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Mutual Fund News

On the hunt for high-quality growth companies

swon@globeandmail.com

WHAT ARE WE LOOKING FOR?

Ideas from the pros.

It's worth checking out what money managers are buying to get stock tips or gain insight into a mutual fund.

Today, we examine Trimark Canadian Endeavour. You can find the top holdings at Invesco Trimark Ltd.'s website at invescotrimark.com.

ABOUT THE FUND

The $864.3-million Canadian-focused equity fund has been run by manager Clayton Zacharias since 2007.

It gained 67.7 per cent for the year ended March 31 compared with 42.2 per cent for the S&P/TSX Total Return index. Over three years, it has a compounded annual loss of 7.7 per cent versus a 0.03-per-cent loss for the index.

The manager looks for high-quality growth companies trading cheaply. "We are looking for out-of-favour situations where a company is mispriced by the market for whatever reason."

Mr. Zacharias expects more market volatility given uncertainty about the strength of the economic recovery and the possibility of a correction. "But we are not expecting it to go back to the March, 2009, level."

WHAT DID WE FIND?

Mostly Canadian stocks, but also U.S. and Irish firms. All have had big gains from their 52-week lows.

Among the domestic stocks, Brookfield Asset Management Inc., which owns mainly commercial real estate and hydroelectric assets, still has potential, Mr. Zacharias said.

It's a high-quality business that generates a lot of cash flow, and has a "great management team," he said "It is big beneficiary of the depressed market that we are in. ... A lot of opportunities are going to come in the property market."

As management makes investments to drive returns over the next decade, the stock is still "significantly undervalued," he added.

Onex Corp. is also in a great position to take advantage of distressed asset prices because it oversees $5-billon of capital for acquisitions, he said.

The stock of the private equity firm got crushed in 2008-09 because it got lumped in with peers that did "stupid deals in the leveraged buyout craze in 2005-07" by paying and borrowing too much before the financial crisis hit, he said.

But Onex was actually a lot more disciplined than the big funds were, he said. "They paid a lower valuation, and used less leverage, so that allowed their [portfolio] companies to withstand the downturn."

Shares of Newalta Corp., a waste oil recycler and industrial waste manager, were hit hard by falling oil prices and a drop in oil and gas drilling activity in Western Canada in 2008, he said. The market also became concerned about its balance sheet, but that has been rectified, he added.

Still, there is a lot of upside in the business because there are big barriers to entry, he said. Newalta operates an extensive network of treatment facilities across Canada, but it would difficult and costly for rivals to build similar facilities today, he added.

Newalta has a strong management team as well as interesting growth opportunities like processing slop oil, he said. "[The stock is] still very cheap on price-to-earnings and cash flow."

*****

Top 10 holdings of Trimark Canadian Endeavour for March 31
Company nameSymbol$ Price (Apr. 20)52-wk high $52-wk low $YTD % price chg% YieldP/EMarket cap ($-mil)Volume
Thomson ReutersTRI-T36.8838.8831.818.63.134.830,601585,225
Brookfield Asset Mgmt.BAM.A-T25.5526.5917.099.22.028.414,637388,566
Kinetic Concepts Inc.*KCI-N48.0453.0121.5927.60.013.43,421488,311
IGM FinancialIGM-T42.9645.6033.311.34.820.311,283763,143
Newalta CorpNAL-T9.179.993.4614.32.248.338920,756
Onex CorporationOCX-T29.0029.9418.1422.90.431.93,492119,698
Power Corp of CanadaPOW-T29.2331.5020.920.14.020.913,3661,751,459
Sino-Forest Corp.TRE-T19.5421.749.530.80.013.84,7311,057,045
Grafton Group PLC**GN54.505.753.255.40.857.7773.8 196,470
Kingspan**KSP8.7510.226.401.7n/a24.91,187 112,877
Source: Globe Investor, Invesco Trimark
The table indicates P/E ratios for all firms, but some companies are not valued on that basis.
*U.S. dollars
**Listed on the Irish Stock Exchange. Figures in U.S. dollars, except market cap in millions of euros.

© 2007 The Globe and Mail. All rights reserved.

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