Daniel Bubis, president and chief investment officer at Winnipeg-based Tetrem Capital Management Ltd., says that there is still some good value to be found among economically sensitive stocks.
The global economy is "staging a classic recovery," he says. In anticipation of this, Bubis and his team have had a cyclical tilt to their equity portfolios for more than one year. Of late, Bubis notes that he has been more selective. "A year ago, these stocks got beaten up badly and there was widespread value to be had."
A veteran manager of 20 years, Bubis observes that investors are "more obsessed" currently than they have been in the past about the possibility of a tightening of monetary policy. He argues that the recent move by the U.S. Federal Reserve Board to raise the rate it charges banks on emergency short-term loans should not be construed as a tightening, which could derail the stock market rally.
"Rather, the Fed is reversing those emergency measures it introduced to shore up the then troubled U.S. financial system," Bubis says. In essence, he adds, the Fed policy remains highly accommodative. His call is that the stock market rally will continue, given that earnings growth is robust, corporate balance sheets are strong, and interest rates are still low by historic standards.
Founded in 2004, Tetrem manages around $6 billion on behalf of CI Financial Inc. and other clients. Its mandates include the flagshipCI Canadian Investment 
, which has assets of $4 billion, and the similarly managedCI Canadian Investment Corporate Class, with assets of $724 million.
CI Canadian Investment, which has a 5-star Morningstar Rating in the Canadian Focused Equity category, also has U.S. and overseas equity exposure. "Our objective is to limit this to 30%," says Bubis. At the end of January, the fund held 74% of its assets in Canadian stocks, 14% in U.S. stocks and 11% in international equities. The remainder was cash.
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| Daniel Bubis | |
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Bubis and his team seek to buy stocks that trade below Tetrem's estimated intrinsic value of the business. The largest holding in the fund at the end of January was Power Corp of Canada POW at 4.2%.
The company controls the financial services group, Power Financial Corp. PWF. This entity, in turn, controls Great-West Lifeco Inc. GWO and IGM Financial Inc. IGM, "two solid, conservatively managed Winnipeg-based financial institutions." While Power Corp. is a core holding, Bubis would "not likely be adding to it at this stage."
The fund also has a separate holding in the financial planning and mutual fund giant, IGM Financial, which owns mutual fund manager Mackenzie Financial Corp. The latter, Bubis says, has had some net redemptions of late, "but this is baked into the stock price and the company is a free-cash-flow-generating machine."
In keeping with the tilt toward cyclical names in the portfolio, Bubis points to two leading Canadian industrial names that he believes should do well in the economic recovery and also have good long-term prospects. They are Magna International Inc. MG.A and Canadian National Railway Co. CNR.
| Canadian National Railway | Magna International | ||
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| Feb. 23 close | $55.60 | $60.25 | |
| 52-week high/low | $37.85-$59.14 | $25.44-$63.31 | |
| Market cap | $25.8 bil | $6.8 bil | |
| Total % return 3Y* | 2.6 | (12.2) | |
| Total % return 5Y* | 9.2 | (6.2) | |
| Total % return 10Y* | 17.7 | 2.6 | |
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| *As of Feb.22 Source: Morningstar |
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A "survivor" in the troubled global auto industry, Magna currently represents 2% of the portfolio. Bubis established a holding in the stock in January 2009, "when it was extremely cheap on concerns about the health of the Big Three U.S. car manufacturers." He then added to it during the course of 2009.
Magna stock has climbed substantially since Bubis bought it, he notes, but "still trades at less than book value per share." Magna is "excellent at its core business of auto-parts manufacturing and has a pristine balance sheet."
By contrast, he says, some of its competitors failed. This increased Magna's market share and pricing power and it is "not reflected in the stock price." A risk to Magna's stock, he says, is if management loses its focus on auto parts.
Canadian National is "the best in class" in the North American railway industry. "It has one of the lowest cost structures in the business." There is a secular aspect to this essentially cyclical business, says Bubis, in that the higher price of energy will benefit railways over the competing trucking industry. The stock is not that cheap, he says, but is "fairly priced given the calibre of the company and its earnings-per-share growth potential."
A business that is being viewed as "old technology and thus in secular decline," is Yellow Pages Income Fund YLO.UN, says Bubis. While, revenue could decline over the longer term, the phone listings and advertising firm is currently experiencing a cyclical recovery, he says. The trust units "provided a significant margin of safety when we bought them around $5 a unit."
The unit price was weak, he says, as investors were concerned that there would be a "drastic cut in the distribution," when the trust converted to a corporation. Subsequently, Yellow Pages announced the conversion details. "They were better than the market anticipated and this helped the units to rally."
Yellow Pages will keep its distribution per unit of 80 cents in 2010. Starting in January 2011, the initial annual dividend will be 65 cents. This dividend level "reflects a relatively modest payout ratio of 60% to 70% of cash earnings per share," says Bubis. Also, the yield on this holding is high, he says.
Bubis has halved his weighting in the telecommunications giant BCE Inc. BCE to 1%. He considers that the stock has limited upside, though it does have a good dividend yield. The company, he notes, is facing a secular decline in its core land-line business. Bubis increased the fund's position in BCE in 2008 after the proposed buyout by a group of investors fell through.
