Stephen Jenkins, senior vice-president, investments, and global-equity specialist at Harbour Advisors, says that the concerns about the economic health of the United States and Europe are slowly abating, and this is buoying the mood in the equity market.
"There has been a lot of money sitting on the sidelines waiting for an entry point into stocks," he says. The ongoing commitment by the U.S. Federal Reserve Board and the European Central Bank to an accommodative monetary policy is allaying fears about the macroeconomic picture, he says. These policies are also helping to keep interest rates at historic low levels, he adds.
On the fundamentals, Jenkins points out that corporate profits are "growing at a decent pace and the valuations are playing catch-up to this." Despite this "re-evaluation of stocks," he considers that there is still scope for valuations to go higher. "The next few years will bring greater clarity and confidence about the big economic picture, and the market will start to pay up more fully for corporate earnings growth."
Essentially a bottom-up stock picker, Jenkins targets world-class companies that dominate their industry, have strong balance sheets, generate consistent, above-average cash flows, enjoy high profit margins and have strong growth prospects. The companies must trade at reasonable valuations. The emphasis is on companies headquartered in industrialized countries. Jenkins' investment horizon is generally five years.
Harbour Advisors, a division of Toronto-based CI Investments Inc., manages more than $16 billion in assets in a wide range of mandates. Jenkins is the lead portfolio manager of Harbour's foreign funds.
He has managed CI Harbour Foreign Equity Corporate Class (assets more than $500 million) since its inception more than a decade ago in December 2001. The fund is fairly concentrated in 32 names with the top 10 holdings accounting for 43% of the total weighting.
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| Stephen Jenkins | |
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U.S. and European stocks each account for 37% of the weightings in CI Harbour Foreign Equity, and companies headquartered in countries like Japan and Australia constitute 13%. The remaining 13% is in cash, "which will be deployed in new seeds for future growth in the portfolio."
Jenkins points to his stock selections in the financial-services sector as illustrative of his investment discipline. Three top 10 holdings in the fund are: Discover Financial Services DFS which operates one of the largest direct-banking and payment-services networks in the United States; Bank of New York Mellon BK one of the world's leading custodians of financial assets and a wealth manager; and MasterCard Inc. MA, a major global credit-card issuer.
"These are not traditional banks, but are predominantly fee generators that enjoy considerable economies of scale and offer good earnings visibility," says Jenkins. By contrast, "it was difficult to assess the income stream" of JPMorgan Chase & Co. JPM, which is a more traditional financial intermediary.
Jenkins notes that he "sold this stock in the second quarter of this year after the company announced a substantial trading loss from financial-derivatives trading." This bank had many challenges and the stock, on the surface was cheap, he says. "The valuation was an attraction, but monitoring the company was taking up a disproportionate amount of my time," he says. "The recent trading loss was the last straw. I lost confidence in the company."
Turning to energy, Jenkins largest weighting in Harbour Foreign Equity is Ultra Petroleum Corp. UPL. "This high-quality company is arguably the lowest-cost natural-gas producer within North America," says Jenkins. He notes that he took advantage of market weakness in this stock to add to his holdings in the first half of the year. This stock, he says, has suffered along with the decline in the depressed commodity price.
Natural gas dipped below US$2 per thousand cubic feet (MCF) in the spring and the price has improved slightly since. "The outlook for the natural-gas price over the longer term is positive, "as the United States seeks to become more self-sufficient in energy."
Ultra Petroleum, says Jenkins, has been growing production by 15% per annum and its return on equity has averaged 36% over the past five years, "which is a high level of profitability."
The company has a strong asset base including its leases in and around "the prolific gas fields" of Pinedale and Jonah in southwest Wyoming. Ultra has 20 years worth of inventory. "This helps to provide investors with good earnings growth visibility." Finally, he says management, under the baton of CEO Michael Watford, has a big stake in the company and is attentive to the needs of shareholders.
In the consumer-staples sector, Jenkins points to his holding in Kerry Group PLC, which has its headquarters in Ireland, as an example of the need to focus on the fundamentals of the company rather than on the macro European headlines.
Based in Ireland, Kerry is one of the largest and most technologically advanced manufacturers of ingredients and flavours in the world with customers in more than 140 countries worldwide, "so it is not hostage to Europe."
The company has major brand-name global food companies such as Nestlé, Kraft and PepsiCo as customers, he says. Its products represent a low-cost item to its customers, so Kerry enjoys considerable pricing power, says Jenkins. The stock has had a big run-up over the past 12 months, he says. "But at a price/earnings multiple of some 13 times 2013 per-share estimates, there is scope for it to go higher."
Also in the consumer-staples sector, one of the oldest holdings in the portfolio "that continues to tick off a lot of boxes for me," is Diageo PLC (which trades in New York under the ticker DEO).
Diageo, says Jenkins, is a market leader in the premium-drinks business with a strong suite of international brands including Johnnie Walker, Crown Royal, Smirnoff, Captain Morgan, Baileys and Guinness. "There are high barriers to entry and the company has a dedicated distribution network which gives it another distinctive competitive edge over its rivals."
The company continues to generate excess cash flow, says Jenkins. "Management is adept at capital allocation, which is one of the factors that I look for in a company." Diageo's CEO Paul Walsh "has done a great job of returning capital to shareholders in the form of dividends and share buy-backs and should continue to do so."
| Bank of New York Mellon | Discover Financial Services | MasterCard Inc. | ||
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| Oct. 2 close | $22.96 | $39.49 | $457.65 | |
| 52-week high/low | $24.95-$17.10 | $40.28-$21.44 | $466.98-$293.01 | |
| Market cap | $27.123 billion | $20.334 billion | $57.114 billion | |
| Total % return 1Y* | 26.30 | 74.15 | 44.58 | |
| Total % return 3Y* | -4.18 | 37.86 | 32.04 | |
| Total % return 5Y* | -10.40 | 13.69 | 24.68 | |
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| *As of Oct 2, 2012.All figures in $US Source: Morningstar |
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