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Global value manager applies the brakes

MFC's Chris Arbuthnot drives his shiny 5-star fund defensively toward larger, liquid names.

Sonita Horvitch 2 June, 2010 | 6:00PM
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Chris Arbuthnot, portfolio manager at MFC Investment Management (U.S.) LLC, has been reducing the level of risk in the global portfolio he manages on concerns that some high-profile challenges around the world could dampen the economic recovery.

There is, he says, the possibility of a slowdown in China, which has been such an important source of global economic growth in recent times. "The Chinese government is taking steps to prevent an overheating of the economy, and it could overshoot the mark."

Also, there is the risk that the European sovereign-debt crisis will spread. "These two prospects have made investors nervous, as they threaten the sustainability of the global recovery," says Arbuthnot.

Then, there is the question at the back of investors' minds about the ability of those economies currently benefiting from a fiscal stimulus and historically low interest rates, "to maintain their momentum once this changes."

In the light of this uncertainty, Arbuthnot, who is a value manager, has embarked on a more defensive strategy. This includes "significantly" moving up the market-capitalization spectrum to invest in larger-cap names that offer good liquidity. "This allows me to be nimble and opportunistic."

He has also reduced his exposure to "industrial commodities" such as copper, zinc and nickel. In addition, he has been emphasizing stocks with positive, specific drivers at the company level, rather than those that are dependent on macro developments.

Chris Arbuthnot

Based in Boston, Arbuthnot is a member of the intrinsic-value team at MFC Global Investment Management, a subsidiary of Manulife Financial Corp. He joined the firm in 2006 and he is now responsible for managing some $600 million in assets.

His mandates includeManulife Global Opportunities Class, which as of the end of April had completed the three years of history required to qualify for a risk-adjusted rating by Morningstar. The fund comes out on top with a 5-star Morningstar Rating in the Global Equity category.

The fund currently has some 40 names. Major country weightings are the United States at 38%, Brazil at 20%, (which includes the biggest holding in the fund, OGX Petroleo E Gas Participacoes SA, at more than 7%), France at 7%, Canada 6% and the UK at 5%. In all, emerging economies represent 35% of the fund.

Arbuthnot says he has "opportunistically" been taking advantage of the substantial weakness in the European equity market so far this year to add big-cap, brand-name telecommunications stocks to the portfolio.

"There are some compelling values in Europe." Furthermore, he says, these stocks could, at some stage, be a source of liquidity for him to move into other areas if the global equity market stabilizes. European telecoms now represent 12% of the portfolio. Arbuthnot has added two new names: Deutsche Telekom AG and France Telecom SA.

Index YTD return*
MSCI World -6.3
MSCI Europe -15.6
MSCI Emerging Markets -5.3
*Total Canadian-dollar return in the year to date to May 31
Source: Morningstar

Deutsche Telekom, which trades on the New York Stock Exchange under the ticker DT, represents 4% of the fund. The stock has a dividend yield of 9%, "supported by strong free cash flow." France Telecom, which constitutes a 3.6% weighting in the fund, is a dominant player in its domestic market and "a huge cash-flow generator," says Arbuthnot.

Both companies, he notes, have interests outside of the Euro Zone. In an interesting development, Deutsche Telekom and France Telecom recently completed a merger of their UK mobile operations. A 50-50 joint venture, this merger was announced last fall, and has created the biggest wireless provider in the UK.

Within the Euro Zone, Deutsche Telekom has "only" 7% of its sales and France Telecom a "mere" 5% of its sales in those countries that are currently experiencing serious government debt problems, Arbuthnot says.

Manulife Global Opportunities Class has had a long-standing position in the UK-based telecom giant, Vodafone Group PLC, which currently makes up 4.6% of the fund.

Emerging markets, says Arbuthnot, have been both weak and volatile in the year to date. This, he says, has resulted in opportunities to buy "best in class" stocks in countries like India, at more reasonable valuations.

He has added: Reliance Infrastructure Ltd. (1.5% of the portfolio) and Sun Pharmaceutical Industries Ltd. (1%). Both these Indian companies have strong growth prospects and have seen their stocks pull back to the point that they "offer a margin of safety in valuation."

Reliance Infrastructure is the largest private-sector power utility in India. The company is also involved in roads and highway projects, subway lines in cities, and other major infrastructure projects in India. "The country has a strong commitment to improving its infrastructure," says Arbuthnot. The stock trades at 1.2 times price to book value per share and 11 times his earnings-per-share estimates for the company's following fiscal year ending in March 2012.

Sun Pharmaceutical, a leading drug manufacturer in India, is growing it sales at twice the industry rate, Arbuthnot says. The company is focused mainly on generic drugs and "a large number of blockbuster drugs are coming off patent in the next five years," he said. "Sun Pharmaceutical is extremely well run and is well placed to take advantage of this."

This stock is not particularly cheap, says Arbuthnot, but given the "sustainability of the company's earnings growth and its exceptional reinvestment opportunities, the valuation is attractive."

Also in emerging markets, Arbuthnot has added Geely Automobile Holdings Ltd. It's an automaker in China that is "both innovative in its products and strategic in its targeting of mid-market domestic buyers."

Geely currently represents 2.6% of the fund and is Arbuthnot's only holding in China. "The company is growing its production quickly and is introducing new models." Geely, he says, has good reinvestment opportunities for the capital it is generating and has an excellent balance sheet.

In keeping with his strategy to reduce the fund's exposure to industrial commodities and to smaller caps, Arbuthnot has sold his holdings in two Canadian junior mining companies that concentrate on zinc. They are Farallon Mining Ltd. FAN and Breakwater Resources Ltd. BWR.

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Sonita Horvitch

Sonita Horvitch  

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