Ian Hardacre, head of Canadian equities at Trimark Investments, says it's challenging to find value in the global equity market, which produced such a powerful run in 2013.
Conversely there are opportunities in the Canadian equity market, which has been a laggard, says Hardacre, who styles himself as something of a contrarian.
"I am generally now more bullish on Canada than on U.S. and European equity markets, based on bottom-up stock valuation," says Hardacre. He is responsible for Trimark Investments' flagship domestic-equity fund, Trimark Canadian, which he has managed since 1999 using a value-oriented approach.
The challenge in the U.S. and European equity markets, says Hardacre, is that their ascent has resulted in price/earnings multiples on the stocks that are well ahead of the companies' fundamentals. Investor enthusiasm for these developed-market stocks is largely being driven by macro considerations -- positive sentiment surrounding the recovery of the economies, he says. "We are not yet seeing the bottom-up earnings growth that the price/earnings multiples imply."
During last year, Hardacre trimmed or sold many of the fund's U.S. and European holdings. "The stocks did extremely well and reached my price targets." This foreign content, he adds, "was a huge help in the performance of the fund." He has deployed some of the proceeds of these trims or sales in Canadian stocks in sectors such as energy and materials.
The result of these moves, he says, is that Trimark Canadian's foreign content is now roughly at 20%, whereas it has been at more or less 30% over the past three to five years. Also, the fund has 5% in cash, "which is higher than usual; I don't hold a lot of cash."
| Index | 1yr | 3yr | 5yr | ||
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| S&P/TSX Composite | 13.0 | 3.4 | 11.9 | ||
| S&P 500 | 41.5 | 18.8 | 14.7 | ||
| MSCI World | 35.9 | 14.7 | 12.3 | ||
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| Total returns in C$ for periods ended Dec. 31, 2013 | |||||
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Hardacre is now in his 18th year at Trimark Investments, a division of Toronto-based Invesco Canada Ltd. In all, he is responsible for $3 billion in assets at the firm, largely in Trimark Canadian. This fund, which currently has 45 holdings, contains a number of core names that have been in the portfolio for many years and some even for decades.
An example in the Canadian industrial sector is Toromont Industries Ltd. TIH, "which has been a holding for some 20 years." It's currently a top-10 holding. The company has caterpillar dealerships in key provinces across Canada. "It is a straight-forward business," says Hardacre.
Toromont "has managed to consistently deliver high returns on equity through economic cycles, and investors have enjoyed excellent long-term returns on the stock." Toromont currently trades at around 14 times the earnings-per-share (EPS) estimates for 2014, "which is mid-range of its historic price/earnings multiple."
Also in Trimark Canadian's top-10 holdings and another stalwart in the portfolio is MacDonald, Dettwiler and Associates Ltd. MDA. "I have held it for more than a decade." Classified as an information technology company, MDA manufactures and integrates satellites, satellite subsystems and advanced antennas for commercial and government customers worldwide.
The 2012 acquisition of California-based Space Systems/Loral Inc., a major commercial satellite producer, has made MDA one of the largest satellite producers in the world, says Hardacre. "It's a complicated business, management delivers on results year after year, yet the company falls below the radar of many investors." The stock had a big run in 2013, says Hardacre. It currently trades at 14 times EPS estimates for 2014.
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In the Canadian consumer-discretionary sector, a top-10 holding that has been in the portfolio for some seven years is RONA Inc. RON. This home-improvement retailer has had its share of challenges. "It is a tough business, there is overcapacity in home-improvement retailing in Canada, particularly in Ontario." Hardacre and another major shareholder "were actively involved in restructuring the company and changing its board over a year ago."
Last March, the company appointed Robert Sawyer, a seasoned retailing executive, as its president and CEO. "RONA has taken costs out of the business; the next phase is growth," says Hardacre. "I remain happy with the stock, which did well last year."
Turning to the financial-services sector, Hardacre points out that the stocks of both Canadian insurers and banks had a good run in 2013, with the insurers putting up a particularly strong showing. "Because of the nature of their business, insurers benefit more than banks from rising interest rates and strong equity markets."
Here his holding is Manulife Financial Corp. MFC. CEO Donald Guloien, who was appointed to this post in 2009 after the company stumbled in the wake of tumbling equity markets, "has put Manulife's problems behind it." The stock currently trades at 13 times 2014 earnings per share estimates and is "fairly valued over the medium term."
Three of the Big Five Canadian chartered banks "continue to be core holdings" in Trimark Canadian. They are, in the order of their weightings in the portfolio, Toronto-Dominion Bank TD, Bank of Nova Scotia BNS and Royal Bank of Canada RY.
TD has carved out an important niche in the U.S. retail-banking market and Scotiabank is growing its presence in emerging markets, Hardacre notes. "Royal is one of the best retail banking franchises in Canada."
The stocks of TD and Scotiabank both trade at 11.5 times earnings per share estimates for their fiscal years ending in October 2014. Royal's stock trades at 12 times fiscal 2014 estimates, a premium. "These stocks have done well; while I am not seeing any major potholes in the banks' paths, I am not running out to buy them."
Of his U.S. financial holdings, Hardacre sold down his long-standing holding in money manager Legg Mason, Inc. LM during last year. "The stock did well, benefitting from the rise in global equity markets, and I took some money off the table."
Hardacre sold his entire holding in the financial-services company Charles Schwab Corp. SCHW during 2013. "The stock reached my price target." It is a high-quality, well-managed company, he says. In a contrarian move, Hardacre bought the stock after the financial crisis. "My thesis, at the time, was that this company had considerable earnings leverage to rising interest rates and improving equity markets; this thesis worked out."
