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Bye-bye BCE, bonjour Quebecor: UBS shuffles model portfolio

Quebecor Inc. president and CEO Pierre Karl Peladeau


UBS Securities has tweaked its model portfolio, the basket of stock selections the firm deems most likely to succeed.

If investing were a game of poker, one of its changes would be a noteworthy discard – throwing out telecom and media giant BCE Inc. for its more diminutive regional rival, Quebecor Inc.

George Vasic, the UBS strategist who designs the portfolio, says there is nothing wrong with BCE and it remains rated as a "buy." It's just that the firm's analyst on the telecom sector, Phil Huang, recently made Quebecor his top pick, arguing that the company is undervalued and has more than twice the upside potential in the capital gains department as BCE.

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Given the UBS portfolio's track record, investors should pay attention to changes in its lineup. Since inception in September, 2004, the dozen stocks in its portfolio have done far better than the S&P/TSX 60, returning a cumulative 78 per cent, versus 45 per cent for the index.

The portfolio only tracks capital gains or losses, and doesn't account for transaction costs, so the actual return for investors would be slightly less. Dividends aren't included either, but that's probably a wash considering its selections are taken from the TSX 60, an index of blue chips that typically have decent payouts.

Other changes don't seem as risqué as culling BCE. UBS is ditching the perennial dog Manulife Financial Corp. and replacing it with Toronto-Dominion Bank. Also on the way out is Nexen Inc., subject of a controversial takeout bid by China's CNOOC Ltd. It will be replaced by oil sands behemoth Suncor Energy Inc., considered a top pick.

The UBS portfolio holds equal amounts of each of its 12 picks and periodically tweaks its roster. Rounding out the rest of the selections are Bank of Nova Scotia, Magna International Inc. and MEG Energy Corp., all deemed "key calls," or highest conviction ideas by analysts in their sectors, along with Onex Corp., Potash Corp. of Saskatchewan Inc., Royal Bank of Canada, and Thomson Reuters Corp., all rated "buys."

First Quantum Minerals Ltd. is in the portfolio, even though the miner is rated "neutral," to balance out the materials sector, where UBS doesn't have any "buy" rated companies. One name isn't public because it's on the bank's roster of restricted securities on which it is no longer able to comment publicly.

"It's a focused list of what we think are our best top-down and bottom-up thoughts," Mr. Vasic says.

One of those top-down ideas is to underweight the energy sector in the portfolio, compared with the TSX 60.

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However, Mr. Vasic says Suncor will have a disproportionate rally, offsetting some of the sector's underweighting, if oil prices rise, as the firm is projecting.

Mr. Vasic attributes part of the portfolio's outperformance to the discipline imposed by having to choose companies that will be removed when new selections are added. It means that new picks have to have more going for them than those being culled.

Mr. Vasic is optimistic about the Canadian market over all. He says the TSX will hit 14,000 within the next 12 months, compared with its recent level at around 12,000, as companies grow their earnings and investors bid up the prices of stocks.

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