Economic growth on track

Sweeney, who is a member of the Canadian equity team, adds that the cross-currents in global financial markets are causing significant volatility in the equity market. This creates opportunities, he says. "We are using the dips to both add to existing positions and introduce new names to the portfolio."

The challenge for all equity investors, say Stadelman and Sweeney, is to look beyond the headlines about the European crisis and the U.S. debt ceiling and focus on the growth in the global economy.

The duo's optimism about global growth has, says Sweeney, resulted in "significant overweight positions" in such key economically sensitive sectors as consumer discretionary stocks and industrials.

At Vancouver-based Phillips, Hager & North, part of RBC Global Asset Management Inc., the Canadian equity team is responsible for managing assets of $10.5 billion. Stadelman and Sweeney co-manage the flagship PH&N Canadian Equity  , which has assets of $1.7 billion, using a GARP (growth at reasonable price) style.

At the end of June, PH&N Canadian Equity, which is predominantly a large-cap fund, held 14.6% of its assets in PH&N Small Float, a smaller-cap internal fund not available for public purchase, of which Stadelman is the lead manager.

The major sector weightings in PH&N Canadian Equity at the end of June were: financials at 30.8%, energy 26.9%, materials 14.6%, industrials 10.4% and consumer-discretionary stocks 6.6%.

Within the consumer discretionary sector, the two managers like auto-parts manufacturers. Magna International Inc. MGA, a major player in this industry with a global reach, is held in PH&N Canadian Equity.

Stadelman notes that North American auto sales are "well below their potential and should improve in a more robust economic environment." Also, he says, Magna is working on expanding its European margins.

The elimination of Magna's dual share class and its greater focus on governance is a plus, says Stadelman. "The assessment of a company's governance is an important part of our investment due diligence."

Magna's founder, Frank Stronach, stepped down as chairman of the company last May, Stadelman notes, but he remains on the board. "We like what we see in the company's direction." The stock, says Stadelman, trades at a discount to many of its peers. "This gap should close and create shareholder value."

In the industrials, the managers like the two Canadian rail companies "as a play on global expansion," says Stadelman. "The rails have been able to raise their prices, as they are offering their customers increasingly enhanced services."

A core holding in the Canadian equity portfolio is Canadian National Railway Co. CNR. "This company has the lowest operating ratio, which is a measure of railway efficiency, in North America," says Sweeney. CNR is enjoying both volume growth and pricing power, he says.

Canadian Pacific Railway Ltd. CP is also in the portfolio. "The stock trades at a discount to that of CNR," says Stadelman.

It has been a tough year for CP, he says, as the company has experienced weather-related disruptions to its services. This has, says Sweeney, "understandably hampered CP's efforts to improve its efficiency ratio." CP, he says, will benefit from the tailwind of global economic growth." In its favour, the company is a significant transporter of commodities."

		Canadian National Railway Co.	Canadian Pacific Railway Ltd.
	Aug 2 close	$2.03	$37.41
	52-week high/low	$0.61-$2.78	$16.11-$41.28
	Market cap	$431.3 million	$3.3 billion
	Total % return 1Y*	22.7%	80.1%
	Total % return 3Y*	17.2%	n/a
	Total % return 5Y*	13.2%	n/a
	*As of Aug 2, 2011 Source: Morningstar

A stock that is a direct play on the global demand for commodities, and that was recently added to the Canadian equity portfolio, is Teck Resources Ltd. TCK.B. "We bought this stock on a dip in the market, taking advantage of the volatility," says Sweeney.

Teck, says Stadelman, is a major producer of two key commodities -- copper and metallurgical coal. "The outlook for both commodities is positive." The company has "long-life assets." On its financials, Teck is a strong cash-flow generator and "it has significantly improved the strength of its balance sheet since 2009."

At the same time as buying Teck, the two managers eliminated their holding in another materials stock, Quadra FNX Mining Ltd. QUX, a mid-tier copper mining company. "Both Teck and Quadra stocks pulled back, but Teck offered better relative value given its higher-quality assets," says Stadelman.

In energy, PH&N Canadian Equity is focused on large-cap, oil-oriented producers. In keeping with the duo's global-growth theme, Sweeney notes that oil is a global commodity. "Also the fundamentals for oil are stronger than those for natural gas." One of the largest energy holdings in PH&N Canadian Equity is the integrated producer Suncor Energy Inc. SU.

The largest holding in the fund is The Toronto-Dominion Bank TD. Sweeney, who covers financial services for the Canadian equity team, says that the bank "is well managed with a credible strategy for tackling the U.S. market." TD, he says, is steadily building its franchise south of the border, by "savvy acquisition."

TD is building a strong regional network of retail branches, he notes, and its purchase of Chrysler Financial gave the U.S. operation a national footprint on the lending side. Improving profitability on TD's U.S. operations will, says Sweeney, boost the bank's overall return on equity and should increase the price/earnings multiple on the stock.

Also in financial services, the duo has sold down the fund's holding in Brookfield Asset Management Inc. BAM.A. The company has substantial real-estate, power and infrastructure interests. "We like the prospects for the company longer term," says Sweeney, "but we considered that the stock had risen ahead of itself and we used the proceeds from our sale as a source of cash to fund other stock purchases."