Canada is in relatively better shape than the United States and major overseas markets, says David Graham, manager of the $6.6-billion CIBC Monthly Income 
.
"Our federal debt-to-GDP ratio is around 40%, while it's about 73% in the U.S.," says Graham, 62, vice-president, Canadian equities at Toronto-based CIBC Global Asset Management Inc. "Our big advantage is that we have better population growth and economic growth and a greater ability to raise taxes, if we have to pay those deficits."
But the outlook for 2012 is less encouraging, as global growth may be 3% and only 2% in Canada and the U.S. At the same time, Europe is casting a pall on markets.
"The bond market is reflecting a lot of negative concerns, as is the stock market," says Graham, who also manages the $210-million Renaissance Canadian Monthly Income . "Price-to-earnings ratios have dropped to around 11 times, compared to 14 or 15 in 'normal' times."
Taking a cautious stance, Graham has recently been holding about 10% in cash. "We don't want to add bonds to the portfolio at these levels," says Graham, noting that about 28% of CIBC Monthly Income is in fixed income, when it's normally been around 35%.
"I don't see rates going to 3.5% to 4%, but they could go up half a percent. I don't want to buy a lot of bonds in front of that move. Nor do I want to have a big equity weight because there's too much volatility," says Graham, a bottom-up, value-oriented investor.
Currently, there is 62% in equities. "If the market went down 5% or 10%, our cash would be ammunition. And if rates went up, I'd do the same with bonds."
With a view to holding stocks whose yields are above the benchmark S&P/TSX Composite average of 2.7%, Graham owns names such as Royal Bank of Canada RY, which yields 4.4%.
Other favourites include H & R Real Estate Investment Trust HR.UN. The firm, which owns office towers such as the soon-to-be-completed The Bow in Calgary, pays a 5% dividend yield and has a stated policy of increasing the dividend.
"They have the borrowing capacity which allows them to make more acquisitions. That is where the growth will come from," says Graham. "Its dividend may only grow 1% or 2% a year. But it's better than a bond."
A Brampton, Ont., native, Graham is a veteran of nearly four decades in the investment industry. After graduating with a bachelor of arts from the University of Western Ontario in 1970, and earning an MBA from York University in 1972, he joined Wood Gundy and trained as an analyst in the research department.
In 1976, Graham joined Deloitte, Haskens & Sells and conducted business valuations for its merger and acquisitions division. But he found it uninteresting and re-joined Wood Gundy as a large-cap analyst. In 1980, he moved to institutional sales and became a manager.
As the brokerage industry went through a consolidation phase between 1986 and 1998, Graham found himself working in institutional sales for a succession of firms, including Richardson Greenshields Ltd. He also spent some time as a special-situations analyst at First Marathon Securities Ltd.
In 2000, Graham was offered a post as senior equity-research analyst at Merrill Lynch Investment Managers. Among other assignments, he looked after Atlas Canadian Emerging Value, the predecessor of the $309-million Renaissance Canadian Small Cap.
Over the next few years, Graham worked for CM Investment Management, a unit of CIBC that was created after the bank acquired Merrill Lynch's management arm.
After a merger with Talvest Global Asset Management Inc., Graham assumed responsibility for Talvest Small Cap Canadian Equity and later joined the equity team at CIBC Global Asset Management Inc. In December 2007, when Stephen Gerring stepped down, Graham was asked to take over CIBC Monthly Income.
The 4-star rated CIBC Monthly Income was in the third and second quartile for the one and two-year periods ending Nov. 30, compared with its peers in the Canadian Neutral Balanced category. It returned 6.8% on an annualized basis for the three-year period, putting it in the third quartile. Part of the underperformance was due to Graham's cautious stance on equities in 2009.
Today, Graham argues that stocks are more compelling than bonds, although it comes at a price. "We would suffer some volatility in the portfolio, which we have done, to capture the better income from holding stocks."
That's why he likes BCE Inc. BCE, for instance, which has a 5.2% dividend yield. "You have to ask yourself, 'How badly will BCE have to do for you to get the same return as a bond?'" says Graham, noting that it's unlikely that the stock price would fall sharply enough to leave a bond investor further ahead.
