Shareholder activism pays dividends

CI's Eric Bushell cites pressures on top executives to maximize shareholder value.

Sonita Horvitch 4 June, 2014 | 6:00PM

Eric Bushell, chief investment officer at Toronto-based Signature Global Asset Management, says a new level of capital discipline in senior corporate ranks around the world will enhance shareholder value.

"This is coming at the insistence of shareholders and augurs well for equities," says Bushell. He and his team are responsible for managing some $50 billion in assets at Signature, a separate portfolio-management group under CI Investments Inc.'s umbrella.

Since the start of the global financial crisis some six years ago, management has been on the defensive and opted to hoard cash, says Bushell. "Over the past three years, shareholders have successfully pressured management and boards to focus on dividends and share buybacks. These have become a material factor in the global equity market."

The new phase of shareholder activism will, he says, require management to further maximize shareholder value. "Increasingly, senior-management compensation packages will be geared to corporate performance." There is evidence of growing pressure on management "to shed marginal businesses, make accretive acquisitions or merge with like businesses to achieve economies of scale."

The global health-care industry "is the epicentre of the restructuring story," says Bushell. For example, two pharmaceutical giants have swapped their respective non-core businesses to augment each other's core businesses." It is little wonder, he says, that this movement started in health care, "as valuations in this sector were so depressed that management had to do something."

Bushell cites another example of recent corporate rationalization, this time in the industrial sector. "Faced with a shrinking market, two leading European cement companies merged rather than fight for market share in a diminishing pie."

The analysis of these key developments at the corporate level is an integral part of Bushell's wide-ranging role as CIO at Signature. On the big-picture front, he evaluates macroeconomic trends and developments in financial markets so as to shape the overall strategy for the comprehensive range of portfolios under his aegis. His team includes sector-focused equity managers and fixed-income specialists.

For his overall strategy, Bushell continues to favour equities over bonds and to emphasize equities outside Canada. He says earnings yields on equities are high relative to bond yields. "Equities are currently fairly valued with the prospect of some further multiple expansion, based on the premise that interest rates will remain lower for longer, given the ongoing challenges facing the global economy."

 
Eric Bushell

As for Canada, Bushell says it is losing competitiveness to both the United States and Mexico. "Allowing the Canadian dollar to weaken is the least painful way of addressing this."

Bushell is enthusiastic about Mexico. "The country is undergoing major political and economic reforms and embracing competition and trade, which includes opening up its energy sector to foreign participation." All this, he says, "is both an opportunity and a challenge for Canada."

Emerging markets in general have stabilized, Bushell says, after the sharp dip in their currencies and rise in their interest rates (and resulting decline in their bond markets) last May. This was precipitated by the discussion about the U.S. Federal Reserve Board's tapering program.

Looking ahead, Bushell considers that these economies will benefit from capital inflows made by "yield-starved" developed-market pensions and insurance companies. "Currently, the yield on German bonds, for instance, is 1.25%."

In addition to his CIO role, Bushell is lead manager of CI Signature Select Canadian  , which had assets of $2.3 billion at the end of April. He is also lead manager of CI Signature Select Canadian Corporate Class, a similar fund, which had assets of $1.6 billion at the end of April.

CI Signature Select Canadian (with some 100 names) is a clear example of Bushell and his team's emphasis on investing in companies headquartered outside Canada. At the end of April, the fund had 45.2% in Canadian equities, 6.7% in cash, 25.1% in U.S. equities and 23% in international equities. In the latter case, the fund had 6.3% in Swiss-based companies, 2.6% in Germany, 2.4% in France and 2% in the Netherlands.

At the end of April, the fund's biggest international holding was the global pharmaceutical company, Roche Holding AG, based in Switzerland. "The company has a strong cancer franchise," says Bushell.

The fund also has a holding in Swiss-based Novartis AG. This company recently agreed to trade assets with rival GlaxoSmithKline PLC, so as to shed their more marginal businesses and focus on their respective core strengths. So, Novartis is purchasing Glaxo's cancer drugs and Glaxo is purchasing Novartis's vaccine business. "This is a prime example of rationalization in the pharmaceutical sector," Bushell says.

Health care represented some 8.7% of the fund at the end of April. "At this juncture, I prefer to have my defensive holdings in health-care stocks rather than consumer-staples stocks," says Bushell. "Health care is more innovative, offers more growth and valuations are cheaper." A new health-care holding is Agilent Technologies Inc. A, a life sciences and diagnostic company.

Bushell says he has been paring back his exposure to consumer staples in favour of more economically sensitive consumer-discretionary stocks. One such favoured holding is Home Depot Inc. HD. "It is one of the best plays on the recovery in the U.S. home-renovation market."

Bushell also owns Delphi Automotive PLC, which has an American Depository Receipt and trades in New York under the ticker DLPH. "This global vehicle-components manufacturers is benefiting from the fact that there is less capacity in the industry after the global financial crisis," he says.

Delphi Automotive PLC Home Depot Inc.
May 31 close $69.06 $80.23
52-week high/low $70.78-$47.40 $83.20-$72.21
Market cap $21.0 billion $109.8 billion
Total % return 1Y* 43.2 4.1
Total % return 3Y* - 32.4
Total % return 5Y* - 30.0
*As of May 31, 2014. All figures in U.S. dollars
Source: Morningstar

Turning to the energy sector, Bushell says that he has added a new large-cap Canadian producer to the portfolio: Encana Corp. ECA. It's a top-10 holding in the fund. "Doug Suttles, president and CEO, who was brought in a year ago, is concentrating on the company's strengths and on maximizing shareholder value." Encana recently successfully spun off a large slice of its royalty lands into a separate publicly traded company, PrairieSky Royalty Ltd., to unlock value for Encana shareholders.

In energy services, CI Signature Select Canadian has holdings in the two big U.S.-based global players: Schlumberger Ltd. SLB and Halliburton Co. HAL. "The opening up of the Mexican energy industry to foreign players," says Bushell, "will be a big boost to these two companies."

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Sonita Horvitch

Sonita Horvitch