Viewing the economic environment as unfavourable, Robert Taylor and his fellow co-manager have positioned the $299-million BMO Resource defensively.
"We've taken down some of the smaller, less liquid names that tend to get punished, and gone to higher-quality, higher-liquid names," says Taylor, who is vice-president and portfolio manager, Canadian equities, at BMO Asset Management Inc.
As well, the fund's cash position has been increased. Usually, it's kept at around 2% to 3%. Now it's almost 10%. "If we do get a correction in commodities, we've got some dry powder to take advantage of some value opportunities," Taylor says.
As Taylor explains, a lot of things are working against the commodities. The leading economic indicators are turning down. Global growth appears to be slowing and, more importantly, growth in China could be slowing. In the short term, Taylor thinks it's difficult to see a positive catalyst, barring a turnaround in the economic data or some sort of geopolitical event.
Despite the current caution, "longer term we're bullish," says Taylor. "We still feel the sectors can be driven by emerging-markets growth, and the higher and higher cost of bringing on meaningful new supply, which is supportive of our commodity prices longer term."
Taylor joined the management team of BMO Resource in September 2005 as a co-manager working under Bill Belovay, who died in June 2009. An energy specialist, Taylor now co-manages BMO Resource with Mark Serdan, who joined the Toronto-based firm in November 2009 and specializes in materials.
Taylor, a graduate of Wilfrid Laurier University, earned an honours bachelor of business degree in 1996. Upon graduation, he joined the accounting firm Price Waterhouse in Toronto, working in audit, then in the corporate finance-department. He received the CA designation in 1998.
In 2000, he moved to CIBC World Markets in the equity research area. He joined the then named Jones Heward Investment Counsel Inc. (now BMO Asset Management) in 2002. He researched small caps before moving into resources in 2005, which was also the year he received the CFA designation.
Under Taylor's tenure, BMO Resource is a Morningstar 4-star fund in the Natural Resources Equity category. Taylor is also the lead manager of BMO Global Energy Class, which has been offered since November 2008.
Taylor describes his investment discipline as growth at a reasonable style (GARP), with a definite value bent. "I'm looking for the unrecognized potential in a company," he says. The stock-screening process looks at the growth profile, the quality of the assets, the management team and the track record. This enables Taylor and his colleagues to assess a company's ability to follow through with its growth plans over the longer term.
Among the 60 to 80 holdings, with a maximum stock weighting of 10%, is a mixture of market capitalizations in primarily Canadian companies. The resources mandate currently holds 24% in small-cap, 38% in mid-cap and 38% in large-cap companies. While the benchmark is 50% S&P/TSX Energy and 50% S&P/TSX Materials, the fund is actively managed. "It doesn't track an index at all," says Taylor.
The core of the portfolio has a larger-cap base. "Around the edges" is exposure to earlier- stage companies with high growth potential. In terms of portfolio turnover, "in 2009, it was 82% but it's been as high as 150%," says Taylor, "where there were value opportunities in the market."
An example of a larger-cap holding is EnCana Corp. ECA, which meets the key criteria of world-class assets, a great management team and above-average earnings growth. "Encana was $35 probably not more than a month ago and it's checked back to $27," says Taylor. "So that's one of those opportunities for a large cap where the sentiment is so negative, and you just don't get those opportunities too often."
Among the mid-capitalization holdings is Advantage Oil and Gas AAV, which illustrates how the BMO team seeks to add value in the oil and gas sector. Favourable attributes cited by Taylor include Advantage's strong financial position, low production costs and a stock that's trading below the company's net asset value. "It's just one of those ones where we can't understand why the market is ignoring it," says Taylor, "but we're really excited longer term."
