Investors who can't decide whether to favour the value approach to investing that thrives in market downturns or the growth style that takes off in an economic rebound can choose a mutual fund that blends both strategies.
The $1.5-billion Spectrum Canadian Equity Fund is managed by McLean Budden Ltd. stock pickers Susan Shuter, Brian Dawson and their teams of growth and value enthusiasts.
The fund lost 8.3 per cent for the year to Jan. 31. That compares with a 10.2-per-cent drop for the average Canadian large-capitalization equity fund and a 21-per-cent tumble for the TSE/S&P 60 composite index.
Ms. Shuter said growth and value can each do well, but she believes funds that use only one or the other style are more volatile.
Ms. Shuter said the managers look for organic revenue growth, rising share-earnings and strong management when picking growth stocks.
On the value side of the portfolio, they look for stocks that are relatively cheap compared with other companies in the industry, have a strong balance sheet, and have a catalyst that might change the market's perception of the stock.
Ms. Shuter said finding rising stocks has been particularly challenging of late as stock markets struggle against investors' fears about sketchy accounting.
"Stocks are being taken down regardless of whether their accounting practices are aggressive or they're conservative."
She added that the fund does not hold any shares in two of the names that have been hit hardest by investor concern about accounting: Enron and Tyco International.
Ms. Shuter believes the U.S. economy will likely return to growth in the second quarter of this year, with a recovery in the Canadian economy following a rebound south of the border.
But she cautions that corporate profit growth will likely be limited to the single digits even when the economy improves.
Ms. Shuter said the managers trimmed their technology holdings through 2000 and bought stocks in the basic industries, consumer products and interest-sensitive groups.
The team lightened up on Nortel Networks Corp. when the shares soared, then bought back in when Nortel's price-earnings ratio tumbled below its historical levels, she explained.
Ms. Shuter said that even with Nortel's slide in fortune as customers stopped building their corporate networks, many rivals fared worse.
A lot of Nortel's competitors that previously were considered serious are no longer a threat, Ms. Shuter believes.
Telecommunications and technology companies are still struggling, she added, but that's why she likes the valuations in stocks such as Nortel.
"It is always the case that you should be buying the stocks when the turn is least evident."
The fund's top holdings as of Dec. 31 included Nortel, BCE Inc., Magna International Inc., Alcan Inc. and the big five banks.
The fund had 17.4 per cent of its holdings in financial services, 14.2 per cent in industrial products and 9.6 per cent in oil and gas.
Despite the hefty weighting in financial services, Ms. Shuter said she has considered many of the insurance companies' stocks overvalued for some time, and the fund currently has a "neutral" weighting on the banks because the managers still have concerns about rising loan-loss provisions.
Ms. Shuter also sees some good opportunities in the energy sector.
Among basic materials, the fund has been increasing its holdings in metals stocks as prices of the commodities improve, the manager said.
The fund has a "neutral" weighting in forest products. In that sector, Ms. Shuter likes Norske Scog Canada Ltd., which she believes is a potential take-out candidate.
The managers are very bullish on fertilizers, Ms. Shuter said, with a big position in Potash Corp. of Saskatchewan Inc.
Close to 24 per cent of the fund's holdings are in foreign equities, with slightly more than half of that in the United States.
Analyst James Gauthier of Fundmonitor.com said he likes the fund's combination of value and growth styles.
"I think the overall approach is what is working for them."
Mr. Gauthier added that the fund's performance has been quite strong, but he notes that the current managers took over in 1999, which means that the long-term track record under previous management becomes less useful as a yardstick.
The analyst considers the fund a good choice for the core of an equity portfolio.
"It's got some pretty good risk control embedded within it."
But he notes that the management expense ratio of 2.57 per cent is about twice as high as the MERs on some Canadian equity funds offered directly by McLean Budden. However, he adds, those funds have a higher minimum investment in some cases and fewer financial advisers are likely to offer them.
SPECTRUM CANADIAN EQUITY FUND
Category: Canadian Large Cap Equity
Manager: McLean Budden Ltd.
Load status: Open ended
Total assets: $1.5-billion
Management expense ratio: 2.57%
Globe 5-star rating system: ***
1-year simple rate of return: -8.3%
3-year compound annual: 9.9%
5-year compound annual: 7.5%
10-year compound annual: 11.4%
Top 10 holdings to Dec. 31/01
1. Nortel Networks 4.7% 2. BCE Inc 3.7 3. Bank of Nova Scotia 3.2 4. TD Bank 3.0 5. CIBC 2.9 6. Royal Bank 2.6 7. Bank of Montreal 1.9 8. Magna 1.8 9. Alcan 1.8 10. Petro-Canada 1.8
© 2007 The Globe and Mail. All rights reserved.
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