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Unless there's evidence of a big pickup, AIC would be more on the trimming side, JONATHAN WELLUM tells ANGELA BARNES,

Portfolio manager Jonathan Wellum selectively reduced positions in the technology and pharmaceutical sectors recently.

Even the big-name technology stocks are trading at levels that "un less there is evidence of a really large pickup in growth, we would probably be more on the trimming side" than on the buying side, said the chief investment officer of Burlington, Ont., based AIC Ltd.

AIC offers a number of funds including a science and technology fund.

From a fundamental point of view, tech companies are being priced for five to seven years of double-digit growth in free cash flow and that is tough to achieve, he said. While tech stock price levels are nowhere near what they were in 2000, "just because things are still down 50 to 60 per cent doesn't mean they are a great buy," he said.

With tech companies currently, "the big wild card is clearly business spending," he said. The market is working on the assumption that there will be a fairly substantial pickup, but Mr. Wellum isn't sure that is going to happen. "We are long-term business people so we want to be careful about putting money on a hypothesis that isn't clearly evident," he said.

He and other AIC portfolio managers have also cut their exposure to the pharmaceutical industry. Mr. Wellum is concerned about the relative scarcity of new blockbuster drugs in the pipeline to replace the current blockbuster drugs. He also is concerned about price sensitivity in the industry and so feels generic drug distributors are in a better position than the big drug companies. He said one of their best investments over the past two years has been Teva Pharmaceutical Industries Ltd., a generic drug company.

With the pharmaceutical industry, political and regulatory issues can become a significant factor and change the economics, Mr. Wellum warned.

He took a little money out of one property and casualty insurance company in the United States simply because it has substantially outperformed its peers in an industry that has been raising prices substantially.

He is picking away at selected financial issues, but recommends investors zero in on companies that have a resilient business model, know how to price risk and have some momentum in their business. Financial issues aren't the "screaming buys" that they were in March, he said. At that time, European financial stocks were especially attractive.

In assessing a stock, AIC, which has consolidated some of its funds in order to better compete in the marketplace, uses a stringent 20-point system of preferred attributes. For example, AIC portfolio managers look for solid industry fundamentals, high barriers to entry into the business, organic growth, a simple business model, long product cycles and substantial free cash flow generation over a three- to four- year period.

The following four issues are among the stocks AIC has added to its positions or bought recently:

Royal Bank of Scotland PLC (RBS-LSE). Edinburgh-based Royal Bank of Scotland is now the fifth-largest financial services group in the world, in terms of profit and market capitalization, Mr. Wellum said. The company has made some attractive acquisitions including Citizens Financial Group, the 17th- largest bank in the United States by deposits. It also owns Ulster Bank in Ireland. He also likes Royal Bank of Scotland's diversification and the fact that it is frugally run. It does corporate lending, retail banking, wealth management and insurance. The shares, which trade on the London Stock Exchange at less than 10 times next year's profit, closed yesterday at 1,612 pence or $35.44 (Canadian).

Toronto-Dominion Bank (TD- TSX). AIC has held shares of TD for quite some time. It continued to hold them even when the stock came under pressure. The shares slipped to a 52-week intraday low of $25.17 last September but then rallied to a 52-week high of $39.50 on Aug. 19. They currently trade at $38.50 on the Toronto Stock Exchange. Mr. Wellum has high praise for the leadership of Edmund Clark, the bank's president and chief executive officer, and the senior management team for their work in correcting the problems that showed up last year, which was a very difficult one for the bank. Among the problems were higher than expected losses on loans made to the telecom and utilities areas. Mr. Wellum is drawn to the stock for a number of reasons, including the fact that it is a "real powerhouse" on the retail side in Canada, a position that has been enhanced by its recent purchase of 57 branches in Ontario and Western Canada from Laurentian Bank. He is also attracted by its capital market and brokerage operations, which stand to benefit from the improving markets. He also said the shares offer an appealing dividend yield.

Automatic Data Processing Inc. (ADP-NYSE). Shares of the Roseland, N.J., company, which provides processing services for outsourced payrolls, insurance claims and brokerage transactions, took a tumble earlier this year, falling to a 52-week low of $27.24 (U.S.), a far cry from the $60 area they had been trading at in the beginning of 2002. The drop materialized as investors reacted to the news that for the first time in 42 years, the company wasn't going to show double-digit growth in profit. The stock has since rebounded somewhat, closing yesterday at $39.20. The 52-week high of $45.26 was set on Nov. 4. "We look at all the factors and say, eventually payrolls will start expanding; brokerage services will come back . . . and interest rates will start to climb," Mr. Wellum said. Also, he noted that ADP has a triple-A credit rating, only a very tiny amount of debt and good free cash flow. AIC started buying the stock in the low $30 and continued to do so into the upper $30 range.

Tesco PLC (TSCO-LSE). Tesco is the market leader in the British grocery business and has shown the fastest organic growth in that sector in the past five years. "They have been able to maintain and in some cases, expand their market share even though Wal-Mart is in full force in their backyard, which is exceptionally admirable," Mr. Wellum said. Also, Tesco has a "very good management team [and] a very good balance sheet." It also has a substantial private label business. Furthermore, the company has been making selective acquisitions in the Pacific Rim area and then building them up. It also generates good cash flow. The shares, which trade on the London Stock Exchange with a "reasonable" valuation of about 12 times forward earnings, closed yesterday at 215.75 pence or $4.75 (Canadian).

© 2007 The Globe and Mail. All rights reserved.

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