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Betting on energy trends pays off for fund manager

INVESTMENT FUNDS REPORTER

PROFILE / NORMAND LAMARCHE

Normand Lamarche sees the day when beleaguered natural gas stocks will re-emerge as investing gems.

"I do see a world - maybe five or 10 years from now - where natural gas is going to play a significant role in the power industry," said the portfolio manager and co-chief investment officer of Toronto-based Front Street Capital. "It may be in the transportation industry, fuelling cars and trucks. It also happens to be greener than oil-related products and coal."

Natural gas prices should remain depressed for two or three more years, but there are ways - be it through energy-service or technology companies - to play the growing demand for the commodity, said Mr. Lamarche who has been piloting the Front Street's Special Opportunities Canadian fund since 1999.

The $590-million fund, which can undertake limited short selling, has benefited from his other calls - such a big bet on gold stocks in 2009. It has won two Lipper Awards in the natural resources category for two periods ending Oct. 31, 2010. It posted an annualized 15 per cent return over three years, and 18.3 per cent over five years.

Mr. Lamarche said the glut of natural gas on the market, caused by new drilling technology that allows easier extraction at lower costs, has depressed prices in the range of $4 (U.S.) per thousand cubic feet, sharply lower than $15 in 2005.

"At some point, we are going to want to own the resource in a big way," he said. "That's a timing thing that we are trying to figure out ... We have been short natural gas stocks for a while."

Meantime, he is investing in the sector peripherally through energy-service companies such as Trican Well Service Ltd. and Gasfrac Energy Services Inc. He also owns such companies as Westport Innovations Inc., which is working on converting internal combustion engines from gasoline to natural gas.

"Who competes with natural gas?" he asked. "Those are things we look at. We would be cautious long term on coal producers."

Mr. Lamarche's longer-term outlook for natural gas is part of the many themes that drive the Front Street Special Opportunities Canadian fund. This fund is focused on resources because of the growing demand for commodities by China, India and other emerging markets, he said. Energy security, self-sufficiency and environmental concerns are also central themes in the portfolio.

The fund is about 50 per cent invested in oil and energy-service companies. Mr. Lamarche doesn't rely on a rising commodity price to make money, but is instead invested in companies applying new technology to re-drill old oil fields.

"What will drive my companies is not the oil price, but their growth in production, cash flow, earnings, reserves and net asset value," he said. "I am happy if oil is in the $70- to $90-range because my companies can be quite profitable."

Among non-oil investments, Mr. Lamarche is playing a rise in uranium prices, triggered by increased demand from China for its nuclear power program and by deep interest in sources of cleaner fuel amid environmental concerns. Instead of plowing money into uranium stocks, he prefers to invest in units of Uranium Participation Corp., a closed-end fund that buys uranium.

"Uranium is one of the few commodities that can deliver significant sources of green power," he said. "Wind and solar are nice, but they don't work without much government incentives. The last time I checked, governments were broke around the world, so there is a risk today and in the future that governments are going to stop providing those incentives."

Mr. Lamarche also owns base metal companies, which are economically sensitive to a recovery in global growth. "Copper is a commodity we like, and nickel," he said. "The world economy is growing at a 4-per-cent-plus clip ... It is a world that is not too hot and not too cold. The growth is a story of two worlds - half of it is probably growing too rapidly [China] and the other half [United States] needs a lot of government help and quantitative easing."

Slowing economic global growth, particularly in China, and the price of oil surging over $100 a barrel are potential headwinds to his outlook on resources. "The United States and Europe will have a hard time dealing with an oil price that keeps going higher right now because they consume so much of it," he said.

The fund is now less than 15 per cent invested in gold stocks, a sharp decline from a peak of 40 per cent in 2009. "I don't like gold," Mr. Lamarche said. Investing in bullion has served its purpose with many investors piling into gold exchange-traded funds because of fears about the collapse of the financial system, he said. "But the world is starting to normalize again ... There is risk that some holders and purchasers of gold may want to sell it in order to purchase more economically sensitive things."

Mr. Lamarche's fund has rebounded with a vengeance from the stock market meltdown in 2008, when it lost a stomach-churning 46 per cent. In 2009, the fund surged 131 per cent. It was holding about 35 per cent in cash prior to the downturn, and Mr. Lamarche used that money to keep buying stocks even as their share prices kept tumbling.

"We were buying things left for dead," he said. "It was a painful time - no question. But that was the reason why we exploded so hard."

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PROFILE / ANDREW MCCREATH

You know the story about the hare and the tortoise? Meet the tortoise: fund manager Andrew McCreath.

Since taking over the Sentry Diversified Total Return fund two years ago, just after the 2008 market meltdown, he has been in no hurry to fully invest the mutual fund in stocks. His cash position averaged 40 per cent last year, but has been as high as 70 per cent twice.

"I am not looking to shoot the lights out," said Mr. McCreath of Toronto-based Sentry Investments. "The best way to make money is not to lose money."

His $351-million fund won a Lipper award in the Canadian-focused equity category for three-year performance to Oct. 31, 2010. The fund, which can invest up to 50 per cent in foreign stocks, posted an average annual return of 4.9 per cent, compared with a 1.7 per cent loss for the S&P/TSX Total Return Index.

Its mandate gives the manager flexibility to invest up to 100 per cent in cash and up to 30 per cent in bonds, and to short up to 20 per cent of assets. But he can't invest more than 15 per cent in small-cap stocks. His portfolio also tends to be diversified across sectors. "I am not a big bet guy," he said, noting that the biggest weighting now is in Apple Inc. at 4 per cent of assets.

Mr. McCreath, who has an MBA in economics from York University, joined Sentry after selling his hedge-fund firm, Waterfall Investments, to Sentry in 2008. His eclectic background includes being a portfolio manager and founding shareholder of fund company Synergy Asset Management Inc., which was acquired by CI Financial Corp. in 2003. Other highlights include being a sell-side stock analyst and even a rock band promoter.

Mr. McCreath said he expects a single-digit return for the S&P/TSX Composite Index this year. "I think the market will be up in the first half, and down in the second half."

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PROFILE / BILL KANKO

Fund manager Bill Kanko has scoured the world for stocks but is avoiding the rush to emerging markets. "Stocks are pricier in emerging markets because most investors think that is where the highest growth is going to come from," said Mr. Kanko, the president of Toronto based Black Creek Investment Management Inc. "We have a few - like a Brazilian bank - but not many."

Instead, his shopping sprees have taken him to the United States, Europe and even Japan, whose moribund market has kept many investors away. His stalwart investment in just over 20 stocks has helped his Hartford Global Leaders Fund win a Lipper Award in the global equity category for the three years ended Oct. 31, 2010.

The $387-million fund has posted an annualized return of 4 per cent for the period compared with a 5.4 per cent loss for the MSCI World Index in Canadian dollars. Hartford Global Leaders is now among funds sold by CI Financial Corp., which recently acquired the Canadian fund unit of U.S.-based Hartford Financial Services Group Inc.

Mr. Kanko, who has run the value-oriented fund since 2006, looks for companies flying under the radar because "investors might not see what we see, or pay attention to it." There is also bias to growth - but not overpaying for it, said the veteran manager who has run global stock funds at Trimark Financial Corp., Mackenzie Financial Corp. and also Invesco Trimark Ltd.

Among U.S. shares, Mr. Kanko bought defence contractor Northrop Grumman Corp. a year and a half ago after its stock got punished by investors' concerns about U.S. military budget cuts. While he didn't foresee the financial crisis in 2008, Mr. Kanko stepped up to the plate to do some bargain hunting during the global market meltdown.

"We were finding all sorts of ideas that we thought were better than the ones we owned so there was quite a bit of turnover," he said. "We thought the stock prices were pretty compelling if you could look out 10 years."

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PROFILE / JULIETTE JOHN

Fund manager Juliette John is bracing for the Canadian stock market to lose wind from its sails this year as interest rates edge upward. A single-digit return is likely in the cards in 2011 after double-figure returns over the last two calendar years, said Ms. John, who's with Calgary-based Bissett Investment Management Inc. "It's likely that we don't have the same extent of capital-market gains this year because interest rates are likely to move a little bit higher."

The manager runs the $394-million Bissett Canadian Dividend Fund, which has won a Lipper Award in the Canadian dividend and income category for three-year performance to Oct. 31, 2010. Over that time, it posted an annualized return of 2 per cent compared with a 1.6-per-cent loss for the S&P/TSX Total Return Index.

Because the fund's investment strategy focuses on analyzing the individual stocks of growing companies, it does not have a lot of resemblance to the S&P/TSX Composite Index, she said. "It keeps us away from the more cyclical sectors."

Ms. John joined Bissett 17 years ago after earning a commerce degree at the University of Calgary. She started as an equity trader before becoming an analyst, then a portfolio manager at Bissett, a subsidiary of Toronto based Franklin Templeton Investments Corp. Ms. John co-managed the fund at inception in 2003, when it was 60 per cent invested in income trusts. She became lead manager in mid-2008 when the focus changed to Canadian dividend-paying stocks.

The fund is now awash in consumer discretionary names, such as Reitmans and Groupe Aeroplan, relative to the index. These companies have delivered solid dividends, have potential for growth and can help diversify the portfolio, she said.

"If we are able to find securities outside of the really traditional areas like pipelines, utilities and banks, then we are to some extent able to limit the negative reaction to an upward move in interest rates."

© 2007 The Globe and Mail. All rights reserved.

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