Rebalancing amid the equity rally

"I felt that the North American equity market had moved up significantly from its lows in October 2011 to the end of February," he says. "This rally in the equity market reduced the dividend yields on stocks, so I sold down my equity holdings."

Frost is looking to invest his increased cash holdings in higher-yielding securities, both bonds and equities. When it comes to equities, he plans to add stocks from outside North America. "I am finding a large number of companies in Europe that have dividend yields above 8%." The sovereign-debt crisis in Europe has "adversely impacted many of the countries' stock markets and raised the dividend yields."

The bond component of the AGF balanced funds has remained fairly stable in the year to date, says Frost. Most bond holdings in the balanced funds are corporate rather than government issues. Within this asset class, the strategy has been to move a little up the credit-quality spectrum from lower-quality corporate issuers to higher-quality issuers.

Peter Frost

"Credit spreads, the reward for taking on bonds with lower credit ratings versus higher credit ratings, had narrowed substantially and are now less attractive." In all, Frost says he has been "quite active on the asset-mix front in the balanced funds I manage, in response to the volatility in the markets."

Frost, who has been in the investment business for some 20 years, has a strong background in asset allocation. He joined AGF in late 2009 and has been taking on an increasing number of mandates.

His responsibilities include three balanced funds: AGF Traditional Balanced   (assets $452 million); AGF Traditional Income   (assets $208 million); and AGF Monthly High Income   (assets $749 million). In addition, Frost has taken over the management of the domestic-equity flagship AGF Canadian Stock   ($1.6 billion), after the promotion of Martin Hubbes to executive vice-president of the firm last fall.

In keeping with his asset-allocation approach for the balanced funds, Frost reduced the equity holdings in AGF Monthly High Income by 10% at the end of February and early March. The current asset mix in this fund is 64% in equities, 23% in fixed income and 13% in cash.

Frost has responsibility for the asset-mix calls and stock-picking in this fund. In stock selection, the key driver is the level of the dividend yield, he says. "It is a bottom-up approach; I am not wedded to any sectors."

The equity component of AGF Monthly High Income currently has 73 names, with more or less equal weightings in each name, ranging from 1.5% to 2%. The fund targets companies across the market-cap spectrum, starting with a market capitalization of $200 million. "I will invest in small caps, but I must be sure that the name is liquid," Frost says. Foreign content is currently around 25%.

Of the fund's smaller-cap holdings, Frost points to Genivar Inc. GNV as a stock that illustrates the attributes he looks for. An addition to the portfolio in the second half of 2011, Genivar (market capitalization of $838 million) is an engineering-services company with both private- and public-sector clients. Its current dividend yield is 5.4%.

Founded in Quebec in 1959, Genivar has expanded across Canada through a series of acquisitions since 2005-2006 and has become a "national player." Looking ahead, Frost says its goal is to increase its global reach and have some 50% of its revenue from outside of Canada by 2014-2015.

The company has the balance-sheet strength, he says, to support its growth. Last December, two major pension funds -- Canada Pension Plan Investment Board and the Caisse de depôt et placement du Québec -- each invested $80 million in the company through an equity private placement.

A mid-stream Canadian energy company, Gibson Energy Inc. GEI, which became public a year ago, "also offers good growth opportunities over the next several years," says Frost. "As the company provides the services that link the producers to the refiners, it is more exposed to the level of activity in the business than to the commodity price." The current dividend yield on the stock is around 5%.

A major Canadian energy producer that is in both AGF Monthly High Income and AGF Canadian Stock is Suncor Energy Inc. SU. With its significant exposure to the oil sands, Frost says Suncor has "a strong and visible growth profile." The stock, which has been lacklustre for some time, is "attractively valued."

Suncor, says Frost, is clearly sensitive to the oil price. "I am bullish on energy prices, as the long-term fundamentals are positive." The stock carries a dividend yield of 1.4%. "There are prospects of the company raising its dividend," he says.

		Genivar Inc.	Suncor Energy Inc.
	April 17 close	$25.80	$31.43
	52-week high/low	$30.80-$19.83	$44.56-$23.97
	Market cap	$848 million	$49.1 billion
	Total % return 1Y*	-9.8%	-24.3%
	Total % return 3Y*	11.8%	1.4%
	Total % return 5Y*	17.3%	-6.3%
	*As of April 17, 2012 Source: Morningstar

Looking south of the border, a significant holding in AGF Monthly Income is the tobacco giant Altria Group Inc. MO. "There are high barriers to entry in the tobacco industry," says Frost, "and Altria is highly profitable." It is also an excellent cash-flow generator.

The company has some of the leading brands in the industry such as Marlboro and Virginia Slims. It also has a 27% stake in SABMiller PLC, a major global brewer. The dividend yield on the stock is 5.2%.

Over the past 18 months, Frost has been trimming his holding in Verizon Communications Inc. VZ. The company is a major telecommunications-services company and one of the largest wireless providers in the world. "The stock has had a good run and the dividend yield has been coming down," Frost says. The current dividend yield is 5.3%.