Eric Bushell, chief investment officer at Toronto-based Signature Global Advisors, makes a cogent case for equities versus bonds. The outlook for equities is positive, he says. "The recovery in the global private sector continues and this will support the stock market."
A key facet of the outlook for global economic growth, says Bushell, is the divergence between the prospects for developed economies and emerging ones. "The slow growth in indebted developed countries will be somewhat offset by stronger growth and capital flows to the developing economies."
Governments in mature economies have run up substantial deficits as a result of their stimulus measures. This "fiscal reckoning" will prove to be a drag on global economic growth. Bushell considers that "there is a 50% chance that there will be a European debt restructuring within the next year."
Furthermore, the highly stimulative monetary policy of some central banks has put further downward pressure on already historically low interest rates, he says, "despite the fact that these policies shape inflationary expectations."
Bushell's approach as CIO of Signature Global Advisors, a division of CI Investments Inc., is to analyze macroeconomic trends. The objective is to determine investment themes for the suite of CI Signature funds, totalling $26 billion, for which he and his team of sector-focused equity portfolio managers and fixed-income specialists are responsible.
The balanced portfolios that Signature Global Advisors manages are "decidedly overweight equities," Bushell says. He argues that equities are more fairly valued than bonds, "given the potential for corporate earnings growth globally."
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| Eric Bushell | |
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Investors in bonds are not being adequately compensated for the risks that they are assuming, he says. They are now facing zero or negative real interest rates (the nominal rate adjusted for the rate inflation) in some instances.
By contrast, equities do offer an inflation hedge and "you are not paying a premium for this," says Bushell. "But there is a premium being priced into other inflation-protected asset classes, most notably gold."
Money is slowly moving back into equities from bonds, says Bushell. Post-crash, investors "were risk averse in their asset allocation" and focused on bonds.
In addition to his CIO duties at Signature Global Advisors, Bushell is the lead manager of CI Signature Select Canadian 
, which has assets of $3.3 billion. He is also lead manager of CI Signature Select Canadian Corporate Class, a similar fund, which has assets of $786 million.
Stock selection in these and other portfolios is, says Bushell, being shaped by three key investment themes. "We like stocks that offer exposure to the higher-growth emerging economies and global growth and are not hostage to the United States. We like companies that have hard assets such as materials, real estate and infrastructure plays, and we like companies that pay dividends and/or have a share-buyback program."
Signature Select Canadian holds 48% in Canadian stocks and 48% in foreign content and 4% in cash. The portfolio holds more than 100 names.
On consumer-related stocks, Bushell points out that there is rapidly expanding domestic consumption in developing economies and an emphasis on global brands among the more affluent consumers in those countries.
A company that offers direct exposure to the increasing personal wealth in China, he says, is Hong-Kong based Hengdeli Holdings Ltd. It's a major retailer of Swiss watches in China and Taiwan.
Swatch Group, Switzerland's largest watchmaker, owns a stake in Hengdeli, as does the luxury-brand giant LVMH, which owns the Tag Heuer and Zenith watch brands. "There is some influence from these European shareholders on the governance of Hengdeli," Bushell says.
Closer to home, a high-end jewellery purveyor that Bushell likes is New York-based Tiffany & Co. TIF. Growing rapidly outside of the United States, Tiffany is transforming itself from a traditional retailer into a global luxury brand, he says, and it is "hard to build such brands."
Along with its successful transformation, "the company will be valued using the higher multiple accorded to companies with powerful brands, versus the multiple placed on conventional retailers."
A more basic consumer-products company with long-established global brands, and that also meets Bushell's criteria, is Procter & Gamble & Co. PG, which earns 60% of its revenue from outside the United States.
On his concern about the general health of the U.S. consumer, Bushell has sold his holdings in those U.S. companies that he thinks are "trapped in what is going to be a difficult time in the United States, and are without the escape hatches to capture global growth." Two examples of stocks he has sold are the U.S. drug-store chain CVS Caremark Corp. CVS and Wal-Mart Stores Inc. WMT.
In the industrial sector, Bushell likes two North American railway companies that are benefitting both from the increased emphasis on rail transportation versus trucking, and the increased traffic volumes reflecting the shipment of North American commodities such as agricultural products, potash and coal, to the emerging economies.
The two railways that Bushell holds are Canadian Pacific Railway Ltd. CP and Union Pacific Corp. UNP. He notes that he sold his shares of Canadian National Railway Co. CNR to purchase CP shares. "CP is less efficient in terms of its operating ratio than CNR and therefore has scope to catch up."
| Cdn Pacific Rlwy Ltd. | Union Pacific Corp. | ||
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| Nov. 16 close | $64.50 | US$89.76 | |
| 52-week high/low | $49.58-$67.50 | US$60.41-US$92.71 | |
| Market cap | $10.8 billion | US$43.5 billion | |
| Total % return 1Y* | 26.8 | 39.8 | |
| Total % return 3Y* | 2.5 | 13.7 | |
| Total % return 5Y* | 7.1 | 21.6 | |
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*As of Nov. 16, 2010. Returns expressed in C$ for Canadian Pacific and US$ for Union Pacific
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Union Pacific is in the same position, as it is "a laggard in efficiency relative to rival Burlington Northern Santa Fe Co., which was acquired by Berkshire Hathaway, Warren Buffett's company, a year ago."
Turning to his second theme of investing in hard assets, Bushell notes that both individuals and pension-fund investors are putting greater emphasis on assets such as real estate, given that they can generate "long-term inflation-protected, stable cash flows and offer yields that are greater than those on bonds."
A Canadian company in CI Signature Select Canadian that provides diversified exposure to hard assets, says Bushell, is Brookfield Asset Management Inc. BAM.A. This company focuses on real estate, power generation and other infrastructure assets. Through its major stake in Brookfield Properties Corp. BPO, Brookfield Asset Management has the benefit of high-quality commercial real-estate assets in North America, he says.
Exemplifying Bushell's third investment theme of stocks with good cash-flow growth plus high dividend yields is his holding in Eli Lilly & Co. LLY.This health-care stock is among the top 10 holdings of Signature Select Canadian.
"This U.S. pharmaceutical company has leading drugs for the treatment of diabetes and cancer," says Bushell. "These and other of its drugs have strong global franchises and the company's sales in emerging markets are substantial and growing." It also does significant business in Japan, he says. "The stock is cheap as pharmaceuticals are out of favour." The dividend yield on the stock is 5.5%.
