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Simple formula buoys Bissett

Equity fund posts solid returns thanks to steady companies

INVESTMENT REPORTER; Sources: and company

The Bissett Canadian Equity Fund has been making money amid continuing market turbulence by following a basic tenet: Portfolio manager Fred Pynn only invests in profitable companies.

For the year to Feb. 28, the $635.4-million Bissett Canadian Equity-F has posted a one-year return of 8.1 per cent, compared with a loss of 0.66 per cent for the average Canadian equity fund and a loss of 3.9 per cent for the Toronto Stock Exchange 300-stock index.

Unitholders who bought 10 years ago have seen an average annual compound return of 14.3 per cent, which beats the average 9.5-per-cent return for the group and a gain of 10 per cent for the index.

Mr. Pynn picks companies with sustainable revenue and earnings growth, a rising dividend yield, international expansion and a relatively low price-to-earnings ratio.

One factor driving the performance of the fund since 1998, Mr. Pynn said, is "a very large bet against technology."

Bissett Canadian Equity, like many of its peers, saw its performance measured by the rise and fall of Nortel Networks Corp. after that company became the powerhouse of the Toronto Stock Exchange in 1999 and 2000.

In 2000, the fund had only a 5-per-cent to 7-per-cent weighting in Nortel, compared with the stock's TSE 300 weighting of more than 30 per cent at times.

That meant the fund significantly lagged the Nortel-powered TSE 300 and at times dropped to a fourth-quartile ranking.

During that time, Mr. Pynn was also selling shares of JDS Uniphase Corp., which he had purchased in the stock's initial public offering.

But when the technology bubble burst and share prices of Nortel, JDS and others crashed, the fund was fully stocked with dull defensive issues that Mr. Pynn had been buying on the cheap.

"Sticking with our discipline resulted in outperformance in 2000 and 2001," Mr. Pynn said.

He points to the example of the Metro Inc. grocery store chain.

The manager bought the stock for its steady earnings growth, but it languished because people were looking for the more dazzling returns from technology shares.

After the tech meltdown, small grocers were back in favour and Metro shares took off.

"In the last year the stock has doubled, even though there has been no fundamental change in the company's business or earnings growth," Mr. Pynn said.

One way Mr. Pynn finds candidate stocks for the fund is by keeping an eye on the Bissett Small Cap Fund's holdings of smaller companies. Often as those companies grow, the Canadian equity fund will invest in them.

Mr. Pynn points to Kingsway Financial Services Inc., for example. When the stock was trading at $10 a share, the manager couldn't buy it because it was not sufficiently liquid.

The stock has had a run to the $17 level, but Mr. Pynn recently added it to the portfolio. He likes the company's expansion into the U.S. market.

"We still think that there's growth ahead of it," he said.

Other recent additions include Alimentation Couche-Tard Inc., which is also finding new locations for its convenience stores in the United States, and Rothmans Inc., which Mr. Pynn considers a "classic value-type stock."

The cigarette maker offers a lucrative dividend yield, growing earnings and potential expansion south of the border, the manager said.

Meanwhile, the fund sold shares of Westcoast Energy Inc., which is being acquired by Duke Energy Corp. Mr. Pynn also locked in some profits in drug company Biovail Corp. after the stock surged.

"We still think the company has good growth prospects, but you're paying fully to participate in those profits," he said.

Mr. Pynn believes that stock pickers will be looking for earnings growth above all in the next few years instead of the ballooning P/E ratios that drove equity markets for the past 20 years.

In 1982, he points out, interest rates were high and P/Es were relatively low. As rates moved down over the long term, P/Es moved up.

The manager says it's hard to make a case that this environment will continue.

Instead, he believes managers will be challenged to look for stocks with fairly low P/Es that have room to expand.

"We're just cherry-picking," he said.

Today, with the TSE 300 trading at about 22 times earnings, Mr. Pynn considers many Canadian stocks fully valued.

"These markets are not cheap."

The Bissett Canadian Equity portfolio, meanwhile, trades at about 15 times trailing earnings.

As of Jan. 31, the fund had 22.7 per cent of its holdings in financial services, 14.1 per cent in industrial products and 10 per cent in oil and gas.

Mr. Pynn avoids technology and gold stocks because they tend to trade at higher multiples than he likes. Generally, he looks for multiples of between 10 and 20.

Dan Hallett, an analyst at Sterling Mutuals Inc., considers Bissett Canadian Equity one of the better core Canadian equity holdings available to investors.

"It's really a nice blend of value and growth," Mr. Hallett said.

While some value managers go after distressed companies, he notes, the Bissett team goes after viable and financially strong companies whose stocks trade at a reasonable price.

The turnover of the fund has historically been quite low at about 25 per cent a year, Mr. Hallett points out. A low turnover means lower costs for the fund and fewer taxable distributions for unitholders.

Mr. Hallett said Mr. Pynn has posted good long-term returns with the help of a very sound selection process that lets him identify growing companies without paying too much for them.

"They don't become overly optimistic," Mr. Hallett said of the Bissett team.

"They are careful not to have unrealistic expectations."
Bissett Canadian Equity-F Fund
: Canadian equity
Manager: Bissett Investment Management.
Load status: Open-ended
Total assets: $634.4-million
Management expense ratio: 1%
Globefund 5-star rating system:****
Returns to Feb. 28, 2002
1-year simple rate of return: 8.1%
3-year compound annual: 12.5%
5-year compound annual: 10.9%
10-year compound annual: 14.3%
Top 10 holdings to Jan. 31

1.  Bank of Nova Scotia      3.6%

2.  Cdn. National Railway    3.5

3.  Magna International A    3.4

4.  Power Financial          3.3

5.  Royal Bank of Canada     3.1

6.  Quebecor World           3.0

7.  Metro A                  3.0

8.  Manulife Financial       2.8

9.  BCE                      2.6

10. Onex                     2.6

© 2007 The Globe and Mail. All rights reserved.

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