In August, a month after taking on three new funds for NEI Investments, Christine Hughes made a sharp shift to stocks in one of them, NEI Northwest Macro Canadian Asset Allocation. Its equity weighting soared to 80%, up from 10%.
Hughes made her bold move in response to the crisis over sovereign debt in Europe, and "unlimited money printing" by the U.S. Federal Reserve. In what remains of her bond portfolio, safety and liquidity are paramount. The bond holdings are Government of Canada issues with maturities of no more than two years.
"Most people are looking the wrong way if you're trying to manage risk," says Hughes, "They're looking at earnings releases. You have to focus on the bond market."
Hughes is the president and chief investment strategist of her Toronto-based firm OtterWood Capital Management Inc. The two other NEI funds that OtterWood began managing in July are NEI Northwest Macro Canadian Equity and its corporate-class version. This follows the appointment in mid-May of OtterWood as the portfolio manager of the 23-year-old NEI Ethical Balanced.
Hughes says NEI Northwest Macro Canadian Asset Allocation best represents her management approach. The mandate gives her wide latitude to vary the asset mix. Her equity portion can range anywhere from 10% to 90%. She can also use options to hedge her equity exposure.
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Among the macroeconomic factors that Hughes considers are financial-market liquidity, currency exchange rates, commodities, credit spreads, money flows into the U.S. banking system and central-bank behaviour.
"Reluctantly bullish," Hughes avoids what she considers the most expensive areas of the market. She favours sectors that are unloved and beaten down, but that have something positive going for them in terms of growth prospects. "Valuation matters to us, but I can't stand deep-value stuff," she says.
NEI Northwest Macro Canadian Asset Allocation has an overall weight of 45% in commodities-related stocks. These include precious-metals mining stocks, which represent the biggest weight in any one industry in Hughes's equity portfolios. The gold sector is currently "despised," according to Hughes. "That's when you know it's the bottom."
Also favoured by Hughes are U.S. housing stocks and U.S. car companies like Ford Motor Co. F. She believes housing and automobile sales will be growth areas of the U.S. economy.
Geographically in the asset-allocation fund, Hughes is currently weighted 50% in Canada, 30% in the U.S. and 20% in Europe. Most of the equity holdings are large-cap issues.
Hughes expects that she'll probably maintain her equity-heavy positioning in the fund for the next one to two years. Among the other developments she's monitoring that leave her wary of the global bond market is her "deep suspicion" that there will also be a sovereign debt crisis in Japan. "I don't know when, but we're ready for it," she says.
Not every Hughes-managed fund is so free-wheeling. The NEI Ethical Balanced mandate is constrained by a maximum of 60% in equities or bonds. In addition, an NEI team in Vancouver continues to be responsible for the fund's socially responsible investment (SRI) screening.
Hughes, 43, considers her early experience in managing money for conservative wealthy clients her greatest influence. A graduate of the University of Toronto, she received a BA in economics in 1991. While completing her degree, she began her investment career by joining Cassels Blaikie & Co. as the assistant to the director of portfolio-management research.
In 1993, Hughes moved to Cassels Blaikie Investment Management Ltd. to become a portfolio manager, co-managing the National Trust Special Equity portfolio. She received the CFA designation in 1995.
In May 1997, Hughes joined Strategic Value Corp. to manage a Canadian small-cap fund. Then in August 1999, she joined AGF Investments Inc. as lead manager of the Canadian balanced mandate.
Hughes left AGF at the end of 2009, had a baby, and took two years off from the industry. After that time frame, she wanted to return to managing money, but as the owner of her own business.
At the end of 2011, discussions began with Daniel Solomon, chief investment officer at NEI. Hughes's timing was fortuitous. Solomon quickly realized that "what I wanted to do was exactly what he was looking for," says Hughes. OtterWood was subsequently set up in January of this year, with an agreement to manage retail mutual funds exclusively for NEI.
Hughes is excited about the strength of her team of three analysts, plus herself, who share a passion for a macro-driven strategy. The team members carry out company-specific and sector research, freeing up Hughes to focus on big-picture issues.
Hughes welcomes the flexibility she has been given by NEI Investments. "If you're looking for risk and you're able and willing to move, you can do it," she says. "Most managers' jobs are to be plus or minus 2% of the benchmark; they're paid relative to a benchmark. If you have a macro opinion, you don't want to hug a benchmark."
