Given their quality-growth-at-a-reasonable-price discipline, it is not surprising that fund managers Dale Harrison and Don Anderson are showing interest in those several areas that investors have recently spurned -- Canadian financial service stocks, selected consumer issues and large-capitalization U.S. stocks -- and they have turned cautious on energy and materials issues, which have rewarded investors handsomely the past few years.
The two run the PH&N Dividend Income and the PH&N Canadian Income Fund, among others. The Dividend Income Fund, which has assets of $3.3-billion, has gained 0.55 per cent so far this year. In the 12 months ended April 30, the fund had a return of 14.11 per cent. Over the past three years, it returned 18.15 per cent annualized; over the past 10 years, 17.41 per cent a year; and 13.07 per cent since inception in 1977. The Canadian Income Fund, which started in October, 2005, has a 6.38-per-cent return so far in 2006.
Financials remain "from our perspective structurally undervalued given the quality and growth characteristics of these businesses," Mr. Harrison said.
And "certainly some of the larger U.S. companies which we hold in some of these funds are starting to look very interesting," the vice-president of Phillips Hager & North Investment Management Ltd. added. "It is very fashionable not to want to have U.S. exposure so some of the best companies in the world in terms of the quality of the businesses and the quality of the management . . . are going begging; [yet] the valuations are extremely attractive on some of these businesses."
Among the large-cap U.S. stocks the managers like are Morgan Stanley, American International Group Inc., Wal-Mart Stores Inc. and Cisco Systems Inc.
The largest position in the Dividend Income Fund is Manulife Financial Corp. (MFC-TSX). "You have a terrific business with terrific management and attractive long-term growth rates, trading well below market valuations," he added. Yet, Manulife has "much more sustainable earnings power than the market currently," Mr. Harrison said. The shares are trading at $72.39, which is 14.6 times the consensus share profit forecast for this year and 12.9 times the 2007 forecast. It has a 1.93-per-cent dividend yield and a 15-per-cent return on equity and " a management team committed to growing the business," he said.
Canadian Imperial Bank of Commerce (CM-TSX) also caught the managers' attention. Mr. Harrison said the bank is the "least favoured and certainly the most volatile of the Canadian banks." He is impressed with Gerry McCaughey who took over as chief executive officer last summer.
The new management is "quietly but steadily effecting a re-engineering and cultural evolution of the bank into a very decent, high-performance organization," he said, adding that Mr. McCaughey is focusing on core businesses that are lower risk and have sustainable profitability. Mr. McCaughey is "a very disciplined steward of capital as it relates to potential acquisitions," the most notable being the FirstCaribbean International Bank. CIBC trades at a discount to the bank group on a price/earnings multiple, he noted. The shares, which closed yesterday at $81.06 on the Toronto Stock Exchange, are changing hands at 12.7 times the fiscal 2006 share profit estimate and 11.7 times next year's.
Thomson Corp. (TOC-TSX) is a stock that has basically gone nowhere for the past five or six years even though the business has grown steadily over that time period, Mr. Harrison said. The financial characteristics and the valuation characteristics relative to the quality of the business make it a "quite compelling" story, he said. "We see a core growth rate . . . of 10 to 15 per cent in terms of free cash flow growth. He describes the valuation at 16.5 times this year's free cash flow and 15 times next year's as attractive. The shares closed at $43.95 yesterday on the TSX.
Mr. Anderson mentioned several stocks that are included in the Canadian Income Fund. The issues are Yellow Pages Income Fund (YLO.UN-TSX), Futuremed Healthcare Income Fund (FMD.UN-TSX) and Livingston International Income Fund (LIV.UN-TSX).
PH&N fund managers Dale Harrison and Don Anderson are showing interest in Canadian financial service stocks, selected consumer issues and large-capitalization U.S. stocks -- and they have turned cautious on energy and materials issues.
'From our perspective [financial stocks remain] structurally undervalued given the quality and growth characteristics of these businesses.'
DALE HARRISON, VICE-PRESIDENT OF PHILLIPS HAGER & NORTH INVESTMENT MANAGEMENT LTD.
Top 10 holdings
|2||Royal Bank of Canada||7.89|
|4||Bank of Nova Scotia||6.78|
|6||Bank of Montreal||4.64|
PH&N Dividend Income-A
|Sales fee type||No load|
|5-star rating system||****|
|Management expense ratio||1.16%|
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