Award-winning manager Oscar Belaiche believes future investment returns should be relatively strong since the equity-risk premium, or the difference between the earnings yield and 10-year U.S. treasuries, is at elevated levels.
The forward earnings yield for the S&P 500 is about 7.8%, a spread of about 6% over U.S. treasuries, says Belaiche, a manager for Dynamic Funds who is the Morningstar Domestic Equity Fund Manager of the Year for 2012.
By definition, the earnings yield is the inverse of the price-earnings ratio. "The spread widened over the 2000s because of the tech and housing bubbles that burst, and then the associated damage that we lived through," says Belaiche. Referring to a chart dating back to the 1960s, he adds: On an earnings-yield basis, "we're back to levels seen 40 years ago."
Although the risk premium is starting to decline because fear of systemic risk has dissipated, it is offset by a sluggish growth environment. "That's the kicker," says Belaiche. "We don't have huge growth because we need stabilization of government balance sheets, but also some deleveraging. We are not there yet."
Belaiche is a vice-president at Toronto-based GCIC Ltd., which manages the Dynamic family of funds. He leads the equity-income team that manages more than $12 billion in assets, held in 15 funds.
A bottom-up manager who adheres to an investment style known as QUARP, or quality at a reasonable price, Belaiche favours companies with strong fundamentals and free-cash-flow yields. As a rule, he limits individual positions to about 5% of a fund's assets.
One top name that is held in several funds is Enbridge Inc. ENB, a major pipeline operator. "It offers a combination of growth and unparalleled free-cash-flow yield," says Belaiche. He expects 15% annualized growth in the dividend, which is currently 2.8%.
"We are rebuilding energy infrastructure across North America and Enbridge is at the forefront," says Belaiche. "It has a multi-billion-dollar backlog of projects to work through."
Born in France, and raised in Toronto, Belaiche is a 32-year industry veteran who came to fund management via the real-estate sector. After graduating in 1980 from the University of Western Ontario with an honours BA in business administration, and travelling for a year, Belaiche returned to Toronto. He worked in Canadian Imperial Bank of Commerce's cash-management division.
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| Oscar Belaiche and Peter Mansbridge at the 2012 Morningstar Canadian Investment Awards. Belaiche won Domestic Equity Fund Manager of the Year. | |
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In 1983, Belaiche was hired as a financial analyst by Inducon Development Corp., where he conducted feasibility studies and worked with executives who struck the deals. But ultimately he was responsible for co-ordinating the firm's different departments.
In 1990, Belaiche seized an opportunity to join Prudential Insurance Co. of America. As director of asset management, he was involved in the leasing and property management of the insurer's portfolio of 43 buildings. Later, as vice-president of property investments, he was also instrumental in the sale of the properties when the U.S. parent firm decided to divest its Canadian operations.
Belaiche's career took another turn in 1997, when Ned Goodman, head of Goodman & Co. (which became GCIC Ltd.) invited Belaiche to join the firm. Belaiche became part of the team that managed Dynamic Global Real Estate Class. Following several fund mergers it became the Morningstar 4-star rated Dynamic Global Real Estate.
In September 2000, Belaiche was appointed manager of Dynamic Dividend, which invests in dividend-paying common equities and real estate investment trusts.
In July 2001, he became co-manager of the then named Dynamic Focus + Diversified Income Trust. After trusts lost their tax-preferential status, the fund was renamed Dynamic Equity Income, which has $1.9 billion in assets and a 4-star rating in the Canadian Dividend Income and Equity category.
Belaiche accepted another assignment in January 2003 when he became co-manager of Dynamic Dividend Income. Besides investing in stocks and income trusts, the 4-star rated fund in the Canadian Neutral Balanced category has about 28% in bonds. The bond portion of the fund is managed by fixed-income specialist Michael McHugh, a GCIC vice-president. The equity holdings tend to overlap in all three income-oriented funds.
In managing the funds, Belaiche has built up a team of 11 investment professionals, who include Jason Gibbs and Tom Dicker. From a performance standpoint, the flagship Dynamic Equity Income returned 6.7% for the 12 months ended Jan. 31, lagging the 8.5% median return in the Canadian Dividend & Income Equity category. But over five and 10 years, the fund has outperformed by wide margins with annualized 7.9% and 11.2% returns respectively, versus the median returns of 4.1% and 7.9%.
Belaiche acknowledges that the fund was hurt last year by under-performing energy stocks. "It's an embarrassment," he admits, noting that he sold the losers and reduced some other holdings. "We've addressed the problem and we're not going to have another year like it."
Meanwhile, Belaiche is waiting to invest some of the heavy cash weightings in several funds. "The way I look at investing, I ask myself, 'Do I have happy money in the fund?' Are the investors happy?" he says. "By absolute and risk-adjusted measures, I'm doing okay."
