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Fund manager foresees 10% TSX rise

Expects summer doldrums, then fall rally

INVESTMENT REPORTER

The Canadian equities market may have weakened in recent weeks, but that hasn't changed fund manager Peter Harrison's upbeat view for the year as a whole.

He still expects the S&P/TSX composite index, which is up 4.1 per cent so far in 2006, to show a gain of about 10 per cent for the year as a whole. He sees the market moving sideways to slightly down in the summer. But then in the fall, "the fundamentals will come back into play," pushing the market higher, said the senior vice-president of Canadian equities for Montrusco Bolton Investments Inc.

He said the Federal Reserve Board's decision last week to raise U.S. interest rates by 25 basis points, and to adopt a less hawkish tone in its comments, has lessened the degree of uncertainty in the market somewhat, adding to the comfort level in his forecast.

Mr. Harrison assumed responsibility for managing part of the Northwest Specialty Equity Fund several months ago. Deans Knight Capital Management Ltd. is the other manager on the $244.5-million small-capitalization fund. So far this year, it has had a return of 4.53 per cent. The return for the 12 months ended May 31 totalled 35.04 per cent, the three-year return annualized is 32.5 per cent and the 10-year, 10.51 per cent. Since inception in 1986, the fund has returned 14.37 per cent annualized.

In choosing stocks for the fund, Montrusco Bolton uses what it calls an ownership investing approach, studying a company of interest as if it were buying part of the company itself, rather than just shares in it. The fund manager studies the industry, the balance sheet, the management of the company, and its ability to generate free cash flow.

Montrusco Bolton's stock choices are spread across emerging growth, developing growth, establishing growth and recognized growth areas.

Mr. Harrison said Montrusco Bolton increased its holding in travel company Transat A.T. Inc. last winter. He said travel is a growth business, and Montreal-based Transat is "well positioned" in the industry, generating "very good free cash flow." Furthermore, it has a "very strong balance sheet," giving it the ability to make acquisitions, should it so choose. The stronger dollar is a plus, making it cheaper for Canadians to travel outside the country. Mr. Harrison has a one-year target of $31 on Transat shares, which are currently trading at $24on the Toronto Stock Exchange.

Part of the attraction of HudBay Minerals Inc., the third-largest zinc and copper producer in Canada, is that zinc is Mr. Harrison's favourite base metal. Winnipeg-based HudBay is a low-cost producer, mainly because of byproducts it gets when it mines copper. Furthermore, it is "a very inexpensive company," both in absolute and relative terms, compared with other materials stocks. HudBay's assets are all in North America, which means no geopolitical risk. Mr. Harrison has a one-year target of $18 on HudBay shares, which closed yesterday at $14.48 on the TSX. Groupe Laperrière & Verreault Inc. is a diversified global provider of process technology, whose liquid/solid separation technologies are used in mining, pulp and paper making, and, more recently, water management. Mr. Harrison likes the company because there are not too many water treatment plays to be had, and it's increasing its presence in the business. He expects it to register very strong growth. "We don't think the market is appreciating its water treatment assets; therefore, there can be multiple expansion." Groupe Laperrière shares ended yesterday at $24.24 on the TSX. Another company that Mr. Harrison favours is Canada Bread Co. Ltd., a more defensive name. He said the bakery has been increasing its profit by mid-teen growth over the past several years, and that is expected to continue over the next few years. It has a "great clean balance sheet." In Canada, the baking industry is basically an oligopoly, which means the company has pricing power, he added. The stock closed at $63.95 yesterday on the TSX.

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Studious approach

In choosing stocks for the Northwest Specialty Equity Fund, Montrusco Bolton uses what it calls an ownership investing approach, studying the company as if it were buying a portion of the company rather than just shares in it. It studies the industry, the balance sheet, the management and its ability to generate free cash flow.

***

Top 10 holdings* as of June 30, 2006

1. Aur Resources6.1%
2. Groupe Laperriere & Verreault4.7
3. BMTC Group4.4
4. Transat A.T.4.2
5. GMP Capital Trust3.7
6. HudBay Minerals3.7
7. Canada Bread3.6
8. Vermillion Energy Trust3.3
9. WFI Industries3.7
10. Highpine Oil & Gas2.7

*On portion of fund managed by Montrusco Bolton

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Northwest Specialty Equity Fund

Inception dateMarch, 1986
Total assets$244.50-million
Managed by Montrusco Bolton/Deans Knight CapitalOpen-ended
RRSP eligibilityYes
5-star rating system*****
Management expense ratio2.68%
RETURNS
1-month-0.80%
6-month18.47
1-year35.04
3-year32.50

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The S&P/TSX composite index may move sideways to slightly down in the summer. But then in the fall, "the fundamentals will come back into play," pushing the market higher.

PETER HARRISON, SENIOR VICE-PRESIDENT OF MONTRUSCO BOLTON INVESTMENTS INC.

SOURCE: GLOBE FUND, MONTRUSCO BOLTON

© 2007 The Globe and Mail. All rights reserved.

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