Eric Bushell, chief investment officer at Toronto-based Signature Global Asset Management, continues to adopt a defensive approach to the global equity market with an emphasis on companies that have predictable business models and can generate both good revenue growth and solid income. "This tends to lead us to the developed markets and to those companies with a consumer focus and to other more defensive companies such as select utilities."
Bushell is skeptical about the sustainability of the first-quarter surge in natural-resource stocks, commodity prices and other riskier assets. This rally was predicated in part, he says, on the U.S. Federal Reserve Board's decision to hold off raising its policy rate in February, amid concerns about the global economy.
Another driver of this "risk-on" investor sentiment in the first quarter, Bushell says, was that the financial markets incorrectly read China's policy-makers' move to stabilize the economy as a stimulative measure.
There will, he cautions, be important repercussions for global financial markets, including emerging markets, when the Fed resumes its strategy of raising its policy rate to more normal levels, given the strength of the U.S. economy.
Regarding China, Bushell says that there is widespread recognition that authorities will need, at some stage, to address the excess capacity in important economic sectors, as well as deal with the high level of bad debts in key areas of its economy. "A move by those in power to tackle these two areas will be painful for the Chinese economy."
While less in the limelight than the economies of the United States and China, the economies of Europe and Japan are having their challenges and are affecting the global picture, says Bushell.
The European economy is holding its own and its growth is in positive territory, "but there is considerable political uncertainty in the region," he says. There are, for example, already many cracks in the European Union, and "Britain's June 23rd referendum on whether to stay or go is not helping European economic unity." There are also other challenges to the free movement of goods and people in the region, as some countries have put up barriers in the light of the flow of migrants into Europe.
On the financial front, a number of major European central banks have set their key policy rates at negative levels, and nominal yields on some bonds of top-rated European governments have fallen into negative territory, Bushell says. Earlier this year, the Bank of Japan also moved to a negative policy rate. But, says Bushell, Prime Minister Shinzo Abe's aggressive monetary and fiscal policy introduced in an effort to stimulate the flagging economy is "floundering."
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| Eric Bushell | |
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The advent of negative central bank interest rates has "infected" the global bond market, says Bushell. There are now "a record US$10 trillion" in government bonds with negative yields. This is an important development, he says, since government bonds have, in the past, been viewed as "risk-free."
In contrast to their European and Japanese counterparts, U.S. bonds do have positive nominal yields. "The U.S. economy continues to be the one area of strength in the global economy and the expectation is that U.S. interest rates are on the rise."
This all dictates caution about the global bond market, says Bushell. The European and Japanese monetary authorities are nearing the lower limit of their policy rates, he says. "Political and financial constraints have emerged to prevent them from going any further." Also, in the United States, the positive rates are headed higher. "In conclusion, we are nearing the end of the bull market in bonds, which reflected the secular decline in interest rates."
Bushell and his team of specialists are responsible for managing some $54.8 billion in assets at Signature, a separate portfolio-management group under CI Investments Inc.'s umbrella. About half these assets are in bonds and half in equities. In addition to his role of determining the overall strategy for Signature, Bushell is also lead manager of CI Signature Select Canadian ($2 billion in assets at the end of April) and CI Signature Select Corporate Class, a similar mandate, which had assets of $1.5 billion.
This portfolio has roughly half of its holdings in Canadian securities and the remainder in U.S. and international equities as well as in commodities.
At the beginning of the year, Bushell and his team "ramped up" the portfolio's holding in gold bullion by investing in SPDR Gold Trust ETF (GLD), which at 7% of the portfolio was the largest single holding at the end of April. "Gold is negatively correlated with risky assets. Investors view bullion as a safe haven and a store of value."
The biggest sector weight in the portfolio is financials. Banks are challenged in a low-interest rate environment, says Bushell. This is particularly the case for banks in Europe and Japan, whose margins are being severely affected by the negative interest-rate environment.
In search of those financial institutions that are able to generate both revenue and income growth, Bushell and his team have invested in two leading U.S. consumer credit-card companies: 
Synchrony Financial (SYF) and Capital One Financial Corp. (COF).
This segment of the financial-services sector is able to generate exceptionally high returns on equity and the companies are growing their revenues, he says. "The yields on their loan portfolios are high and their non-performing loans are modest."
| Capital One Financial Corp. | Synchrony Financial | |
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| May 30 close | $73.83 | $31.16 |
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| 52-week high/low | $92.10-$58.49 | $36.40-$23.74 |
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| Market cap | $37.3 billion | $26 billion |
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| Total % return 1Y* | -10.9 | -4.0 |
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| Total % return 3Y* | 8.4 | n/a |
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| Total % return 5Y* | 7.8 | n/a |
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| *As of May 30, 2016. All figures in U.S. dollars Source: Morningstar |
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Among the portfolio's top-10 holdings are Bank of Nova Scotia (BNS), Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD). "The Canadian banks recognize that the domestic economy is soft and are adopting a cost-cutting strategy in order to sustain profitability," says Bushell. Also, some of these big banks have been "increasing their footprint in the United States."
Also on the theme of consumer strength, Bushell and his team have invested in Newell Brands Inc. (NWL), the result of a merger between Newell Rubbermaid Inc. and Jarden Corp. (Newell acquired Jarden for about US$15.4 billion). The combined company produces a range of consumer goods including cookware and household wares. "The acquisition will provide the opportunity for considerable cost savings," says Bushell. "The company plans to expand the global reach of its brands."
Characteristic of its defensive stance, the Signature team participated in the initial public offering of Hydro One Ltd. (H) last November. "This utility has predictable earnings growth, an ongoing theme of ours," Bushell says. The IPO price was $20.50 a share. This IPO, he says, is part of the Ontario government's move to sell down its holding in this electricity transmission and distribution utility.
Bushell says that there is good value to be had in health care. His fund's holdings include two global pharmaceutical giants, Roche Holding AG, which is based in Switzerland, and Bristol-Myers Squibb Co. (BMY). These companies have strong balance sheets and the stocks carry a good dividend yield, says Bushell. Roche and Bristol-Myers are leaders in developing immunotherapy drugs to treat cancer, he says. Some of their drugs, which are aimed at boosting the immune system to kill cancer cells, are currently in clinical trials, he adds.
Technology is a substantial underweight in the portfolio, says Bushell. It is a difficult time for the hardware companies, he says. "The advent of the Cloud is hurting them." The team's emphasis is instead on those companies that are big collectors of data through their powerful websites and services. "These companies are leading the charge," he says. Technology-related holdings include the online retailing giant Amazon.com, Inc. (AMZN) and the Class C non-voting shares of the dominant search-engine company Alphabet Inc. (GOOG).
