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Martin Hubbes, chief investment officer of AGF Funds, took your questions

Martin Hubbes, chief investment officer, AGF Funds

September was supposed to be a brutal month for the stock market, and many investors chose to stay on the sidelines and wait it out. Well, here we are past the halfway mark of the month, and equities are still rising. Is this the right time to get in the market -- or could it be time to jump out? What should you be looking for?

1 . Do you think this is a bear market rally?

2. AGF manager Christine Hughes who runs a Canadian balanced fund, has been cautious on the market in recent years. She suggested in a interview earlier this year that there could be a very steep market collapse - maybe in 2010 - that could present a buying opportunity of a lifetime. What do you think?

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Martin Hubbes: Thank you, Shirley, for your questions.

1. We do believe that over the next few years, economic growth will be challenged due to the deleveraging going on in the market economy. This, in turn, may very well translate into more muted returns for the equity markets. It also implies more volaility for the equity markets. Whether it is a bear market rally or not, history will tell us. At AGF, we continue to focus on the long term opportunities in all asset classes, regardless of where we are in the cycle. Given a muted economic environment, companies able to generate growth will garner a premium. We continue to seek out those companies, rather than make a call on the market.

2. Certainly if there is a steep market collapse, I would agree. We have to remember that there are always opportunities for investors. As I mentioned earlier, I would not disagree with Christine that markets continue to be challenging. However, timing them is a diffiicult thing. Therefore, my best advice is to focus on sound investments. Try to be as diversified across asset classes as possible, as well as geographies. This is the best way to deal with the continuing volatility and uncertainty. There is nothing wrong with a bit of caution in these markets. However, caution, should not be interpreted as holding excessive amounts of cash and not participating in other opportunities.

Thomas Lewis writes: From what we read the economy has started to rebound, albeit at a slower pace than originally anticipated. However, the market indices suggest that valuations have got ahead of the limited recovery. Is this a time to wait for a correction? If not, what sectors are particularly attractive in the early stages of the economic recovery?

Martin Hubbes: Thank you, Thomas. We are seeing a rebound in the markets due in large part due to the fact that we have staved off the imminent collapse of the financial system. As you noted, the pace of the recovery is still unclear and thus causes a challenge for investors.

Waiting for a correction is not what I would advise. Currently, people have focused on the more speculative side of the market and that is creating opportunities in more sustainable businesses.

I believe there are still opportunities in technology stocks, energy, as well as consumer oriented stocks. The key is not to overpay for expected future growth. For example, names that our fund hold include Cisco Systems, Research in Motion , Suncor, Encana, Metro and CVS Pharmacies. We think all these companies will yield long term returns and shouldn't be hurt too much if we get a correction.

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M.B. Brill writes: Hi, I am about to completely overhaul my portfolio. I would like to invest solely in index etfs. I am in my mid 30's and have a high tolerance for risk. Could you please suggest the best asset allocation both by region and sector and give examples of index etfs with relatively low management fees which might fit within the parameters of your plan?

Martin Hubbes: If you are completely overhauling your portfolio, the first thing I would recommend is that you consult with a financial advisor you trust. The first thing you need to do is to identify your long term goals to properly align them with your portfolio. I may not be the best source of information about ETFs as I am a firm believer in active management. The risk for index investors is that we find ourselves in a choppy sideways market over the next few years as the world reduces its financial leverage. Under those circumstances, index investing may not be effective.

In terms of asset allocation, it will be dictated by your financial needs. However, given that you are in your 30s you should be able to take on a little more risk. Currrently, AGF's global managers favour European and emerging equity markets over the U.S. while our bond managers favour shorter duration bonds.

Billy Chan writes from B.C.: Hi Martin. Where do you think our loonie is heading in the near future? Say six months? Are the bank stocks good picks for mid to long term investment with the present values?

Martin Hubbes: Thank you, Billy. Currencies are sometimes the most difficult thing to predict, particularly in the short-term. As long as commodities continue to be in demand around the world, the Canadian dollar should remain relatively strong. However, I don't think you should be looking for the kind of price appreciation we've had over the last three to four years. Purchasing power parity calculations put the fair value of the Canadian dollar around 82 to 84 cents. Just like we undershot at 60 cents to the U.S. dollar, we will probably overshot to the upside for a longer period of time.

Banks do represent good long term investments because they have proven their ability to grow dividends over the long term. Within our portfolio at AGF, we continue to hold TD, RBC and Scotia Bank.

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A reader identified as BigD41 writes: Both your funds appear to be underweight materials and, based on the top holdings, seems to be geared more towards precious metals than base metals. Is it safe to assume you believe the markets and expectations of recovery have gotten ahead of themselves?

Also, do you expect the spread between natural gas and oil to continue to narrow - as it has the past week or two -- or do you think the huge inventories of natural gas will continue to be a problem?

Martin Hubbes: Thank you for your questions. Yes, I am worried that some base metal prices may have gotten ahead of themselves in the short term. Most of the demand seems to be driven by the massive stimulus programs in China. I am concerned that this does not represent long term demand and therefore may be transient. Over a three to five year period, I am still optimistic about the long term prospects for base metals.

I am surprised by the sharp narrowing of the spreads. I was expecting that to happen as the inventories declined. In the long run, spreads do need to close but I would agree with you that the inventories may present an obstacle to that happening. Ultimately the lack of drilling activity in the natural gas space will diminish supply which will close the spread.

Tony Hoare writes: I am curious whether you have any thoughts about the industry outlook for an advertising stock like Yellow Pages . I know there are a lot of negative opinions that it is a dying industry. Could you comment on both the long term prospects for the industry as well as the short term timing for the industry given where we are in the economic recovery. Thanks.

Martin Hubbes: Thank you, Tony. The future of Yellow Pages will be determined by how effectively they can move their clients to the electronic medium and what price they can charge for electronic services. It is too early to tell whether they will be successful or not. In the short term, we should see a rebound in advertising revenues as we move into a more stability economy in 2010 and 2011. At current rates, their dividends appear relatively safe.

Christian_F writes: What are your picks for the top three Canadian-focused mutual funds of all time?

Martin Hubbes: Thank you, Christian. I have to be completely biased and choose AGF Canadian Stock Fund and Canada Class, both of which I manage. There are a number of talented managers in Canada with whom I compete and have a high regard. When analyzing managers, I focus on managers who have long, uninterrupted track records.

M.B. Brill writes again: My other question is whether Mr. Hubbes is bullish on GE stock at current levels?

Martin Hubbes: Thank you for your question. I like the industrial side of the GE business. However, I still find it challenging to analyse the financial portion of GE which represents about half of the business. My preference is to concentrate on companies that offer a more pure play industrial products investments. One stock I would recommend you look at is United Technologies . It has a long history of generating dividend growth and strong ROE and it is simpler to analyse than GE.

Sonali Verma, Globe Investor: Thank you very much for all your time and expertise. We really appreciate it. And thanks to everyone who joined us today.

Martin Hubbes: Thank you so much for this opportunity to talk directly with investors.

I know it has been a challenging time for investors and the outlook remains somewhat clouded. However, I would urge everyone to stay focused on a disciplined long-term investment plan matched to long-term financial goals. This is the only way to succeed particularly in turbulent markets.

I would also urge readers to look at AGF's seasoned and award-winning team of investment managers. At AGF, we've been in the investment management business for over 50 years and are committed to excellence in money management. I am sure we have a solution that would meet your needs and encourage you to visit us at www.agf.com.

Once again, thank you so much for your interest.

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