BMO’s Lesley Marks expects convenience-store chain Couche-Tard to be ‘an active buyer’ as other retailers are forced to divest.CHRISTINNE MUSCHI/Reuters
For three portfolio managers investing for charity, the third quarter brought big changes.
Summer began with concerns about instability in the euro zone – especially Greece. But in a recent shift, an economic slowdown in China and worries about commodity prices have moved front and centre.
Keeping track of these themes is critical as the three Canadian managers build wealth for not only investors, but also for the Change for Kids Investor Challenge. This year-long fundraiser will conclude at the end of 2015. Then, donations and profits will be sent to Toronto's Holland Bloorview Kids Rehabilitation Hospital, which is the largest facility of its kind in Canada for kids with disabilities.
The money raised will fund specialty care, education and research for children with conditions such as concussions, autism and developmental disabilities. The facility has about 580 patients in residence and 55,000 outpatients each year.
The managers participating in the charitable contest are John Wilson, chief executive officer of Sprott Asset Management; Lesley Marks, chief investment officer of fundamental Canadian equities at BMO Asset Management; and George Lewis, group head of RBC Wealth Management. They started out with a cumulative $75,000 to manage for the hospital and halfway through the challenge, they were up to $130,000. Donations of cash or securities are accepted through changeforkids.ca.
There have been plenty of ups and downs to navigate so far. In the final quarter of 2015, managers return to the same question they faced when the challenge began: What decision will the U.S. Federal Reserve make on interest rates?
This is our third quarterly checkup on the managers' strategies.
The manager: George Lewis
The fund: RBC Global Dividend Growth Fund
Third quarter and outlook:
The fund's investments in sectors that are interest-rate sensitive – such as utilities and telecom services – were the best performers of the pack, Mr. Lewis said.
"These stocks tend to be the most sensitive to a change in short-term rate expectations," he said. "The Federal Reserve was broadly expected to raise rates in September, but chose to delay what would have been the first rise in short rates since 2006, thus giving these two rate-sensitive sectors a reprieve."
As the Fed held on, the fund's biggest beneficiaries were companies such as Germany's Deutsche Telekom AG, which was a new investment during the second quarter. Shares climbed 9 per cent. U.S. utilities company NextEra Energy Inc. was up 7 per cent.
The fund has limited direct exposure to emerging markets, but Mr. Lewis said slowing growth in China led him to ratchet down exposure to the European and Japanese autos and components sector.
Alongside the Fed's decision, Mr. Lewis will be closely watching the quality of earnings growth in the coming reporting season.
The RBC Global Dividend Growth Fund is up 12.2 per cent as of the end of the quarter.
The manager: John Wilson
The fund: Sprott Enhanced Equity Class fund
Third quarter and outlook:
Throughout the challenge, Mr. Wilson has warned that volatility will continue at least as long as uncertainty persists with the Fed. But the more recent downturn in North American markets has added a layer of opportunity.
"We needed a good reset that makes things cheaper," Mr. Wilson said, adding that he's not seeing any "market killers" on the horizon.
"For a while there, people started to panic that China was going to implode … but I was at a conference recently and people selling things there were talking about 4-per-cent demand growth, so it's not that China is fantastic, but it's not horrible, either," Mr. Wilson said.
He highlighted an investment in Element Financial Corp. The company's $8.6-billion acquisition of part of General Electric Co.'s fleet-management business adds to its earning potential. "In a world that's struggling for growth, it has got really great visibility to grow earnings," Mr. Wilson said.
In the last quarter of the year, Mr. Wilson is calling for a rally. "Everyone's got a lot of angst, mostly because everyone else seems to have a lot of angst. I don't think in the end there will be a real reason to go a lot lower here."
The fund's year-to-date returns were 4.6 per cent, as of Sept. 30.
The manager: Lesley Marks
The fund: BMO Asset Allocation Fund
Third quarter and outlook:
The one thing that was really worrying Ms. Marks at the end of the second quarter was the Chinese stock market, and that concern proved to be well founded.
"That wound up really taking the headlines away from Greece," Ms. Marks said. "Markets can go up and be in that steep increase or longer than you think they can – to be honest, I don't think any of us ever know when it's going to stop or what the catalyst will be."
Ms. Marks was concerned about what impact the turn in China could have on Canada, where 70 per cent of the fund's equity and fixed-income assets are based, particularly in the energy and materials sectors. The BMO fund is now underweight in these groups.
The fund has been looking for Canadian investments that could benefit from some of the global trends, such as convenience-store giant Alimentation Couche-Tard Inc. "With the weak oil price, many of the integrated companies that own retail locations are forced to divest, and Couche-Tard will be an active buyer."
Ms. Marks is also looking forward to a better final quarter of the year. "I think, fundamentally, the Canadian earnings growth picture is still strong and that the stocks are overly discounting a negative outlook for 2016 right now," she said.
The fund is up 1.82 per cent in the first three quarters.
Top fives
Sprott Enhanced Equity Class fund
Top five holdings as of Sept. 30:
- Government of Canada, 1%, Nov. 1, 2015
- Element Financial Corp.
- IntercontinentalExchange Inc.
- UnitedHealth Group Inc.
- CVS Health Corp.
BMO Asset Allocation fund
Top five stock holdings as of Sept. 30:
- Toronto-Dominion Bank
- Canadian National Railway Co.
- Bank of Nova Scotia
- Intact Financial Corp.
- Manulife Financial Corp.
RBC Global Dividend Growth Fund
Top five holdings as of Aug. 31:
- Legal & General Group PLC
- Blackstone Group LP
- UnitedHealth Group Inc.
- Union Pacific Corp.
- CVS Health Corp.