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Mutual Fund News

Battered, but bouncing back

After incurring major losses in their funds last year, some managers have found strategies to help them regain a lot of ground in the first half, Shirley Won writes

Stock funds were clobbered last year amid a global credit crisis and ensuing economic downturn. But some equity funds have rebounded nicely and beat their benchmark indexes for the first six months of this year. We talked to managers of five comeback funds to find out how they did it, and their outlook for the markets.

$1.5-billion Dynamic Power Canadian Growth

(Canadian-focused equity)

First six months: 28.5 per cent v. S&P/TSX total return

of 17.6 per cent

Veteran manager Rohit Sehgal has learned some lessons from last year's market collapse that shaved 51 per cent from his Dynamic Power Canadian Growth Fund. "It was a very unusual event; there was a total disconnect with fundamentals after the Lehman Brothers fiasco," he recalled.

"On the credit side, everything shut down, and there was a massive move to the exits by hedge funds or more levered institutions. It was total chaos."

This year, he is managing the downside volatility better because his fund is more diversified and has a bigger weighting in larger, more liquid stocks. Last year, the fund was 50 per cent in hard-hit energy stocks, but that sector makes up just 30 per cent of his fund today. He did not own Canadian banks last year, but they are now part of his 28-per-cent holding in financials.

The fund was badly hurt because it was fully invested last year, but "being fully invested helped us [this year]," said Mr. Sehgal, who looks for companies with strong earnings growth. Some winners included Niko Resources Ltd., Petrobank Energy and Resources Ltd., Pacific Rubiales Energy Corp., Paladin Energy Ltd., Mirabela Nickel Ltd., Visa Inc., Manulife Financial Corp., URS Corp. and also Addax Petroleum Corp. (which was taken over recently by China oil refiner Sinopec).

The markets are undergoing a "healthy correction" after a strong recovery, and there could be another 5-per-cent slide, he suggested. "What we may see is the markets gradually moving toward the levels before the Lehman fiasco ... and that's an upside of another 15 to 20 per cent over the next 12 to 18 months."

$283.2-million Mackenzie Growth Fund

(Canadian-focused equity)

First six months: 34.5 per cent v. S&P/TSX total return of 17.6 per cent

Fred Sturm's equity fund is a play on major themes. One is population growth, which implies potential increased demand for natural resources. Another is the population in emerging-market countries trying to live a more prosperous life - a trend that should benefit well-capitalized domestic banks as their citizens look for financial products such as mortgages.

In last year's market panic, investors fled resource and emerging-market stocks, and that contributed to the fund's 60-per-cent loss, he said. In the first half of this year, "there was a recovery in the resource sector from the depressed levels of last year, but more specifically the emerging-market banks that are prominent in our portfolio."

Some of the fund's big financial gainers included Garanti Bank in Turkey; Bank Kerjasama Rakyat Malaysia Berhad (Bank Rakyat); and Itau Unibanco Holding SA in Brazil. First Quantum Minerals Ltd., a copper play, was the biggest winner with a 230-per-cent return, he said.

Given the fund's stunning loss last year, Mr. Sturm said he and his team are learning to be more defensive. "We have hedged off 10 to 15 per cent of the fund using index futures, and we are maintaining an additional 5 to 7 per cent in cash," he said. "That is an important change ...

"We are steadfastly bullish for the economy and for equity markets into next year, but we recognize that given the rapid runup, that the market needs to consolidate its recent gains," Mr. Sturm said. "We have been short-term cautious but would expect the markets to resume a stronger uptrend by the fourth quarter."

$20-million Primevestfund (alternative strategies)

First half: 29.3 per cent v. S&P/TSX small-cap total return of 17.9 per cent

During normal market conditions, Ryaz Shariff said his hedge fund would hold about 35 underfollowed "gems" among mainly Canadian small-company resource stocks. After his fund lost 36 per cent last year, and because of continued market uncertainty in the first half of this year, he embarked on a market-neutral strategy and has been investing in larger-company stocks.

"We have been utilizing more nimble trading strategies," he said. His fund went from holding 38 stocks and 3 per cent cash in January, 2008, to 15 stocks and 54 per cent in cash in January this year.

Big gainers in his fund in the first six months included Niko Resources, Petrominerales Ltd., International Tower Hill Mines Ltd., and Mantra Resources Ltd. Some short positions in the resource sector helped.

"I am short-term bearish more in the next two months, and long-term bullish," he said, adding that he increased his short positions recently. "I think we have had a significant rally that may not have enough fundamentals justifying it."

$11-million Van Arbor

Canadian Advantage

(Canadian equity)

First six months: 69.1 per cent v. S&P/TSX total return of 17.6 per cent

Andrew Parkinson's fund is fully invested these days, compared with last summer when it was holding 50 per cent in cash. "The market may be going down a bit, but there is still very good value in Canada," said the manager, whose fund lost 36 per cent last year. "We are not going to sell. If there is a pullback, we think it is going to be short-lived."

Mr. Parkinson uses a value-oriented quantitative investment style, but chooses his stocks from sectors that he feels will outperform. That has led him to the mining sector, which should benefit from governments throwing money into infrastructure projects, and the energy sector where the price of oil has recovered after plunging to about $35 (U.S.) a barrel earlier this year.

His fund takes concentrated positions with about 20 stocks that were "firing on all cylinders" in the first six months of this year. Some of his winners included Suncor Energy Inc. and its takeover candidate Petro-Canada, Teck Resources Inc., Petrobank Energy and Resources Ltd., Trinidad Drilling Ltd., Sino-Forest Corp. and Cameco Corp.

And he said he is cautiously optimistic. "The oil price moved up quickly and is taking a breather, but fundamentally it is still fairly strong," he said.

"Canada is well positioned because it does have a lot of materials and energy which are going to be in demand with these infrastructure projects."

$149-million VPI Cardinal

Canadian Equity Pool

(Canadian dividend and

income equity)

First six months: 20.3 per cent v. S&P/TSX Total Return of 17.6 per cent

David Atkins, a co-manager on the fund, said the team uses a value-oriented investment style and typically holds 20 to 25 stocks. "We focus on high-quality companies that pay dividends, are growing those dividends and have strong balance sheets."

During the first half of the year, the fund, which lost 30.1 per cent last year, was about 58 per cent invested in financials, and 28 per cent in energy stocks.

"We owned the Big Six Canadian banks and four major insurance companies, and we have owned them for a while," Mr. Atkins said. When they were down and cheap we continued to buy more .... In February, you could buy the banks at six times earnings and have a yield of 8.5 per cent. To me that is pretty attractive for owning what people keep saying are the world's safest banks."

The fund's performance was helped by the rebound in financial stocks as well as energy holdings such as Suncor and Petro-Canada. Currently, the fund remains fully invested despite the recent pullback. "We still see significant value in the marketplace," he said.

© 2007 The Globe and Mail. All rights reserved.

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