Greener pastures found outside Canada

CI's Eric Bushell tops up foreign content in domestic mandate.

Sonita Horvitch 3 April, 2013 | 6:00PM
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 Eric Bushell, chief investment officer at Toronto-based Signature Global Advisors, says that he continues to favour equities over bonds in balanced funds and is maximizing his foreign content in the Canadian equity portfolios for which he is responsible.

As CIO of Signature Global Advisors, a separate portfolio-management group under the CI Investments Inc. umbrella, Bushell's approach is to analyze macroeconomic trends and developments in financial markets around the world, so as to shape his investment strategy for a wide range of portfolios. His team includes sector-focused equity managers and fixed-income specialists.

"The outlook for equities remains positive as the worst appears to be over in Europe, and the United States is decidedly on the mend," he says. Still, he adds, global economic growth is likely to be "tepid" for some time, which will keep interest rates low.

Looking further out, Bushell expresses concern that there could be a bubble developing in financial assets, given the amount of liquidity being pumped into the system by central banks around the world that is finding its way into financial assets.

Of the short-term challenges, Bushell says the Cyprus banking crisis is unlikely to unsettle the banking systems in other financially troubled economies in the eurozone, specifically major countries like Italy and Spain.

The European banks have already experienced several shocks since the global financial crisis erupted in 2008, and "the deposits that are likely to move have already done so. What remains are stable domestic retail deposits."

In the U.S., the economic recovery is intact, says Bushell, despite the federal budget sequestration or spending cuts across the board. This imposed fiscal restraint is "being offset by both the ongoing accommodative monetary policy and the revival in consumer confidence." The rise in employment and the improving housing market are both boosting consumer confidence, he says. "A further plus is that housing is still far more affordable than before the financial crisis."

Furthermore, the international competitiveness of the United States has improved, says Bushell. "Wages are down, unions are less powerful and the economy is benefitting from cheap shale gas." Funds are starting to flow back into the country from the developing countries, he adds. "The result of all these positives is a stronger U.S. dollar."

Signature Global Advisors manages more than $35 billion across all asset classes. In addition to his CIO role, Bushell is lead manager of CI Signature Select Canadian, which has assets of $2.3 billion. He is also lead manager of CI Signature Select Canadian Corporate Class, a similar fund, which has assets of $1.5 billion.

These funds, says Bushell, are fully invested with "the maximum global orientation." At the end of February, Signature Select held some 50% in Canadian equities and cash, 32% in U.S. equities and 18% in international equities, with companies based in the UK, Switzerland and Germany dominating these international holdings.

Bushell expects 2013 to be another challenging year for investors in the Canadian equity market versus the global equity market. "Canadian telecommunications-services stocks, pipelines and real estate investment trusts, which have been favoured for their dividend yields, are expensive."

The heavily weighted materials sector is out of favour, Bushell notes. "The emerging-market super cycle is slowing down, and there has been an increase in the supply of these commodities." Bushell has sold Signature Select Canadian's position in a gold-bullion ETF. "Well selected equities should outperform bullion this year," he says.

Eric Bushell speaking at the 2012 Morningstar Investment Conference

Two significant areas in the Canadian equity market that Bushell is positive on are large-cap energy producers and the big Canadian banks.

Canadian energy producers have been under pressure for some time, he says. The price for natural gas remains depressed and the price of crude oil is at "a discount to the U.S. benchmark West Texas Intermediate and that, in turn, trades at a discount to the Brent price, the international benchmark. "The forward commodity market is showing signs of a narrowing of these two discounts and the stock market is gradually starting to recognize this." Also, the infrastructure challenges facing western Canadian energy producers will be addressed over time, he says.

Long-standing top-10 energy holdings in CI Signature Select Canadian are Suncor Energy Inc. SU and Canadian Natural Resources Ltd. CNQ. Bushell has sold his holding in the oil-sands producer Cenovus Energy Inc. CVE.

Signature Select Canadian has four out of the Big Five Canadian banks among its top-10 holdings. They include Toronto-Dominion Bank TD and Canadian Imperial Bank of Commerce CM, which have been the two biggest holdings in the fund for some time. The other top-10 bank holdings are Bank of Nova Scotia BNS and Royal Bank of Canada RY.

"The Canadian banks are growing their capital every quarter and should be more than able to meet additional regulatory requirements," Bushell says. The stocks, which have been flat for the last two and a half years, "have income support and trade at reasonable valuations."

Over the same period, says Bushell, U.S. bank stocks have doubled, albeit from their depressed levels. "The big recovery opportunity in U.S. financial stocks is over," he says, "but we are still enthusiastic about these stocks." He points out that the stocks carry dividend yields of around 3% and these banks have low payout ratios in the range of 25%. "There is room for dividend expansion."

The recovery in U.S. house prices "is strengthening the value of the banks' collateral in respect of its mortgage lending," says Bushell. Signature Select Canadian continues to have holdings in JP Morgan Chase & Co JPM and Bank of America Corp. BAC.

In the more defensive areas of the U.S. and international stock markets, the fund has sizeable holdings in both health-care and consumer-staples stocks.

In health care, Bushell's focus is on major global pharmaceutical companies, "which have seen the worst of the patent expirations," and niche medical device companies. In the latter category, Bushell likes Baxter International Inc. BAX, which makes kidney-dialysis products in its devices division and plasma-based proteins in its bioscience division. "It is a leader in both fields globally." Late last year, the company, says Bushell, bought rival Swedish dialysis-equipment maker Gambro AB to expand its position in this growing market.

Consumer-staples stocks are "getting expensive, but they could get even more so, as investors returning to the equity markets seek out these stocks," says Bushell. His holdings include the major drugstore retailer CVS Caremark Corp. CVS and the British-based global purveyor of spirits, wine and beer, Diageo PLC, which has an American Depository Receipt and trades in New York under the ticker DEO.

Baxter International Inc. CVS Caremark Corp Diageo PLC
April 1 close $72.30 $54.53 $125.55
52-week high/low $72.85-$48.98 $56.07-$43.08 $132.10-$92.55
Market cap $39.4 billion $67.9 billion $79.3 billion
Total % return 1Y* 23.8 23.3 33.1
Total % return 3Y* 9.5 15.7 24.8
Total % return 5Y* 5.5 6.6 10.3
*As of April 1, 2013. All figures in US$
Source: Morningstar

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Sonita Horvitch

Sonita Horvitch  

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