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Interest rates fuel manager's caution

INVESTMENT REPORTER

Fund manager Robert McWhirter is playing it safe. At the end of February, the Northwest Specialty Innovations Fund, which he has managed since inception in late 2000, had a 39-per-cent weighting in cash.

Despite the heavy cash weighting, the $46-million fund is already up 11.39 per cent this year, which betters its 11.15-per-cent return in the 12 months ended Feb. 28. The three-year return was 29.68 per cent annualized, and over five years, 13.18 per cent.

Mr. McWhirter's cautious bent stems from a number of factors, not the least of which is rising interest rates around the world. "This is the first time in 17 years that the U.S. Federal Reserve, Europe and Japan are tightening monetary policy at the same time," he says.

That suggests that bonds could provide more competition to stocks in North American markets. And there is the question of whether higher rates will slow global growth significantly enough to have an impact, "particularly from Canada's perspective, on the price of oil and/or base materials," says Mr. McWhirter, the president of Selective Asset Management Inc.

Some recent technical signs also give him cause for concern about North American stock markets.

But Mr. McWhirter sees reason for optimism in the longer term. "If I have to forecast nine months into the future, I think some of the near-term concerns should be behind us and the stocks that I picked are ones that appear to have reasonable rising industry trends."

He uses a 12-point quantitative model to pick stocks, which includes factors such as profit momentum, earnings surprises, price-to-sales and price/earnings multiples, and return on equity.

He continues to like CAE Inc. even though the stock has rallied close to 50 per cent since he mentioned the Montreal-based company as a Best Bets pick on July 15, 2005. "We still think that the more-aircraft delivery trend has still got two or three years to go."

He believes CAE could surprise on the upside with 22 or 23 simulator sales for the current fiscal year ending Friday, and thinks simulator sales could rise 25 to 50 per cent in the coming fiscal year. His optimism stems from projections that Boeing Co. and Airbus SAS will deliver 800 planes this year. Mr. McWhirter expects 900 to 950 aircraft will be delivered in 2007 and 2008, suggesting further increased sales for CAE. The shares closed yesterday at $8.98 on the Toronto Stock Exchange, down from a March 9 high of $9.82, but well ahead of the 52-week low of $5.30 a year ago.

Com Dev International Ltd. is a new name for the Northwest portfolio. The Cambridge, Ont.-based firm makes space hardware subsystems.

"Com Dev believes they are entering a period of sustained growth as many of the satellites launched in the 1990s are nearing the end of their design life," Mr. McWhirter says. The company also expects to generate more revenue per satellite than previously recorded because the new satellites have an average of 59 transponders, compared with 33 on satellites launched in 1995. Furthermore, Com Dev has expanded successfully beyond the commercial satellite market, he says, adding that analysts have boosted their share profit estimates for the fiscal year ending in October to 23 cents, an increase of about 130 per cent over last year. Com Dev shares have risen sharply since early December when they stood at $1.67. They are now changing hands at $3.35.

Biovail Corp. is an even more recent addition to the Northwest portfolio. The Mississauga-based drug company reported a stronger-than-expected fourth quarter last week and management guided analysts' estimates up for the current fiscal year to $2.30 (U.S.) to $2.40 a share, which is well above the analysts' previous consensus of $2.14, Mr. McWhirter says. He liked the stock even before the news came out. "Sales of Biovail's key drug Wellbutrin continue to show growth," and analysts don't expect a generic version to be released until mid-2007, he says. Biovail should also see sales of the once-daily pain drug Ultram ER rise as Johnson & Johnson salespeople brief doctors on the drug, he adds. Biovail shares hit a 52-week high of $32.96 (Canadian) last Thursday and have since eased back, ending yesterday's session at $27.97.

Careful stance

Fund manager Robert McWhirter has a substantial cash weighting. His cautious bent stems from a number of factors, not the least of which is rising interest rates around the world.

Top 10 holdings (as of Feb. 28, 2006)

1Cinram International3.41%
2CAE Inc.3.22
3MEMC Electronic Materials3.05
4Systems Xcellence3.02
5Ceramic Protection3
6Seagate Technology2.86
7CryptoLogic2.76
8Shaw Communications2.5
9Rand A Technology2.44
10Armor Holdings 2.38

Northwest Speciality Innovations

Inception dateNovember, 2000
Total assets$46.12-million
Fund typeOpen-ended
RRSP eligibilityYes
5-star rating system****
Management expense ratio2.85%

Returns (as of Feb. 28, 2006)

1-year11.15%
3-year29.68
5-year13.18

SOURCE: GLOBE FUND

© 2007 The Globe and Mail. All rights reserved.

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