Stephen Carlin- AEGON Capital Management Inc.

Manager favours U.S. stocks for superior earnings growth.

Michael Ryval 28 September, 2012 | 6:00PM
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Stephen Carlin believes that Canadian and U.S. equities are fairly valued, although the latter have better upside.

"The Canadian market is not cheap -- nor is it expensive," says Carlin, manager of the $234-million imaxx Canadian Fixed Pay and senior vice-president and head of equities at Toronto-based AEGON Capital Management Inc. "The S&P 500 Index can also be described as fair value. However, one of the key differences is that there is better earnings-growth potential in U.S. companies relative to those in Canada."

One reason for the divergence is that Canada has a high percentage of resource-based companies. "In light of the weaker global economic prospects, we've seen pressure on the profitability of companies in the energy and materials space," says Carlin. "A prime example of that are gold companies. For a given change in gold prices, you are not getting the same rate of change in earnings -- in fact, earnings have been deteriorating."

But looking ahead at 2013, Carlin is generally optimistic because he expects the Bank of Canada to maintain low interest rates for some time. "Canada is the U.S.'s Siamese twin. The Bank of Canada is basically tied to the policy of the Federal Reserve."

Secondly, most companies are "lean and mean" and benefit from strong balance sheets. "The offset is that job growth has been anemic," says Carlin. "We expect that it's going to be a slow, slow improvement."

A bottom-up manager, Carlin oversees about $1.5 billion in assets and runs a variety of mandates from growth to income-oriented. For the latter, in addition to identifying companies with good earnings prospects, Carlin screens for above-average income yields.

In constructing imaxx Canadian Fixed Pay, Carlin owns about 40 companies that produce a gross dividend yield of 4.2%, or 50% higher than the S&P/TSX Composite Index. Single holdings are limited to about 4.5% of fund assets. Portfolio turnover was moderate last year, at 56%.

Income is also generated from the 20% held in investment-grade corporate bonds, selected by the fixed-income team headed by Marc Goldfried, senior vice-president. "The bond weighting has been a real bonus," says Carlin, adding that bonds act as a buffer against a backdrop of volatile markets.

The 5-star rated fund returned 6.1% for the 12 months ended Aug. 31, versus 2.8% for the median fund in the Canadian Equity Balanced category. The fund has been a top-quartile performer over almost all periods since its inception in June 2002.

On the equity side, one representative holding is Crescent Point Energy Corp. CPG, an oil producer in the Bakken area, which straddles Saskatchewan and North Dakota. "It's got a 6.7% yield, which we believe is sustainable," adds Carlin. "And the company continues to grow its production volume by about 10% a year."

A Montreal native, Carlin is an industry veteran who initially went into banking in 1984, after graduating with a BA in economics and accounting from University of Western Ontario. He joined CIBC as a small-business loans officer in London, Ont., and stayed for about two and a half years. Then he switched to Bank of Montreal, where he was a credit analyst in the corporate-banking division in Toronto.

But Carlin wanted to work on the investment side. In 1988 he joined the private-placement department at Crown Life Insurance Co. When the firm was transferred to Saskatchewan in 1991, he stayed in Toronto and moved to Confed Investment Counselling, the investment-management arm of Confederation Life Insurance.

The bankruptcy of the parent company in 1994 saw a few executives acquire the investment-counselling firm and rename it BonaVista Asset Management. Carlin managed the Canadian equity portfolio for institutional clients.

In 1998, Carlin joined CT Investment Counsel and stayed until the parent firm, Canada Trust, was acquired by Toronto-Dominion Bank. In 2000, he was hired by Knight Bain Seath & Holbrook, which later became KBSH Capital Management Inc.

Carlin joined AEGON in March 2009. Besides managing imaxx Canadian Fixed Pay, he also oversees the $41-million imaxx Canadian Equity Growth, the $14-million imaxx Global Equity Growth and the $7-million imaxx Canadian Dividend. More recently, through AEGON's partnership with Calgary-based Canoe Financial LP, he also oversees the $25-million Canoe GOC Equity Income Class A.

The 4-star rated imaxx Global Equity Growth has been a first- or second-quartile performer under Carlin's tenure. The fund had an annualized 4.9% return for the three years ended Aug. 31, compared to 3.4% for the median fund in the Global Equity category.

"We can cast our net much wider with a global mandate," says Carlin. However, over 80% of the assets are in U.S. stocks since Carlin has a dim view of Europe and limited the emerging-market exposure to a handful of names.

Although performance has lagged for the 2-star-rated imaxx Canadian Equity Growth, Carlin is staying the course. "We're stick to our knitting," he says, noting that he has been beefing up the U.S. equity exposure to around 18% of the fund. "Growth will come back."

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Michael Ryval

Michael Ryval  Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

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