Donald MacKay, managing director and team leader for Canadian equities at Greystone Managed Investments Inc., says that 2010 might well provide the right economic and stock-market backdrop for the growth style of equity management to outperform value.
"Our growth discipline does well when the economy, earnings and the stock market are steadily trending higher," says MacKay.
The opposite has been the case over the past two years and the growth style has substantially underperformed the value style, he says. Over the past two years, the equity market has been extremely volatile and "the turns in the macro picture have been equally dramatic."
Formed in 1988, Regina-based Greystone manages $32.2 billion, including more than $14 billion in Canadian equities, mainly for institutional clients. MacKay joined Greystone at the beginning of 1992 and assumed leadership of the Canadian equity team in January 2004.
Since 2004, Greystone has managed retail mutual funds for Toronto-based Hartford Investments Canada Corp. It is currently responsible for four Hartford mutual funds with total assets of $648 million, includingHartford Canadian Dividend Growth andHartford Canadian Stock.
MacKay notes that the fall of 2008 marked the beginning of a tough time for equity investors. "The macro economy seized up. Good growth names and momentum names seized up too as the earnings growth of these companies faltered."
Former strong performers such as Potash Corp. of Saskatchewan ( POT) and Agrium Inc. ( AGU) saw their stocks come under aggressive selling pressure, he notes. A top-down approach to equities paid off during these volatile stock market times, says MacKay, with investors who made good calls as to when to get out and into the market doing extremely well.
 |
|
 |
|
| Donald MacKay | |
|
|
|
|
|
The depressed valuations in the equity market during the downdrafts favoured those value managers who were prepared to look through the valley, he says. As equity returns moderate in 2010, "investors are likely to focus more on stock picking and to reward those companies showing superior earnings growth."
In their growth discipline, MacKay and his team apply both quantitative and qualitative analysis to stock selection. Quantitative screening of 700 Canadian companies focuses on key growth characteristics such as earnings growth, earnings revisions by financial analysts, and earnings surprises.
The team then does a qualitative review of each targeted company to assess the drivers of its earnings growth and evaluate its competitive advantage so as to judge whether the earnings growth will be sustained. "Valuation does come into the picture, because we assess what that earnings growth is worth," says MacKay.
Hartford Canadian Stock currently has 38 names. On sectors, the fund has 27% in financial services with an emphasis on the banks rather than insurance companies, 25% in energy with a focus on oil producers, and 22% in materials.
Here the Greystone team is targeting gold miners, copper producers and metallurgical coal companies. "We have been increasing our weighting in materials producers and this continues to be the case, as names in this area rank well in our quantitative work," MacKay says.
Technology, a traditional hunting ground for growth managers, represents 8.5% of the portfolio. Leading wireless-device maker Research in Motion Ltd. ( RIM) at a 4% weighting in the portfolio, is the largest technology holding.
This company, says MacKay, has the ability to grow revenue and earnings at 20% for its fiscal year to February 2011. "Its smart-phone penetration in the retail market will continue to drive growth." Although this field is highly competitive, he says, "the number of potential customers is substantial and RIM has a strong brand."
Also, the company continues to enjoy its commanding presence in the business market. "In all, RIM has an extensive global reach, strong growth prospects, and the stock is reasonably valued."
CGI Group Inc. ( GIB.A), one of the largest independent information technology services firms in the world, is a 2% weighting in the fund. "It is an outsourcing, enhancing client productivity story," says MacKay.
The company, he says, was able to grow its earnings in its fiscal year to September 2009, bucking the general decline in earnings growth for the Canadian equity market. CGI should be able to grow its EPS in the "single-digit range" in its fiscal year to September 2010, and the stock is attractively valued.
Similar to CGI, earnings of SNC-Lavalin Group Inc. ( SNC) held up well in 2009, says MacKay. SNC-Lavalin, which is 3% of the portfolio, is one of the leading engineering and construction groups in the world. "It is an infrastructure story and the company has substantial exposure to projects in the resource sector," he says. SNC-Lavalin's earnings growth for 2009 was solid and this growth should continue in 2010, he adds.
| CGI Group Inc. | SNC-Lavalin Group Inc. | ||
 |
|||
|
|||
| Ticker | GIB.A | SNC | |
| Feb. 1 close | $14.29 | $49.40 | |
| 52-week high/low | $8.64-$15.21 | $26.35-$54.89 | |
| Market cap | $4.3 billion | $7.6 billion | |
| Total % return 3Y* | 15.5% | 13.4% | |
| Total % return 5Y* | 11.9% | 19.6% | |
| Total % return 10Y* | -5.9% | 30.1% | |
|
|||
| *As of Jan. 31, 2010 Source: Morningstar |
|||
|
|||
The largest weighting in Hartford Canadian Stock is Royal Bank of Canada ( RY) at 7%. MacKay says the bank has been steadily boosting its presence in the global capital markets, in part, by hiring key players from some troubled or failed U.S. investment banks. "Royal is thus ensuring that it has a seat at the global table."
The bank's earnings growth has turned positive year on year, MacKay says, and there is potential for it to produce earnings-per-share growth of 10% through 2010. The stock, he says, trades at less than 12 times EPS estimates for the fiscal year to October 2010.
Last year, MacKay and his team sold their holding in power generation and electricity marketer TransAlta Corp. ( TA). Electricity prices are "quite weak," says MacKay. Furthermore, TransAlta has struggled with some outages and missed on its earnings versus analysts' estimates. "The sale of this stock was part of a strategy, started in 2009, to reduce defensive holdings in favour of more cyclical stocks, particularly materials."
