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Manager keen on hard assets despite commodity downturn

'Short-term volatility is to be expected'


Commodity stocks have taken a hit recently but that hasn't diminished portfolio manager Jim Huang's belief that there is a strong secular trend at work with hard assets such as resources.

"Short-term volatility is to be expected," said Mr. Huang, vice-president, Canadian equities with Natcan Investment Management. He took over as lead manager of the AltaFund Investment Corp. fund one week before Sept. 11, 2001. The $81-million fund is up 2.03 per cent so far in 2006, continuing a performance that saw it gain 41.52 per cent in the 12 months ended Jan. 31, 30.42 per cent annualized over three years and 10.41 per cent over five years.

The returns have been helped by the fact that the diversified equity fund has a Western Canadian bias so it is heavily weighted in energy issues. Mr. Huang expects hard assets, which include commodities but is not limited to them alone, will continue to outperform.

Mr. Huang believes the long-term sustainable oil price is probably around $45 (U.S.) a barrel. The fact is that oil is a depleting asset and the incremental supply to meet rising demand is coming from riskier places, such as the Middle East and Russia. "Those factors combined convince me that in the next three to five years that the oil price will stay well above that $45 long-term equilibrium," he said. Could oil hit $100, as some have suggested? Mr. Huang isn't about to rule that out, noting that if one adjusts the $40 peak of 1982 for inflation, it works out to $90 to $95 a barrel.

He is also a fan of the golds. "Can we get to $600 [an ounce] this year? It is possible; it is quite possible," he said.

Some of the stocks in the AltaFund portfolio are blue chips with solid but not spectacular returns. Others are what he calls opportunities, where there are elements within the company such as management change that make it interesting and offer good returns. The third type encompasses higher risk, higher potential return issues.

The blue-chip pick is Canadian National Railway Co. (CNR-TSX). It has a "market-leading position," industry-leading efficiencies, a good balance sheet and a good track record, great management and is doing a great job in execution, Mr. Huang said. The Montreal-based rail giant doesn't produce spectacular returns, "but they can deliver say 10 to 15 per cent per year," he said. Capacity utilization is high and the company has been able to pass along the increase in fuel costs to its customers. CN shares have soared recently, hitting a record high close yesterday of $107.60 on the Toronto Stock Exchange.

Nexen Inc. (NXY-TSX) was the choice in the second category. Mr. Huang said he likes the Calgary-based energy company because of the changes that have been made as a result of several acquisitions and projects undertaken in the past few years. The Long Lake oil sands project is coming on stream in 2007. That deposit has a long life and stable production, he said. And there is the coal-bed methane project, production from which is scheduled to begin in several years time. Mr. Huang also noted that Nexen bought into the Buzzard field in the North Sea.

Mr. Huang expects that Nexen's production could increase by 40 per cent over the next couple of years. Nexen is up about 90 per cent in the past 12 months and closed yesterday at $58.04.

Mr. Huang also likes UTS Energy Corp. (UTS-TSX), a Calgary-based company with a significant interest in the Fort Hill oil sands project. UTS "is well on the way to becoming a big oil producer in five years time," he said. Petro-Canada and Teck Cominco Ltd. are partners of UTS in that early stage project, he noted. UTS's management is "very proactive in terms of creating value for shareholders," he said. The stock has done well over the past year, surging from $1.47 a year ago to a record closing high of $7.76 a week ago. The shares ended yesterday's session at $6.55.

Oil man

Undeterred by recent slides in commodity prices, fund manager Jim Huang believes the secular trend that has driven crude oil and other resource prices to multi-year highs remains in place.

Altafund Investment Corp.

TOTAL ASSETS$80.79-million

Returns to Jan. 31, 2006

6-month compound annual19.78%
1-year simple rate of return41.52
3-year compound annual30.42
5-year compound annual10.41

Top 10 holdings As of Jan. 31,2006

1EnCana Corp. 6.85%
2Suncor Energy5.59%
3Canadian Natural Resources 5.36%
4Manulife Financial 4.53%
5Petro-Canada 4.03%
6Royal Bank of Canada 4.02%
7Talisman Energy 3.62%
8TD Bank 3.31%
9Cash and other assets 3.30%
10Bank of Nova Scotia 3.01%


© 2007 The Globe and Mail. All rights reserved.

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