‘YOU HAVE TO BE CAREFUL’
Fund manager treads cautiously amid risks of elevated markets
Irrespective of the political environment in both the U.S. and Europe, it’s easy to see why investors may be a little cautious these days.
Even though interest rates have remained low, which may help justify lofty multiples in many parts of the market, it’s fair to say that stocks are expensive.
“Money is gravitating to the market regardless of what Donald Trump says, but there are a lot of potential negatives,” said Stephen Takacsy, chief investment officer at Montreal-based Lester Asset Management.
The portfolio manager of the Lester Canadian Equity Fund — approximately one-third of which is in large-cap dividend payers, and the remainder focusing on smaller growth-oriented companies — highlighted protectionist policies such as tariffs and import taxes. Those could be negative, not just for countries like Canada or Mexico, but for global markets as a whole.
“The chances of retaliatory action by other governments are quite high, and there is also political uncertainty in Europe with elections coming up,” Takacsy said. “When you have expensive markets and potential risks, you have to be careful.”
That’s a big reason why the portfolio has a cash position of roughly 15 per cent, compared to about five per cent usually.
However, Takacsy isn’t trimming the fund’s positions, but is rather holding onto the cash generated through various takeovers of fund holdings last year. Those included Prism Medical Ltd., QHR Corp. and DirectCash Payments Inc.
Deals like that helped the Lester Canadian Equity Fund generate a return of 24.7 per cent in 2016, which was achieved with very little oil and gas exposure, no mining or gold stocks, and no banks.
The fund also posted a 10.4 per cent annualized return (net of fees) for the past 10 years, as of Dec. 31.
One of Takacsy’s focuses in the past few years has been on companies that may be based in Canada, but are growing in the U.S. and get a lot of revenue in U.S. dollars.
Several names that fit this criteria were added to the portfolio late in 2016, including NAPEC Inc. (NPC/TSX). The Quebec-based company builds and maintains electrical transmission and distribution systems, as well as natural gas networks, and does about 80 per cent of its business in the U.S.
Halogen Software Inc. (HGN/ TSX) is another company that gets the majority of its revenues in U.S. dollars.
The portfolio manager took a position in the human resource software firm because the stock was cheap after being beaten up for several years. He also saw the growth Halogen was seeing in its North American business.
A few months after it was added to the portfolio, Halogen received a takeover bid, and it’s been a big winner since.
A third name that fits this theme is Winpak Ltd. (WPK/TSX), a massive packing company that had always been expensive, but was treading water for about a year.
T aka csy noted that Win pak made some investments to increase capacity, so he made a move into the stock before the resulting sales and earnings growth kicked in.
He bought the stock in the low $40s, and it is now trading above $50 per share.
The manager also highlighted his optimism on the renewable energy sector, noting an opportunity emerged after the U.S. election.
“We’re not afraid of any repercussions in the U.S.,” Takacsy said. “The industry is well on its way to being a real force, and some of these companies operate internationally as well.
“Utilities, telecom and renewable energy stocks tanked in the day or two after the election,” he added. “Anything with a high yield tends to be sensitive to bond yields, which jumped.”
That prompted Takacsy to top up positions in renewable energy names like Algonquin Power & Utilities Corp., Boralex Inc. and Innergex Renewable Energy Inc., along with high yielders like BCE Inc. and Pembina Pipeline Corp.
“That was a great buying opportunity because it was an overreaction,” he said.