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Advising on the side of caution

Equity return of 2009 won't be matched any time soon, he says, labelling the coming year as a period of consequences


Eric Bushell recently won the coveted Morningstar Equity Fund Manager of the Year award, but admits his foray into money management was "like most things - an accident."

After graduating with a history degree from Queen's University and facing a "brutal job market," he earned a Charter Financial Analyst designation, which helped open the door to a job in the fund industry.

He did everything from "stuffing envelopes" to later running a dividend fund at BPI Financial before that small fund company was bought by CI Financial Corp. in 1999.

"I was entering the job market in 1993 ... at the beginning of an explosive growth cycle in the asset management industry," recalls the chief investment officer of CI's Signature Global Advisors unit, and who now oversees $22-billion in assets.

Mr. Bushell has made the most of his opportunity, garnering an impressive performance in his flagship mutual fund. The $3.2-billion CI Signature Select Canadian Fund made an average annual return of 10.9 per cent for the 10 years ending Nov. 30, compared with 6.5 per cent for the S&P/TSX total return index.

While his fund was 42 per cent in bullion and cash at the end of 2008, "which was the most defensive positioning ever," he plowed that back into equities by July of this year.

We asked the 41-year-old fund manager, who is also big believer in holding foreign stocks in his Canadian equity fund, about his strategy for 2010, which comes against a backdrop of a rebound in global stock markets from the 2008 meltdown and credit crisis, and governments undertaking massive stimulus programs to kick-start their economies.

What is your outlook for 2010?

We are going to see a test of whether in fact the patient can walk without crutches. I am of the view that the patient can't yet quite walk without the crutches. The market may need that reminder. We will have to have the bridges, which governments have provided in a variety of forms, to be extended somewhat further - to the point where private sector finance can in fact carry the day.

And then longer-run issues - like the fact that taxes need to be taken considerably higher and growth rates in developed economies will be structurally, permanently lower - are going to be things that weigh on equity markets.

So you are cautious?

I am. I think we have a period of consequences next year, while 2009 was about government bridges that were very effective in bringing about repair to credit markets. That confidence bled into equities, and we got what will be the biggest equity return for the next number of years in this calendar year. Now, we have to deal with the longer-run consequences of those bridges.

So how are you positioning your equity fund?

Our orientation is toward sectors and industries where we see more stable markets so we are not engaging in cyclicals and base metals. I think the economy is slow, and there is spare capacity so there won't be great top-line [growth]. ... We are not wholly bearish. If the healing continues, stock markets should actually be higher.

But there are the challenges before us. The markets were perhaps reminded of that with Dubai [with its debt woes]. There are 10 Dubais at least.

Will the S&P/TSX composite be up next year?

I expect a positive year. It boils largely down to the fact that bank equities can deliver low double-digit returns. By that I mean 10- to 15-per-cent returns. And I think the Canadian life companies, which are an important part of our index, are good value today. And the energy sector should be all right on the oil side.

Where do you see the opportunities?

We think that growth stays low, and interest rates stay low. So income-generating securities are going to continue to be in favour. Canadians are still rolling off of maturing bonds from previous years, and are facing a reinvestment shock at the rates at which they are being offered. So this is forcing them, as they did in 2001-2002 time frame when short-term interest rates were very low in Canada, to take on more risk to capture income. We think that higher yielding parts of the stock market ... are going to be well supported. I think banks are part of that, as well as telecom, real estate investment trusts and the high-yield debt market.

Are there other areas?

The health care sector is of interest to us because it is so desperately out of favour. It also offers very attractive yields. I am thinking of largely medical device and pharmaceutical stocks like Eli Lilly, Roche and Smith & Nephew.

We are still interested in energy [the oil side]. We think that what's happening in the North American gas market in relation to the shale gas development is a game-changing event. It means that gas prices are going to be depressed for an extended period of time. And it means that energy investors are going to concentrate their dollars in the oil producing sector. If you look at the non-integrated oil companies [without retailing], the list globally is very short and is dominated by Canadian companies. I feel the world is going to come shopping for oil-oriented exploration and production companies.

Your fund is about 42 per cent weighted in foreign stocks. Why?

The Canadian market doesn't offer us what we need in terms of diversity, growth and opportunity. This is a permanent condition until I see more companies like Research In Motion sprouting up, and large new businesses forming in this country. I don't see that today. The United States is still really the dominant engine of ideas and risk-taking that is reshaping different businesses. I think India and China will [be there] too as they get their capital markets and other ingredients in those equations into gear. They'll challenge the U.S.


Eric Bushell's stock picks

Talisman Energy Inc.


The oil and gas company is executing a restructuring program that includes focusing its North American operations on unconventional gas production, expanding operations in Southeast Asia, and rationalizing non-core assets, Mr. Bushell says.

Talisman trades below its North American peers "at about 4.5 times debt to adjusted cash," and has one of the best balance sheets in the sector, he adds. "As the company demonstrates its growth potential, the market will start to rerate the stock to trade at valuations more in line with its peers." The stock closed at $19.56, down 28 cents.

Manulife Financial Corp. (MFC-TSX)

The insurance giant continues to be undervalued, with its price to book value ratio, for example, at half of its historical average of 2.2 times, Mr. Bushell says.

"Its earnings and return on equity will improve significantly when interest rates rise, and its 'fortress' capital position should facilitate accretive acquisitions that could improve sentiment." The stock closed at $19.25 yesterday, up five cents.

Roche Holding AG

(ROG-SIX Swiss Exchange)

After acquiring California-based biotechnology firm Genentech Inc. this year, the Swiss pharmaceutical now has a pipeline of potential new products not being recognized by the market, Mr. Bushell says.

"The stock trades at a lowly 12.5 times 2010 earnings per share, which is ridiculous for such a great franchise. As we get better clarity on health-care reform in the United States, and as the differences between Roche and its peers become clearer to investors, we expect the stock will more closely reflect the fundamental outlook." The stock closed at 177.9 Swiss francs ($178.69) yesterday, down seven centimes.

© 2007 The Globe and Mail. All rights reserved.

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