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Manager of Fidelity True North Fund says the clues are in the numbers

For fund manager Stephen Binder it's all a numbers game. If it looks like a double-digit growth story, he'll keep digging and meet with management; if not, it's an easy pass. It's the numbers he trusts, designing his own spreadsheets to uncover the trends.

"The numbers of the company will often tell the story of the company and that's my starting point for further investigation," he says.

Mr. Binder is manager of one of the biggest equity funds in Canada -- the Fidelity True North Fund -- with more than $5.6-billion in assets under management. Working out of Boston, he has a rather non-Canadian strategy right now -- he's underweight energy and has a dislike of energy income trusts. And that was before the rules on income trusts changed.

"There's plenty of energy in the portfolio but over all, yes, I'm underweight. But if you drill in, that's because I'm underweight the conventional oil and gas trusts," Mr. Binder says. "I believe those are a depleting asset, because when you produce gas from your wells, your resources decline."

The energy trusts went on a buying spree to build up reserves, but Mr. Binder feels the race has run its course. "Acquisitions had been accretive until people figured this out and bid up all the junior oil and gas companies," he says. "Now arbitrage on valuations between the trusts and other companies has kind of gone away, which has closed down a lot of the acquisition activity."

That's the fundamental view and when he's crunching the numbers he treats trusts just like common stock. As he puts it, albeit in a simplified version, he takes the current dividend or distribution yield and the production per share growth to give him a total return expectation. For energy trusts, "production per share growth is inherently negative, which offsets most of the dividend yield, the fat dividend yield," he says.

What Mr. Binder wants is double-digit growth and what he finds in most of the energy trusts is single-digit growth, which isn't high enough for an equity fund.

In the oil patch, Mr. Binder is putting his money behind Nexen Inc., Canadian Natural Resources Ltd. and Talisman Energy Inc. Despite the income trust dustup, he's still "light on the gas trusts, prefers oil names with sands exposure, and some business trusts. The focus is on total long-term returns, regardless of common equity or income trust structure."

Mr. Binder has been labelled a "balance sheet guru," but he bridles at the name because he spends more time and effort looking at the cash flow and income statement. He uses the balance sheet to assess debt, but cash flow is the key. Whether management wants to pay down debt, buy back shares or increase dividends, they need the cash flow to do it.

Like many Canadian equity funds, financials are a cornerstone of the portfolio, with four of the top five holdings. Royal Bank of Canada, Toronto-Dominion Bank, Manulife Financial Corp. and Bank of Nova Scotia are his top weightings.

The non-financial making the fund's top five is Telus Corp. Mr. Binder likes to look at the telcos because they often have a solid dividend yield, but cautions investors against only looking at the yield. "Often a high yield looks attractive, but is artificially high because the market expects the company to cut the dividend." In the case of Telus, it's the mix of land lines and a growing wireless division that makes the stock attractive, he says.

Aaron Sobeski is a producer at Report on Business Television.

Fidelity True North Fund

Top 10 holdings (as of Sept. 30, 2006)

SecuritySector
1Royal Bank of CanadaFinancial
2Toronto-Dominion BankFinancial
3Telus Corp. Telecom.
4Manulife Financial Financial
5Bank of Nova ScotiaFinancial
6Rogers Comm. BTelecom.
7Potash Corp.Materials
8Nexen Energy
9Cdn Nat'l ResourcesEnergy
10Talisman EnergyEnergy

SOURCE: COMPANY

© 2007 The Globe and Mail. All rights reserved.

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