Chuck Roth admits he is concerned about the prospect of rising U.S. long-bond yields and the potential adverse impact on stocks.
"If anything will shut down this equity cycle it will be long-term rates increasing in the U.S.," says Roth, 45, manager of the $93.5-millionMackenzie Maxxum Canadian Equity Growth and vice-president at Toronto-based Mackenzie Financial Corp. "It will slow the U.S. and global economies. It will also make bonds more competitive in terms of returns."
U.S. long treasury bonds yielded 4.6% in late August, but were 5.25% in July. "When that 10-year treasury goes through 5.25% I get a lot more worried about equities. That's the threshold. I'm not going to sell, but I do start to get more worried."
A growth investor, Roth favours highly liquid large-cap stocks. Typically, holdings are around 2% to 5% of fund assets, although they can go as high as 7%.
"I like to really get to know a company before I invest in it," says Roth, who works closely with analyst Chris Sit. "Once I make a decision, I want to have a meaningful representation."
While growth investing covers a spectrum of styles, Roth focuses on two areas. One is characterized as conservative growth, which invests in companies such as banks and insurance companies, and consumer products firms such as drugstore operators that demonstrate consistent growth in dividends and earnings.
The bulk of the portfolio is invested in this area. Studies in the U.S. show that "companies that generate the most consistent growth in dividends and earnings provide the highest rate of returns at lower levels of risk," says Roth.
A representative core holding is Bank of Nova Scotia (
BNS/TSX). The organization is a standout, says Roth, because of its successful foreign expansion. "They are making fewer bets in the U.S., and more in international markets such as the Caribbean and Mexico," Roth says.
Cyclical growth stocks form the second area, and are a smaller component of the fund since they experience earnings growth for shorter periods. About one quarter of the fund is held in holdings such as natural resources companies EnCana Corp. (
ECA/TSX) and Teck Cominco Ltd. (
TCK.B/TSX)
From a selling standpoint, Roth will drop a stock if there are significant management changes or if earnings start to deteriorate. "I subscribe to the cockroach theory -- there's not just one bad quarter, but usually three or four -- especially with cyclical growth stocks. For instance, when earnings for base metals stocks roll over, you want to be gone." Portfolio turnover was moderate at 29.5% for the six months ended Dec. 31, 2006.
A native of Listowel, Ont., Roth has been in the financial services industry since he graduated in 1983 with a bachelor of commerce from Wilfrid Laurier University. That year, he joined Moss Lawson in Toronto and worked as a retail broker and in the research department. "I was lucky and got in an area that I was interested in. It was great training."
In 1985, Bank of Montreal hired him as a credit analyst. He mainly covered the bank's real estate clients and lending to developing countries. After about 18 months, he joined New York Life Insurance in Toronto and worked as an analyst. When his boss quit, he managed the Canadian equity portfolios for institutional clients.
In 1989, Roth was hired by Allstate Insurance, where he worked in its asset management division, which later became Ultravest Investment Counsellors. Over the next eight years, he ran several products, including Colonia Special Growth, a Canadian small-cap equity fund.
Roth joined Mackenzie Financial in late 1997 and worked on the "Ivy" side of the firm. For example, he managedMackenzie Ivy Enterprise for more than two years and also worked alongside Jerry Javasky, lead manager ofMackenzie Ivy Canadian
.
In October 2001, when Mackenzie acquired the Maxxum family, Roth took over the management of Mackenzie Maxxum Canadian Equity Growth. Since then, he has also been co-manager of the $84.7-millionMackenzie Maxxum Canadian Balanced.
Under Roth's mandate, the 3-star rated Canadian equity fund has produced a five-year annualized return that ranks in the second quartile as of July 31. The 4-star rated balanced fund has a similar record.
In the current environment, Roth admits that if long-term U.S. treasury bond yields rise to 6%, he would reduce the equity weighting in the balanced fund, and take a more conservative approach in the equity fund.
Yet he does not expect this scenario to pan out. "We could move towards more cyclical growth stocks in the equity fund, if the rate structure continues to remain low," says Roth, who believes that Canada's natural resources players will continue to benefit from China's rapid growth.
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