Christopher Arbuthnot, senior managing director at Manulife Asset Management (US) LLC, is adopting a decidedly contrarian approach to the global portfolio he manages by emphasizing those areas of the equity market that are out of favour. Using a hockey analogy, Arbuthnot says: "I am focusing on where the puck is headed, rather than on where it has been."
The U.S equity market, for example, has handily outperformed the European market over the past couple of years and there is "a lot of value to be had in Europe."
Of the Continent's challenges, Arbuthnot says: "The impasse among the major political players is creating instability." Although, Greece, Ireland and Portugal have significant issues, "they are peripheral and collectively represent only a small portion of Europe's gross domestic product."
Italy is Arbuthnot's largest European weighting and he is "warming to Spain." He says that Italy is in better fiscal shape than Spain, but that the latter is not in as dire straits as many fear "given its relatively low level of debt to GDP at 70%.
Emerging markets are also under pressure, says Arbuthnot, and there are widespread opportunities in these markets, as well. Here, the portfolio's biggest weightings are in Brazil and India. But Arbuthnot has been adding holdings in Egyptian and Russian stocks.
In the Canadian equity market, "energy and materials are distinctly out of favour and there are opportunities in these sectors." Here, Arbuthnot is targeting well positioned natural-gas producers and select smaller-caps.
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When it comes to the United States, Arbuthnot says his emphasis is on technology companies that dominate a fast growing niche. Based in Boston, Arbuthnot is the lead portfolio manager for the global opportunities strategy and a co-manager for the emerging-markets-equity strategy at the U.S. division of Manulife Asset Management. He is responsible for mandates totaling $1.1 billion, including Manulife Global Opportunities Balanced and Manulife Global Opportunities Class.
His approach is two-pronged: value in developed markets and more of a GARP (growth at a reasonable price) approach in emerging markets. "It is an all-cap, flexible investing style," says Arbuthnot.
Manulife Global Opportunities Class has 62 names, with the top 10 holdings representing some 35% of the portfolio. Cash is 10%. Geographically, the portfolio has 29% in the United States, 15% in Europe, 15% in Canada and 27% in emerging markets.
In the U.S. technology sector, two significant holdings are LinkedIn Corp. LNKD, which is the largest weighting in the portfolio, and CEVA Inc. CEVA.
LinkedIn is a major global professional network on the Internet with 161 million members worldwide. Its members create business profiles and share their professional identity online. The company has a diversified business model, says Arbuthnot, with subscription revenues from its members and from recruiters mining "this powerful database for candidates." Marketers also pay LinkedIn "to target this high-end audience."
Arbuthnot says that while LinkedIn "looks expensive on its current earnings, it is attractively priced if you take into account the growth potential of the company over the next three to five years."
CEVA is a leading licensor of digital signal processors and integrated applications to the semiconductor industry and original equipment manufacturers, including handset makers, worldwide. "This increasingly sophisticated and high-end technology is both a volume story and a pricing story," says Arbuthnot. The company's business model consists of the upfront licence fee, royalties from every processor sold and revenues from related support, development tools and maintenance.
CEVA has had challenges in the past few months and the stock has pulled back, says Arbuthnot. "The second half of the year should improve and I have used the weakness in the stock to add to it." The valuation, he adds, is cheap for a technology company with a strong balance sheet and a large market share.
In the Canadian energy patch, Arbuthnot has a significant holding in Progress Energy Resources Corp. PRQ. This company has a commanding position in the prolific Montney shale-gas play, says Arbuthnot, "one of the most important shale plays in North America."
The price of natural gas is low due to oversupply, he notes, but this is starting to correct as producers curtail output, he says. "This should boost the commodity price, and companies like Progress with quality asset bases should do well."
In 2011, Progress entered into a strategic partnership with the Malaysian national oil company, PETRONAS, to accelerate the development of part of Progress's Montney shale assets, says Arbuthnot. In addition, PETRONAS (80%) and Progress (20%) have a liquefied natural gas export joint venture to look into establishing an LNG facility on the west coast of B.C.
A Canadian energy junior with assets in Kenya, Ethiopia, Mali and Puntland (Somalia) that "holds promise" is Africa Oil Corp. AOI. The company's drilling program in Kenya is producing good results, says Arbuthnot. The stock has done well, he says, but there is further upside.
In the Canadian materials sector, Arbuthnot likes a smaller-cap potash company, Karnalyte Resources Inc. KRN. "It is working to complete permitting and financing for its large potash deposits in Saskatchewan."
It plans to adopt a special method of extracting potash that differs from its rivals' approach, he says. "Karnalyte's method should require less capital upfront and be profitable using conservative commodity-price assumptions."
In Europe, the portfolio is emphasizing well placed media companies. A major holding is in Italy's Mediaset S.p.A, a dominant television broadcaster. Its controlling shareholder is Silvio Berlusconi, the former prime minister of Italy. "The company is a high free-cash-flow generator and has low capital-expenditure requirements," says Arbuthnot.
Mediaset has been hurt by the poor Italian economy and its adverse impact on advertising, he says. "This has provided an opportunity to invest in a quality cyclical company at trough earnings levels and a trough price/earnings multiple."
Arbuthnot is also enthusiastic about Mediaset's Spanish subsidiary, Mediaset Espana Comunicacion. "Although it does not have the same market share in Spain as its parent enjoys in Italy, it is still an important Spanish broadcaster."
He has taken some profits in the Italian luxury leather goods and clothing manufacturer, Salvatore Ferragamo S.p.A. "The stock was listed last year and it has been a star performer."
