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Manager expects bumpy ride in '05

David Picton sees 'lots of short-term jolts'


Be forewarned, says fund manager David Picton: North American stock markets will rise this year, but "there will be lots of short-term jolts along the way."

Mr. Picton manages a number of funds, including the $920-million Synergy Canadian Class Fund. The fund, which he has run since its inception in December, 1997, is down 0.46 per cent year to date, which is less than the 0.8-per-cent slide in the S&P/TSX composite index over the same time period. Its 2004 return was 17.85 per cent and it has returned an annual average of 6.35 per cent over the past five years. Mr. Picton uses a three-stage process for stock selection that includes quantitative measures, fundamentals and momentum indicators.

This year, "equity investors will be conflicted between the positive forces of good relative stock market valuations, strong corporate cash flows and clean balance sheets and the negative pressures of slowing economic growth and decelerating corporate earnings growth," said Mr. Picton, a partner at Synergy Asset Management Inc., which was recently spun out of CI Fund Management Inc. Mr. Picton expects equity markets to be range-bound with the TSX composite trading between around 8,700 and 9,500.

Canadian National Railway Co. (CNR-TSX) is among Mr. Picton's top picks. Shares of the Montreal-based rail company climbed 33.7 per cent during 2004 only to lose a little ground recently. Mr. Picton sees the shares regaining their momentum and rising to $80 over the next 12 months from their current level of $72.48. CN "has consistently delivered positive fundamental change and beaten expectations through a combination of strong cost control, timely acquisitions and, more recently, strong demand and better pricing," he said. Moreover, "the longer-term secular story for railways remains quite positive as well" given the capacity constraints. He feels that CN, "as the low-cost producer in the group," deserves a premium valuation.

HudBay Minerals Inc. (HBM-TSX) is the new name of OntZinc Corp., which in December completed the takeover of Hudson Bay Mining and Smelting Co. Ltd., purchased from Anglo American International SA. "Unlike many junior mining companies, HBM has assets that are actually producing today -- and at very profitable levels," Mr. Picton said. Furthermore, the stock trades at a significant discount to its net asset value and the company has substantial tax-loss carry forwards and "very strong leverage" to rising copper and zinc prices. He has a 12-month target of $4 on the shares, which compares with yesterday's close of $2.46.

Electronic Arts Inc. (ERTS-Nasdaq): Redwood City, Calif.-based firm is the leader in video games with a market share double its nearest rival. "The key to this story will be the transition in its business to the next generation of gaming consoles that will occur later this year," Mr. Picton said. "This event should allow ERTS to show strong earnings acceleration against a backdrop of earnings deceleration for the rest of the stock market," he added, noting that the company stands to benefit from the launch of portable gaming machines. The shares surged 29.3 per cent in 2004 and have risen further since year-end.

Synergy Canadian Class

Category:Canadian equity
Manager:CI Mutual Funds
Load status:Open-ended
Total assets:$919.6-million
Management expense ratio:2.87%
Globefund 5-star rating system:****
Returns to Dec. 31, 2004
1-year simple rate of return:17.9%
3-year compound annual: 10.7%
5-year compound annual: 6.4%
Top 10 holdings to Nov. 30
1. Synergy Global Sector12.5%
2. CIBC 4.1
3. Bank of Nova Scotia 4.0
4. EnCana 3.1
5. Cdn. National Railway 2.8
6. Bank of Montreal 2.7
7. TD Bank 2.6
8. Niko Resources 2.3
9. Canadian Tire 2.0
10. Manulife Financial 2.0


© 2007 The Globe and Mail. All rights reserved.

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