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Dynamic veers from commodity strategy -- for now

Communications, aerospace among sectors of interest


Fund manager Rohit Sehgal has taken some profits in the energy sector, particularly on natural gas shares, and the mining and metals group, while adding a variety of new names including Tim Hortons Inc., Potash Corp. of Saskatchewan Inc. and Rogers Communications Inc. to his Canadian portfolio.

Mr. Sehgal, chief investment strategist at Toronto-based Dynamic Mutual Funds Ltd., became a fan of commodities three or four years ago, which was well before the broader market. "Being early did pay off in spades," a fact that shows up in the Dynamic Power Growth Fund's performance, he said.

The $1.6-billion fund is showing a 2.07-per-cent gain so far this year, but was up 9.64 per cent in the 12 months ended Jan. 31, 23.63 per cent annualized over the past three years and 19.06 per cent over the past five years. Since inception in August, 1985, the fund has had an annualized return of 11.69 per cent.

His cutbacks in commodity-related holdings doesn't mean that Mr. Sehgal has turned bearish on those sectors. "Although we are in a long-term bull cycle for commodities, we are going to have consolidations from time to time so we are being very selective more recently."

The sectors that are currently drawing Mr. Sehgal's attention include communications, agriculture, aerospace and infrastructure.

He continues to be upbeat about the global market. He thinks the worst is probably over for the U.S. economy and that it is going through a soft landing. "Goldilocks is alive and well," he said, referring to a U.S. economy that is neither too hot nor too cold.

Also, inflation continues to be contained globally, Mr. Sehgal said, which means a "fairly benign interest rate environment." Moreover, the Chinese and Indian economies are still growing at "very healthy rates," he added.


Tim Hortons

Tim Hortons Inc. (THI-TSX) has over 3,000 outlets and a business model that partly shields it from cost inflation as franchisees are on the hook for most expenses, Mr. Sehgal said. The model also is unaffected by fluctuations in the economy, and "with its low prices, [Tim Hortons] should be able to institute larger price increases each year than competitors such as Starbucks or Second Cup, without damaging its value brand," he added. Mr. Sehgal thinks Tim Hortons will likely increase its profit by 15 per cent or better in each of the next three to five years. "Their high free cash flow should also allow for large share buybacks and dividend increases," he said. Tim Hortons shares are currently trading at $36.88 on the Toronto Stock Exchange.


SNC-Lavalin Group Inc. (SNC-TSX) is a Canadian engineering and construction company with strong and diversified global operations, particularly in mining, metallurgy, power and infrastructure. "Its strong balance sheet gives it the opportunity to bid on significant public-private partnership projects and concessions around the world," Mr. Sehgal said.

The engineering and construction sector tends to do well at this stage in the economic cycle as companies undertake capital investment projects and governments take on infrastructure development, he added, noting that SNC-Lavalin's annual return on equity has averaged 15 per cent over the past 10 years and its share profit has grown by more than 20 per cent. Furthermore, the company has a portfolio of interests in a variety of projects, such as Ontario's 407 toll road, that will provide a steady stream of dividends and enhance the balance sheet, he said. SNC-Lavalin shares trade at $36.50.



ICICI Bank (IBN-NYSE American depositary receipts) is India's largest private sector bank and has built a strong retail franchise to complement its corporate banking activities and capitalize on the fast-growing retail market. Retail assets are growing as the middle class increases, Mr. Sehgal said. And credit growth in India exceeds 25 per cent, he noted. ICICI is also involved in an insurance and asset management franchise.

Mr. Sehgal said the Indian insurance market has lots of room to grow as penetration is low. "We believe the stock is undervalued and see significant upside as analysts revise the value of its insurance subsidiary," he said. He has a 12-month price target of $55 (U.S.) on the ADRs, which closed yesterday at $44.35.

Dynamic Power

Top 10 holdings as of Jan. 31, 2007

1Paladin Resources
2Potash Corp. of Saskatchewan
4Tenke Mining
5Shaw Communications
6Rogers Communications
7Ritchie Bros. Auctioneers
8Tim Hortons
9Addax Petroleum


© 2007 The Globe and Mail. All rights reserved.

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