By Mark Barnicutt on October 5, 2001
I’ve spent a few weeks speaking about conservative investment strategies in light of recent events. However, the strategy that each investor should take is a function of individual objectives and constraints. In other words, what investors do now depends on return goals, comfort with risk, time horizon, cash and income requirements, etc. While my recent comments have been directed at the “average Joe” among Canadian investors, this week, the focus will be the investor who doesn’t get queasy when the market moves in ‘roller coaster’ fashion.
Aggressive investor defined
The term aggressive investor may conjure up different images for different people. For some, aggressive means holding more than 50% in stocks. Yet others wouldn’t classify an investor as aggressive until most of the portfolio was riding on stocks with market values under a dollar.
Personally, I define an aggressive investor as one who expects low to mid double-digit returns over time and is comfortable with the occasional dips of 30% or so for the entire portfolio. Such an investor would have nearly all of their money invested in stocks and a significant portion of these stocks would be in aggressive market segments. That said, there are a couple of market segments aggressive investors may want to consider in today’s battered markets. (While the specific fund recommendations are in no particular order, the following headings go from least to most aggressive.)
Canadian small companies
I speak to money managers on a regular basis. Most managers with a value orientation had been having a really tough time finding stocks of larger companies that they liked that were also reasonably priced.
(A value-oriented manager is one who does not like paying too high a price for a stock in relation to its current earnings and expected growth. Also, such managers typically don’t get too aggressive in their profit projections and usually build in a margin of safety to account for the fact that their projections are imperfect.)
However, even before last month’s terrorist attacks, money managers running portfolios made up of smaller Canadian companies were seeing lots of good value opportunities. Martin Ferguson, a small cap money manager with Calgary-based Mawer Investment Management, who typically holds about 40 stocks in his fund, summed up this sentiment nicely. I typically ask a manager to tell me about one or two of their current stocks about which they’re particularly excited. When I asked this Martin this question in late July, he responded: “I can tell you about 40”.
Given the market declines we’ve seen over the past few weeks, many are saying that the Canadian market looks attractively valued. While this has been heard from some managers seeking stocks of larger companies, that sentiment has been twice as loud from managers of small cap funds. Even with the murky economic outlook, stocks of smaller companies are more attractive than ever. Irwin Michael, manager of the ABC funds, has been sitting on a cash balance of 18 to 20 per cent for some time, but he says the universe of smaller companies is very attractive. He expects to be spending much of that cash picking up new stocks before the end of the year.
Mutual fund investors can play this opportunity by taking a look at some of today’s most attractive small cap funds, namely:
Mawer New Canada (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=297&FundKey=12495)
Beutel Goodman Small Cap (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=125&FundKey=11617)
Trimark Enterprise Small Cap (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=106&FundKey=13976)
Ethical Special Equity (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=167&FundKey=11306), and
Clarington Canadian Small Cap (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=149&FundKey=10923).
The most attractive of this group currently are the last two mentioned, which are both run by Leigh Pullen, of QVGD Investors Inc.
I also highly recommend Irwin Michael’s ABC Fundamental Value (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=102&FundKey=12655), but with a minimum investment of $150,000 you’ll need a portfolio of at least $750,000 to buy that fund in reasonable proportion.
Early in 1994, when investors ploughed money away for the retirement savings plans, many chose funds investing in Asia and emerging markets. Why? Because many had posted dizzying returns ranging from 80 to 120 per cent for calendar 1993. While the technology boom revived these funds in 1999, many investors have shunned them since their big showing in 1993.
While those markets have run into a bit of trouble over the years, with the collapse of Southeast Asian currencies in the fall of 1997, the devaluation of the Brazilian real, and a general economic weakness that has persisted for a few years, many see this as an opportunity. Money managers are generally optimistic about stocks outside North America.
George Morgan, lead manager of Templeton Growth, says that emerging markets stocks are heavily discounted due to perceived risks in the region. While he remains cautious on the region, he likes the valuations.
Fidelity Investments money manager Rick Mace confirmed recently that he has been shifting stock exposure away from the U.S., in favour of Europe and emerging markets stocks due to more favourable stock valuations in those regions. The U.S. market has been expensive (based on its P/E ratio) for years, but it continued to deliver solid returns due to huge productivity gains and economic growth. Mace simply doesn’t think the U.S. economy can continue that stellar performance, which is what lead him to less expensive overseas stocks.
Nandu Narayanan, manager of CI Pacific and CI Emerging Markets, said in a recent commentary that he likes the prospects of India and China, but is remains cautious about Korea and Taiwan, which are both heavily reliant on the technology sector. Narayanan also added, “Given Europe’s low inflation, trade surplus, ample energy, and strong consumer balance sheet, we believe it is in a better position than other major markets to lead global economic growth. We expect to see further interest rate cuts, tax cuts, and other measures to stimulate consumer borrowing which, in turn, could help lift stock values”.
My picks for overseas stock funds include:
Spectrum European Growth (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=200&FundKey=13592),
CI Emerging Markets (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=128&FundKey=10710), and
the broader based Perigee International Equity (http://stocks.myto.com/mutualfund/FundList.asp?MasterKey=253&FundKey=13235).
I’m still a little leery about technology. In fact, I wrote articles in May, September, October and December of 2000 warning of the sector’s high valuations. I reiterated my cautionary tone in March of this year. Now, I’d say this is probably a decent time to start building a position. Everybody hates technology right now. Momentum managers don’t like it because revenues have flat-lined and earnings are non-existent. Growth managers don’t like the sector because they haven’t got the “visibility” to confidently project future growth. Value managers don’t like them because they’re not cheap enough yet. With lots of economic stimuli at work, I’d be willing to go out on a limb and say that tech stocks may start to produce respectable returns at some point next year.
Let’s face it, if I knew what was going to happen next week, next month, or even next year, I’d be sipping drinks under my beach umbrella in a much nicer climate. In other words, the recommendations above are very subjective and were formed from recent comments from portfolio managers and pure gut instinct on my part. While these recommendations may be suitable for the more aggressive, they still require patience since the timing of a turnaround in all of these areas is uncertain – particularly in technology. In any event, even aggressive investors should keep some balance in their portfolio and not bet the farm on any one area.