What Cana­dian port­fo­lio man­agers were think­ing and buy­ing this past week

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - BRENDA BOUW

It was a wild week on the mar­kets and a painful re­minder for in­vestors of the stom­achchurn­ing feel­ing of watch­ing the value of a port­fo­lio drop in a mat­ter of min­utes. For some pro­fes­sional in­vestors, the sell­off was a chance to pick up stocks at a cheaper price, while oth­ers did noth­ing, try­ing to re­main fo­cused on long-term per­for­mance. The Globe asked a hand­ful of port­fo­lio man­agers how they re­acted to the lat­est bout of volatil­ity and what they think could hap­pen next:

Craig Jerusalim, se­nior port­fo­lio man­ager at CIBC As­set Man­age­ment Inc., says mar­ket swings “cre­ate re­ally ex­cit­ing op­por­tu­ni­ties for ac­tive man­agers, be­cause even high-qual­ity com­pa­nies with strong fun­da­men­tals still get caught up in the panic sell­ing.”

Mr. Jerusalim says this week’s mar­ket cor­rec­tion “felt fast and fu­ri­ous, but so far it is still of the plain-vanilla va­ri­ety,” given that there was no ma­jor shock to drive a se­vere cor­rec­tion.

“Eq­uity mar­kets, specif­i­cally in the United States, had got­ten ahead of them­selves, and the pull­back brings val­u­a­tions more in line with the de­cent fun­da­men­tals of the econ­omy,” he says. “Fur­ther earn­ings growth will have to be the driver for fur­ther stock price ap­pre­ci­a­tion.”

Mr. Jerusalim has a pos­i­tive out­look for the North Amer­i­can econ­omy and is buy­ing more high-qual­ity com­pa­nies whose stock prices he says were “un­fairly pun­ished al­most as much as their ex­pen­sive peers with in­fe­rior prospects.” Ex­am­ples in­clude bus man­u­fac­turer NFI Group Inc. and spe­cialty foods com­pany Pre­mium Brands Hold­ings Cor­po­ra­tion.

He has also been repa­tri­at­ing funds that were al­lo­cated to for­eign hold­ings back to Cana­dian eq­ui­ties. “Cana­dian bench­marks are trad­ing at a much steeper val­u­a­tion dis­count rel­a­tive to U.S. bench­marks de­spite clear­ing some rather large hur­dles with re­spect to trade, in­fra­struc­ture and en­ergy ex­ports,” he says.

Peter Imhof, port­fo­lio man­ager at AGF In­vest­ments and a vet­eran small-cap in­vestor, rec­om­mends in­vestors re­main cau­tious with mar­ket volatil­ity ex­pected to con­tinue.

“Pick your spots with names that you may have liked but were look­ing for bet­ter en­try points,” he says.

Mr. Imhof is adding to po­si­tions that have re­cently re­ported strong quar­ters that have sold off with the rest of the mar­ket.

One ex­am­ple is Parex Re­sources Inc., which he says re­cently re­ported strong pro­duc­tion num­bers and some en­cour­ag­ing ex­plo­ration re­sults. “The com­pany is presently in a strate­gic re­view process to pos­si­bly sell the com­pany with an out­come be­fore year-end,” he says. “I be­lieve the risk/re­ward looks at­trac­tive whether the com­pany gets taken out or re­mains on its own.”

He also bought more Cana­dian Pa­cific Rail­way Limited, which re- cently raised its 2018 full-year out­look and pro­vided pre­lim­i­nary third-quar­ter re­sults that were well ahead of con­sen­sus. “The stock sold off back to lev­els that pre­ceded their up­ward guid­ance,” Mr. Imhof says. “I be­lieve this presents in­vestors with a buy­ing op­por­tu­nity on a com­pany that will put up strong earn­ings growth in 2018 and 2019.”

Jen­nifer Rad­man, vice-pres­i­dent and se­nior port­fo­lio man­ager at Cald­well In­vest­ment Man­age­ment Ltd., says her team has been pick­ing up a few spe­cial­ized U.S. com­pa­nies in­clud­ing fi­bre-laser spe­cial­ist IPG Pho­ton­ics Cor­po­ra­tion, fi­nan­cial ser­vices rat­ings com­pany S&P Global Inc. and en­gi­neer­ing soft­ware com­pany ANSYS Inc. “We be­lieve these are good en­try points for these names, although they could still see con­tin­ued volatil­ity,” she says.

Ms. Rad­man is about 30 per cent cash in her Cana­dian port­fo­lio right now, and hasn’t moved to in­vest that money de­spite the mar­ket pull­back. “We have a me­thod­i­cal in­vest­ment process that fo­cuses more on com­pany-spe­cific cat­a­lysts,” she says.

François Bour­don, global chief in­vest­ment of­fi­cer of Fiera Cap­i­tal Cor­po­ra­tion, says his firm isn’t feed­ing off the re­cent mar­ket dip, at least not yet. “An­other 10 per cent down and we would move in for a re­cov­ery,” he says, adding that his team favours Cana­dian and emerg­ing mar­ket eq­ui­ties com­pared to those in the U.S. and in­ter­na­tional. David Barr, CEO and a port­fo­lio man­ager at Van­cou­ver-based Pen­derFund Cap­i­tal Man­age­ment Ltd., says the re­cent sell­off pre­sented sev­eral op­por­tu­ni­ties for his team to buy busi­nesses they like at an at­trac­tive price. Ex­am­ples in­clude pri­vate eq­uity and real es­tate firm KKR & Co. Inc. and Pho­ton Con­trol Inc., an optical sen­sor de­sign and man­u­fac­tur­ing com­pany.

“We’ve been able to shift our port­fo­lio to higher-qual­ity names as they came back to a val­u­a­tion we deemed at­trac­tive,” he says. “The end re­sult has been a shift in the port­fo­lio to­wards qual­ity and a sig­nif­i­cant de­crease in the cash lev­els of our funds to be­low 5 per cent, about as low as we’ve ever been.”

Robert Sned­don, pres­i­dent and chief port­fo­lio man­ager at CastleMoore Inc., says his team is do­ing some buy­ing on the dip, which is a nor­mal part of their strat­egy.

“We had port­fo­lio changes com­ing up that we sim­ply de­layed be­cause of the volatil­ity. We did some ad­just­ments on Thurs­day and will do more on Fri­day that al­lowed us to take ad­van­tage of lower prices for buys (broad mar­ket in­dices, base met­als) and higher prices for sells (some gold and gold pro­duc­ers, nat­u­ral gas),” he says.

Mr. Sned­don favours more cycli­cal sec­tors right now such as en­ergy, base met­als, in­dus­tri­als, tech­nol­ogy and U.S. fi­nan­cials and is stay­ing away from in­ter­e­strate-sen­si­tive se­cu­ri­ties such as bonds, util­i­ties and pipe­lines. Ex- am­ples of stocks he’s picked up in re­cent days in­clude oil and gas player En­er­plus Cor­po­ra­tion, di­ver­si­fied miner Teck Re­sources Limited. and cloud-based soft­ware com­pany Ki­naxis Inc.

Cameron Hurst, chief in­vest­ment of­fi­cer and port­fo­lio man­ager at Equium Cap­i­tal Man­age­ment Inc., says he’s been sell­ing on the re­cent mar­ket drop, but added to short-du­ra­tion U.S. bond ex­po­sure. “It’s ac­tu­ally pay­ing more than 2 per cent now, where be­fore you didn’t earn any­thing,” he said.

His firm’s cash lev­els have been ris­ing since mid-Septem­ber, clos­ing the month at 13 per cent and climb­ing to about 20 per cent to­day.

“For some time now, we’ve been high­light­ing the sig­nif­i­cant and grow­ing risks from re­ced­ing global liq­uid­ity, the neg­a­tive ef­fects of which are best seen in emerg­ing mar­kets,” Mr. Hurst says. “Tar­iffs and trade wars are only com­pound­ing the prob­lem and now it looks like we’re see­ing down­ward re­vi­sions to global growth.”

He also says higher debt lev­els are an­other sign of a stressed mar­ket.

“In­vestors should be pre­par­ing for a pe­riod of more mod­est in­vest­ment re­turns and not chas­ing high-fliers with un­nec­es­sary risks, e.g. semi­con­duc­tors or cannabis.” In­ter­views have been edited and con­densed.

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