan’s offshore plants and was satisfied with the way in which management had resolved issues that had led to the stock undergoing a correction earlier this year.

“Notwithstanding there could be some sensitivity to an economic downturn, I am less concerned with how the downturn affects the purchase of T-shirts and underwear,” says Macklin. “We are not talking about luxury cars.”

Gildan’s stock was recently trading at $19.80 share, or nine times 2009 estimated earnings.



Although Mark Thomson does not make market calls, the manager of Beutel Goodman Canadian Equity Fund and senior vice president with Toronto-based Beutel Goodman & Co. Ltd., believes it is a great time to buy stocks.

“We look at stocks from the perspective of what they are worth as businesses,” he says. “Stocks are trading at the largest discount that we have seen in a decade. It’s double what it was in the trough in 2002.”

He notes that stocks have twice the projected return over the next three years as they had in 2002.

Thomson tends not to focus on macroeconomic issues, nor does he speculate on whether or not the massive bank fixes will work or when hard-hit consumers will regain confidence.

“We don’t worry about things like that,” says Thomson. “Canadian banks are in exceptionally good shape. We have the strongest financial system in the world, by far. If you look at any basic measure, whether it’s capital ratios or long-term return on assets, Canadian banks are far superior to their competitors around the world.”

He also notes that the London interbank offered rates (or LIBOR, which refers to the short-term interbank lending rate in the Eurodollar market) are at four-year lows, so interbank liquidity is flowing.

Yet, he has noticed that whenever there is positive news, the markets respond by sending materials and energy stocks higher, while banks remain vastly undervalued. To him, that’s a sign of rear-view thinking. “We think the environment will improve for these stable-demand companies,” he says, “especially the financials, much sooner than it will for the materials.”

A value investor, Thomson favours the financial services sector (36% of the fund’s AUM), consumer staples (11%) and telecommunications (7.7%). There is also 22% of AUM in energy, 8% in consumer discretionary, smaller holdings in industrials and materials, and 5% in cash.

Running a 31-name portfolio and taking a defensive approach to investment strategy, Thomson has added to the Beutel Goodman fund’s position in EnCana Corp.

“We like natural gas and don’t like the tarsands projects at all,” says Thomson. “Oil pricing in the current range significantly impairs [tarsands producers’] ability to have a decent return on capital. If oil goes below US$40 a barrel on a sustained basis, then the [net asset values] become meaningless. As value inves-tors, we have to buy stocks that are trading at a significant discount to what they are worth.”

Natural gas is trading at the equivalent of US$40-US$50 a barrel. In this environment, Thomson says, “EnCana can still get a very good return on its investment and capital.”

The stock recently traded at $54 a share, a price/earnings ratio of 7.6 for 2009. Thomson has no stated price target.

Another favourite is uranium producer Cameco Corp. “There are some questions about management’s operating abilities,” he says. “But the company is very well positioned longer term.”

Thomson believes Cameco’s financial results should improve over the next several years. The stock recently traded at $19.30 a share, or 9.9 times 2009 estimated earnings.

Thomson also likes Molson Coors Brewing Co., a long-time holding. “The underlying business is incredibly stable and senior management is extremely capable,” he says. “It’s one of the few brewers to grow its business over time.” The joint venture with Miller Brewing Co. will soon generate major cost savings. “[Molson Coors] can grow its business significantly over the next three years. The downside is very limited.”

Molson Coors stock recently traded at $43.40 a share, or 9.6 times 2009 earnings. IE