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Fund manager likes U.S. prospects

INVESTMENT REPORTER

The U.S. stock market is off to a good start this year and fund manager Brian Rogers expects it will continue to do well for the remainder of the year.

"I think this year investors are more likely to be surprised by the time Dec. 31 rolls around, and by that I mean surprised positively rather than disappointed," said Mr. Rogers, chief investment officer of Baltimore-based T. Rowe Price Associates Inc. and manager of the TD U.S. Large-Cap Value Fund. The Standard & Poor's 500-stock index has gained 5.1 per cent so far in 2006, which surpasses the 3-per-cent advance for all of 2005.

He says he is optimistic about the U.S. market because the Federal Reserve Board is believed to be close to the end of its tightening, valuations are neither too high nor compellingly attractive, and liquidity is good.

The $401-million (U.S.) fund is up 5.44 per cent year to date. Over the 12 months ended Feb. 28, the fund dropped 2.44 per cent, but over the past three years, it had a positive 6.22-per-cent annualized return. The fund started in November, 2002.

Mr. Rogers thinks large-capitalization stocks are cheaper than small caps and a lot of stocks that once were considered growth issues are attractively priced. He isn't a fan of some utilities because he doesn't think there is much upside on valuations, but he likes selected health care companies, financials, several conglomerates and some media and entertainment stocks.

His stock picks exhibit several common themes including stock prices that have in some cases been halved. But the companies also have strong balance sheets and have bolstered shareholder value, including share buybacks and increasing dividends.

General Electric Co. is the largest holding in the portfolio. Mr. Rogers finds the yield attractive at 2.9 per cent. He noted that the Fairfield, Conn.-based conglomerate consistently raises the dividend. The shares are not expensive at 20 times profit. "They are in a very strong free cash flow position," he said, noting that GE has bought back billions of shares. He said the shares "are a great proxy for a developing world." GE shares, which traded as high as $60 in August, 2000, closed yesterday at $34.42 on the New York Stock Exchange.

J.P. Morgan Chase & Co. is a favourite in the financial services sector. The stock is attractively valued on a P/E basis, Mr. Rogers said. It has a dividend yield of about 3.2 per cent. And it recently announced an $8-billion buyback that follows on its previous buyback. That, together with the dividend, "is a sign of a management bent on improving value," he said. J.P. Morgan Chase shares rose to a two-year high of $42.54 yesterday.

Pfizer Inc. has taken a big hit in recent years. Shares of the New York-based drug company, which traded at around $50 in 1999, dropped as low as $20.27 towards the end of last year. Since then, they have recovered somewhat and now trade at $25.17. Mr. Rogers doesn't think the stock will go back to its old highs, but said "I think it is very reasonable to expect much better stock performance out of the company over the next couple of years." It has a 3.8-per-cent dividend yield, a reasonable P/E and a strong balance sheet. It is "just a powerhouse company," he added.

Mr. Rogers also likes Chicago-based Tribune Co., which publishes papers such as the Chicago Tribune and the Los Angeles Times, but has a number of other operations, including the Chicago Cubs baseball team. It also has a sizable stake in the Food Network, "which people say is worth half-a-billion dollars," he said. The company has "valuable saleable assets," adding that management may be beginning to feel pressure "to take some more radical steps to get investors to notice the company, and usually when managements feel that pressure, that oftentimes can turn into a good outcome." Tribune shares have also taken a kicking in recent years, dropping from more than $53 early in 2000 to the current level of $27.31.

More to come?

U.S. markets are off to a strong start this year and could continue to rise thanks to attractive valuations, an end to Fed rate hikes and good liquidity.

Top 10 holdings

1General Electric2.66%
2J.P. Morgan Chase & Co.2.3
3Exxon Mobil1.71
4Chevron Corp.1.64
5Union Pacific1.61
6Marsh & Mclennan Cos.1.6
7AT&T Inc.1.55
8International Paper1.5
9Merck & Co.1.4
10Morgan Stanley 1.4

TD U.S. Large-Cap Value-A

Inception dateNovember, 2002
Total assets$401.32-million (U.S.)
Fund typeOpen-ended
RRSP eligibilityYes
5-star rating systemHH
Management expense ratio2.52%

Returns

1-month0.46%
6-month-0.13
1-year- 2.44
3-year6.22

'Investors are more likely to be surprised by the time Dec. 31 rolls around and by that, I mean surprised positively rather than disappointed.'

BRIAN ROGERS, CHIEF INVESTMENT OFFICER OF T. ROWE PRICE ASSOCIATES INC. AND MANAGER OF THE TD U.S. LARGE-CAP VALUE FUND.

SOURCE: GLOBE FUND

© 2007 The Globe and Mail. All rights reserved.

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