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Inside the Market This award-winning fund manager says it’s time to overweight Canada and load up on dividend stocks

Portfolio manager Michael Simpson from Sentry Investment is a respected fund manager on Bay Street – a seven-time winner of Brendan Wood International’s Canadian TopGun Investment Minds Award and recipient of the Thomson Reuters Lipper Fund Award for Excellence in Fund Management. As the lead portfolio manager of numerous North American mandates, he oversees mutual funds, including the Sentry Conservative Monthly Income Fund and the Sentry Canadian Income Fund.

This year, Mr. Simpson is putting his expertise to work for a children’s charity through his participation in the 2018 Holland Bloorview investor challenge. Supporters can make a donation to the Holland Bloorview Kids Rehabilitation Hospital Foundation and designate their donation to the fund being managed by one of three portfolio managers participating in this year’s investment challenge: Mr. Simpson of Sentry; Alfred Lam, chief investment officer of CI Multi-Asset Management; and Som Seif, president and chief executive officer of Purpose Investments Inc.

We asked Mr. Simpson for his perspectives on the markets and what buying opportunities he believes are being created during this market turbulence.

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What is driving the market volatility and do you anticipate it will continue?

I think there are three things, the cadence of interest-rate increases from the U.S., and to a lesser extent, Canada. Canada is really tied to the U.S. even though we have quite different markets. Earlier in the year, the U.S. 10-year Treasury yield rose to about 3.25 per cent. It’s the fear of rising rates. Second is the fear that we have seen peak profits or the U.S. economy is slowing. The third big issue is perhaps China is slowing. Those are some of the issues that the market is digesting as well as a higher U.S. dollar, a factor that could be impacting global growth.

We had a period for about two or three years when the VIX [Cboe Volatility Index] averaged between 10 and 12. If you look at a longer term chart of the VIX, the average is around 17 or 18 so I think the volatility will continue but I think that is the norm in the markets so I am not fussed by the volatility.

Are we close to a bottom in the markets or is there further downside risk?

I think the market is oversold. If you look at the TSX, there are technical factors such as the RSI, which stands for the relative strength index, which shows that the market is oversold. Another measure is the MACD, the moving average convergence divergence line, also shows that we are oversold.

In terms of sentiment, I think it’s overdone. I think once we get through October and people realize that [corporate] earnings in Canada are still decent, the market could be up 3.5 per cent [from 14,972 at the time of the interview].

It’s important for investors not to be mesmerized by the headlines. Stay focused, stay invested and don’t panic when there is irrational selling. I think it’s important that investors stay invested in companies that pay and grow their dividends.

Does your positive outlook extend into 2019?

I think it might be a tougher year because we are going to find out what the cadence is for rate increases from the Bank of Canada but you still might have a positive year in Canada with the TSX Index reporting a return of 6 to 7 per cent.

What stocks are attractive to you?

We screen for companies looking for good valuations and balance sheets. We try to find companies that are growing. We look for stability of the cash flow, the ability to pay a dividend and the ability to withstand shocks (i.e., anything that can derail a company such as higher commodity costs, higher wages or increased competition). Examples include Canadian Pacific Railway Ltd., Alimentation Couche-Tard Inc., Bank of Nova Scotia and Royal Bank of Canada.

Canadian companies such as CP Rail and Couche-Tard can take advantage of a stronger U.S. economy because they have operations on both sides of the border. CP Rail is extremely well-run. We went to their investor day and they see good things from their clients. Couche-Tard has operations in Canada, the U.S., and also Europe.

Turning to financials, Bank of Nova Scotia is a stock that has been beaten up. It’s a high quality company that trades at a reasonable price-to-earnings multiple and has a reasonable [return on equity]. It has lagged the group because the bank has made some large acquisitions. I also like Royal Bank for the U.S. exposure.

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In the U.S., once CVS Health Corp. completes its merger with Aetna Inc., the combined company will have greater revenues and earnings, and have a more dominant position in the U.S. health care system.

Are there certain sectors that you have positive outlooks for?

In Canada, we like some of the energy infrastructure names such as Keyera Corp., Pembina Pipeline Corp. and also Enbridge Inc. They all have the ability to raise their dividends. I expect the railways to show very good revenue and earnings growth.

In the U.S., we like some of the larger beaten-up technology plays and some health care names as well.

You manage North American mandates, investing in both the Canadian and U.S. markets. Do you favour Canadian or U.S. equity markets?

The valuation of the TSX Index is compelling when you compare it with other stock markets, especially American markets.

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I would overweight Canada [with a portfolio allocation] such as 80 per cent Canada, 20 per cent U.S.

With the Bank of Canada raising interest rates, how will interest-sensitive sectors perform?

The market looks forward and rates have already been going up. There is still a decent spread between the yields of the telcos and utilities compared with the Government of Canada 10-year bond. What investors won’t get from a bond are dividend increases, and good dividend companies – whether it’s Fortis Inc., BCE Inc., or Telus Corp. – will continue to raise dividends every year.

We actually favour defensives – some of the utilities, telcos and real estate investment trusts – because we don’t think there will be many future rate increases by the Bank of Canada – you may see two more.

Do you hold a lot of cash in your portfolios allowing you to take advantage of market weakness?

We have been reducing our cash – which is now about 4 per cent of our holdings – and on down days we have been adding to our positions.

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This interview has been edited and condensed. A fuller version can be found at

Jennifer Dowty is an investment reporter and equities analyst with The Globe and Mail.

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