Yassen Dimitrov

Potential credit crunch in Europe pushes Dynamic manager to get defensive.

Michael Ryval 30 September, 2011 | 6:00PM
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Since August, the European sovereign and banking crisis has escalated to the point that it has prompted some money managers to become very defensive.

"If unsecured term funding for European banks remains difficult to access or expensive, that means there is a potential for a credit crunch in Europe," says Yassen Dimitrov, a portfolio manager at Toronto-based Goodman & Co. Investment Counsel Ltd., who oversees the $95-million Dynamic Financial Services.

Dimitrov notes that there has been a dramatic increase in Italian and Spanish bond yields. "With the intervention of the European Central Bank to buy Italian sovereign bonds, yields fell from 6.18% to 5%. But they have since increased to 5.7%. Recent auctions for one-year Italian bonds have seen spread-widening of 150 basis points, compared to July."

Dimitrov, and co-manager Rohit Sehgal, have had no exposure to the region's banking sector since assuming the portfolio in July 2010. But the worsening situation has caused them to raise cash to 18% by selling some emerging-markets names. There is also 22% in U.S. companies and 60% in Canadian firms.

Dimitrov runs a concentrated portfolio of about 20 financial-services companies, with single holdings limited to about 9.5% of the portfolio. While Dimitrov and Sehgal develop a macroeconomic view, it's Dimitrov's task to identify individual names.

In particular, he likes TD Bank Financial Group TD. "It's the best managed Canadian retail and commercial bank, and has consistently outperformed its Canadian peers in terms of revenue and earnings growth," he says. "Its competitive advantage is based on best-in-class customer service which is confirmed every year by independent surveys." TD's combination of customer service and having the network with the longest branch operating hours is difficult for its competitors to replicate, Dimitrov adds.

Dimitrov expects that TD's revenue and earnings growth are likely to slow down, due to factors such as a flattening yield curve putting pressure on net interest margins. "Nevertheless, we believe that TD will be able to deliver the best revenue growth relative to other large Canadian banks."

A native of Varna, Bulgaria, Dimitrov has been in the financial-services industry since 1999, the year he graduated with a BA in economics from the University of Economics in Varna. Dimitrov worked in corporate banking at UniCredit Bulbank, a unit of UniCredit SpA, a leading Italian bank. During a two-year stint, he looked after trade finance and letters of credit.

Dimitrov immigrated to the United States and worked as an account manager for Devon Health Services in a suburb of Philadelphia. After two years, he came to Canada to complete an MBA at York University's Schulich School of Business. In 2005, Dimitrov began working in equity research at CIBC Capital Markets, where he covered Canadian banks and life insurance companies.

In January 2008, he joined Goodman & Co when he was hired as an investment analyst by Sehgal, chief investment strategist and head of the Power funds team. "We had no exposure to the U.S. [in the Power Canadian funds]. My work involved trying to figure out how bad things could get."

In July 2010, Dimitrov was promoted to portfolio manager and, along with Sehgal, replaced Adam Donsky, the previous manager. Due to the management change, portfolio turnover was a rather high 71.1% last year.

Though it's an above-average performer in its peer group over the past decade, the 4-star rated fund has been through a recent rough patch. It lost 2.4% for the 12 months ended Aug. 31, compared to a 0.8% loss for the median fund in the Financial Services Equity category. On a year-to-date basis, the fund is down 13.5%, better than the 17.8% loss for the median fund.

While Dimitrov has adopted a defensive stance over Europe, he has focused on Canadian banks and U.S. financial technology companies. For instance, he likes VISA Inc. V. "It has excellent prospects because of the growing use of electronic payments globally. Recently, the impact of a significant regulatory move contained in the Durbin amendment has been reduced. This will improve VISA's earnings visibility going forward."

Another favourite is CME Group Inc. CME, better known as the Chicago Mercantile Exchange. Dimitrov says the firm is "the leading global operator of electronic exchanges with a very diverse product mix, including interest rate derivatives, oil and gas, agricultural commodities, and base metals and precious metals." He adds that CME stands to benefit from recent regulatory changes that require financial institutions to move over-the-counter derivatives to clearing houses or be traded on futures exchanges.

Dimitrov says he intends to keep the defensive stance until he sees evidence of a credible resolution to the European sovereign and banking crisis. "At which point, we are prepared to invest the cash in attractively valued stocks," he says, adding that he is keenly interested in Indian and Brazilian financial-service companies. "We are tactically underweight [in emerging markets], but intend to go back when we see signs of a resolution of the European crisis."

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Michael Ryval

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

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