As Hugh McCauley became more concerned over the summer with the European sovereign-debt crisis, he and his team began reducing the equity holdings in several Acuity income and balanced funds.
"We sold about 10%, across the board," says McCauley, lead manager of the $733-million Acuity High Income and managing director at Toronto-based AGF Investments Inc. (AGF acquired Acuity Investment Management Inc. in February.)
"The normal weighting is 60-40, equities and bonds. Right now, we're at 50-50," says McCauley. "When we see a green light in Europe, we'll move back to 60-40, or even 70-30."
McCauley sold some cyclical stocks, but kept large-cap gold-mining companies such as Goldcorp Inc. G and mid-tier oil and gas players such as Trilogy Resources Corp. TET. Like all the equity holdings, these companies have dividend yields.
Trilogy, which produces about 30,000 barrels of oil, is very active in Alberta's Deep Basin. "It has the best economics in all of the oil and gas industry." The recent Montney oil discovery could add another 20,000 barrels per day within 12 to 18 months. "It's low-cost, growing and should outperform its peer group," says McCauley, noting that the company is profitable even if the price of crude oil falls to US$50 a barrel.
Most important, McCauley is focusing on solid firms that can pull through while markets are tough. "Things are quite stretched. The Europeans have to fix their banking system, put confidence back into the debt market and solve some of the sovereign issues, such as the Greek debt."
Besides shifting the allocation in Acuity High Income, McCauley has become risk-averse within the $396-million Acuity Diversified Income. The latter fund, which is in the Global Fixed Income Balanced category, has reduced its equity weighting to just 11%.
A US$2-trillion contingency plan is necessary, in McCauley's view, to backstop the European banks and sovereign debt and write down Greece's debt. "When they do these things, Europe will breathe a sigh of relief," he says. "And we can get back to the other things, like worrying about the U.S. economy."
A native of Greenoak, Scotland, McCauley has a background in engineering and banking. He completed an undergraduate degree in engineering physics at McMaster University in 1986.
During the program, McCauley also took some time off to help his father set up a pneumatic-controls service depot as well as work at a glass-production plant. He had planned to complete a PhD in solid state or nuclear engineering, but an interest in business led him to complete an MBA at McMaster.
In 1988, McCauley joined Toronto-Dominion Bank, where he was involved in disaster-recovery planning. The job entailed working with various business units to prepare them if their systems were damaged. Two years later, McCauley moved into human resources, where he supported the treasury department.
In 1994, McCauley joined Bank of Montreal's human-resources branch. Before long, he moved to the treasury department, where one of his main tasks was managing risk for the bank's fixed-income portfolio.
In 1996, McCauley became an analyst at Acuity, which then had about $100 million in assets. He was promoted to fund manager in 1999 and oversaw the firm's rapid growth in assets, now around $7 billion. McCauley, who is part of a 12-person equity team, has been lead manager since 2001.
Each of the five portfolio managers covers several sectors. In McCauley's case, his fields include energy, materials, information technology and health care. "We work as a team, and make decisions collectively," he says.
The 3-star rated Acuity High Income is a top-quartile performer over the 10 years ended Sept. 30, with an annualized return of 7.7%, comfortably ahead of the median return in the Canadian Equity Balanced category.
But over three- and five-year periods, the fund is in the third and fourth quartile, respectively. The weak performance over five years is largely attributable to the fund's previously heavy exposure to income trusts, which were hurt by the federal government's 2006 decision to end preferential tax treatment.
Meanwhile, the $396-million Acuity Diversified Income returned 0.8% in the 12 months ended Sept. 30, half a point lower than the median fund in the Global Fixed Income Balanced category. For the three and five-year periods, the fund was in the fourth quartile, with its income-trust exposure again a drag on performance.
McCauley expects that markets will have a sustained rebound, after a decade of weak performance. He points to a chart that shows 10-year rolling numbers for the S&P 500 Index since 1857.
The current market, according to McCauley, is an echo of the 1973-74 bear market, which turned into a bull that lasted 26 years. "It's a great time to be buying equities," he says. "When the European problem is solved and the U.S. avoids a recession, this will be a green light."
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