William John is the latest manager to oversee the PH&N Short-Term & Mortgage Fund, but insists he is only part of a well-oiled machine.
"I have been involved in the fund for a year and a half, but the style remains consistent," says the 33-year-old portfolio manager with Phillips Hager & North Ltd., part of RBC Global Asset Management. "Most of our funds here are very much a team approach."
The fund won Lipper awards in the Canadian short-term fixed-income category for the one, three, five and 10 years ending Dec. 31, 2009. It garnered an average annual return of 5.1 per cent over three years, and 5.3 per cent over 10 years. The returns have also been given a lift from having a low management expense ratio of 0.63 per cent. "The goal for our fund is to provide our clients with a good high yield in a very diversified way," Mr. John said.
Unlike most short-term bond funds, the PH&N offering can invest up to 40 per cent in mortgages and that has contributed to performance. "Right now it is in the low teens" because building a mortgage position takes time, he said. "The process is longer than, for example, purchasing a corporate bond or provincial bond."
But the firm's credit team, which looks at corporate bonds, "is a big part of the success of the fund," he said. "It has been a very active part of this fund over the past couple of years, as there has been tremendous volatility in credit spreads of all types and great opportunities."
While interest rates are set to rise as the economy recovers, "the outlook for bonds is a lot rosier than many people think," he suggested. "The general outlook for the Canadian economy is strong ... our government has a very good track record of controlling inflation and that will allow them to manage the interest rate in a controlled way. I think that gradual rate increases are already priced into the market."
Cecilia Mo piloted Fidelity Income Trust Fund to a 46-per-cent return in 2009, but warns not to expect that kind of "spectacular" gain this year.
"If I could get a 6- to 7-per cent yield, which I believe is possible, and have capital appreciation of 5 to 10 per cent, I would be very happy," says the manager with Fidelity Investments Canada.
Fidelity Income Trust won Lipper awards in the income trust equity group for one and three years ending Dec. 31, 2009. The D series posted an average annual return of 6 per cent over three years, while the S&P/TSX capped income trust index lost 5.9 per cent. Her strategy to reduce risk includes owning a core of "reliable" income trusts with sustainable distributions. But she also buys "fallen angels" with higher reward potential. "They used to be good companies, but ran into bad times," said Ms. Mo.
While she has about 8 per cent in cash to take advantage of opportunities, she is not fussed by Ottawa's plan to tax income trusts as corporations by 2011. She also owns some income trusts that have already converted.
"For me, it is a non-event. [Trusts] have to convert, but it may not have any impact on the yield or their distributions."
She currently favours power income trusts and also some of the real estate investment trusts such as H&R REIT. In the energy sector, she prefers natural gas names rather than the oil plays.
But she is avoiding business trusts which she expects "might have to cut their distribution [on conversion]," because she thinks that possibility is not being priced into the market. Still, Fidelity Income Trust Fund will have to change its name later this year, and broaden its mandate. In future, her fund will be allowed to invest in high dividend-paying U.S. stocks and hedge those securities to Canadian dollars. "You can't call it an income trust fund any more, but we understand the market's appetite for more yield."
Alexander Lane takes a two-pronged strategy when trying to snap up winners for his Dynamic Power Small Cap Fund.
"I consider myself to be a conservative growth manager," says the portfolio manager with Goodman & Co. Investment Counsel Ltd., which runs Dynamic funds.
He likes to buy secular growth firms that are less economically sensitive, but are "great companies" with strong margins, free cash flow, good balance sheets, and long-term track records of rising revenue and profits.
But he also looks for cyclical stocks that can have run up nicely over the shorter term because of drivers such as a rising commodity prices or order books, and give the fund some extra zip. "I like to buy my cyclicals when they have been hit hard, and are out of favour," Mr. Lane said.
"Just as important as buying them right is selling them right" so that profits can be redeployed back into the secular growth stocks that have not been on a roll, said the 35-year-old manager.
His fund won Lipper awards in the Canadian focused small-to-mid-cap equity group for three and five years. It posted an average annual loss of 1.8 per cent for the three years ended Dec. 31, 2009, compared with a loss of 1.6 per cent for the BMO Nesbitt Canadian Small Cap Index. Over five years, the fund has an average annual return of 6.4 per cent.
He suggested that his preoccupation with risk may stem from his family influence: His father was once chief investment officer and a value manager with a major insurance company. "I used to watch Wall $treet Week with him on Friday nights when I was small," Mr. Lane recalls.
He expects commodity stocks to do well in the first part of this year, but give way to defensive stocks mid-year as investors become more concerned by weaker economic growth. Technology and industrial sector stocks should improve throughout the year, he said.
© 2007 The Globe and Mail. All rights reserved.
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