Vital signs improve in the U.S.

On the U.S. consumer, Priest says there are some encouraging signs of a turnaround. While the headline unemployment rate is likely to remain at 10% for the time being, disposable incomes of those employed are on the rise. As a result, consumer purchases are going up, he says.

Also, credit-card delinquencies are declining. The historically low interest rates have reduced debt-servicing costs, which is clearly helping consumer health, he says. "In all, the U.S. consumer is out of the critical-care unit and is in stable condition, but still needs to be hospitalized."

U.S. businesses, says Priest, have "historically high levels of cash." Expect to see more merger and acquisition activity, including purchases of assets as well as companies.

Also, expect the level of businesses' capital expenditure to go up, with telecommunications-equipment and information-technology firms, for example, the beneficiaries. "There is pent-up demand for their products," says Priest. His call is that this transition to private-sector spending is unlikely to put pressure on U.S. interest rates in the shorter term.

Bill Priest

Of the U.S. equity market, Priest's colleague Janet Navon, director of research and a member of the U.S. equity team, notes that it was the low-quality, highly leveraged companies that outperformed in the sharp rebound in the U.S. equity market starting in March 2009.

"The good old steady Eddy names that we were happy to hold during the downturn in the market, underperformed in the rally and continue to offer value," she says. It is the high-quality, mainly large-cap names that Epoch's U.S. equity team focuses on in its bottom-up stock picking with a value bias.

In all, Epoch has roughly US$12 billion in asset under management. Its mandates include managing some $1.6 billion in assets for Toronto-based CI Investments Inc. Epoch is responsible for such high-profile funds as   CI American Value   ($298 million) and   CI American Value Corporate Class   ($331 million), which have similar holdings.

The portfolio has 55 holdings, which is at the high end of its normal 40-60 names. "In this volatile equity market it is prudent to be more diversified," says Navon.

In stock selection, the U.S. equity team focuses on strong businesses generating a high degree of reliable cash flow, and run by management teams with a solid track record of allocating capital to enhance shareholder value. The team looks for a stock pick to generate a total return of at least 50% over a three-year time frame, with a modest risk of a stock-price decline. This analysis involves establishing a target price on the stock three years out, based on estimated future cash flow, says Navon.

At the end of May, CI American Value had 22.9% in financial services and 21.3% in information technology, the two biggest weightings in the portfolio. Other major sector weightings include energy at 12.3%.

In the financial-services sector, the focus is on non-bank financial companies. An insurance company that features prominently in the portfolio is MetLife Inc.   MET.

Navon says that MetLife is particularly well capitalized and has a good offering of savings and insurance products. It is also gaining market share at the expense of weaker competitors such as American International Group Inc.   AIG, which nearly collapsed in September 2008 during the global financial meltdown.

Earlier this year, MetLife agreed to purchase AIG's American Life Insurance Co. or Alico, which sells a range of insurance products and financial products in 55 countries. The price tag on this purchase was US$15.5 billion -- part cash and part equity in MetLife. "The acquisition is accretive to MetLife," says Navon.

In the information-technology sector, Epoch's U.S. equity team has added to its position in the software giant Microsoft Corp.   MSFT, the largest holding in CI American Value at 4% at the end of May.

	Total returns ($US)	MetLife	Microsoft
	YTD*	16.6	-14.0
	2009	3.5	59.5
	2008	-42.2	-44.1
	*Year to date to June 21 Source: Morningstar

Microsoft, says Navon, will benefit from the pent-up demand for its products. In addition to the new operating system, Windows 7, and the introduction of Office 2010, its new servers will be sold to corporations and help to generate substantial free cash flow. This can be used for increased dividends and stock repurchases, she says.

Also in this sector, the U.S. equity team has trimmed its holding in Apple Inc.   AAPL, which designs and makes personal computers and mobile communications devices mainly aimed at the consumer. "We evaluate the risk/reward on a stock and considered that there were better opportunities elsewhere," says Navon.

An energy stock that exemplifies the characteristics that the Epoch team values is Exxon Mobil Corp.   XOM, the world's largest publicly listed energy company. It represents 3% of the portfolio and is in the top 10 holdings.

"Exxon Mobil is a good allocator of capital," says Navon. It has demonstrated its willingness to return some of its free cash flow to shareholders in the form of dividends and share buybacks. It is also successfully growing production.

In terms of its acquisitions, cash-rich Exxon Mobil's purchase of XTO Energy Inc. for US$30 billion in stock was a good move, she says. XTO was one of the leading developers of unconventional natural-gas resources in the United States.