Chief Investment Strategist and Portfolio Manager
Equity markets have been under severe pressure over the past several months. How are you positioning the mutual funds you manage in the current environment?
On an on-going basis, we review our long-term strategy to ensure the funds are appropriately positioned. Over the past few months, global economic growth and equity market conditions have changed dramatically. Financial de-leveraging, paralysis in the credit markets, and fragile consumer confidence have combined to negatively impact both current and prospective global economic growth rates. Although we expect the concerted global stimulus package to eventually work its way into the real economy, it will take time. The economic and market reality has led us to change our long-term strategy by increasing sector diversification and capitalizing on selective opportunities in the US market. Despite the repositioning, we have not strayed from our growth discipline. The current market is simply providing us with growth opportunities in a different group of areas than what was previously available.
Is the bull market in commodities over?
I continue to believe in the long-term growth potential for commodities, particularly energy, and view the correction in commodity prices as merely a cyclical correction within the longer term secular growth story. The global economic slowdown is putting pressure on commodity prices, and although growth has moderated in the emerging markets it is still expected to be robust for a long period of time into the future. What is being forgotten in the current market environment is that long-term demand expectations for commodities remain healthy. Countries like India and China have to make huge capital investments in infrastructure, and growth in the emerging middle class will continue to impact demand. At the same time, supply constraints may become even more acute as uncertainty and lack of confidence in credit and equity markets have sidelined expansion projects. Recent research reports from the oil sector suggest that the combination of underinvestment on the supply side and long-term growth expectations on the demand side will necessitate massive supply side investments. For the long-term supply and demand relationship in the oil sector to remain in equilibrium, the supply side will have to make annual investments of hundreds of billions of dollars each year over the next 20 years. New investment is even more critical in light of the high annual decline rate of existing oil fields.
What changes have you made to the sector allocations and when did you begin to make the changes?
In this environment, with so much uncertainty, we felt it was prudent to incorporate a more balanced approach to sector exposure. We started to gradually make these changes three months ago and continue to make adjustments.
The portfolios you manage have been underweight financials for the past five years, why increase exposure now?
Since 2003, the most attractive growth stocks have resided in a fairly narrow set of sectors - energy, materials, industrials, and agriculture. Changing market conditions have allowed us to enter the financials sector, in the US and Canada, as a way to position the funds for above average future growth. We have outperformed over the long term by making early calls on growth sectors, and we feel the financial crisis in the US has provided an opportunity for the surviving companies. Although financials may not appear to be a growth sector at present, we believe the transformation of the global financial industry and continued consolidation will leave a handful of well-capitalized companies with the ability to increase market share and grow earnings.
The portfolios’ equity allocations are much more in-line with the S&P/TSX Composite Index now than they have been historically. Would you say that the portfolios resemble the index?
The portfolio decisions we make are independent of the index allocations. I do not look to the index for guidance and that should be very evident by our 40% exposure to foreign markets.
How is the foreign content allocated?
The foreign content is primarily in the US with exposure to financials, consumer staples, agriculture, and oil services companies.
Over the past several weeks, the Canadian dollar has depreciated significantly versus the US dollar. How has this impacted the portfolios’ US holdings?
The fall in the Canadian dollar has enhanced the return of our US positions. However, given the large move in the currency, we have now hedged half of the US dollar exposure.
You have increased exposure in consumer staples, are you looking at other defensive sectors such as utilities?
With valuations as low as they are across the market, we are looking for growth opportunities wherever they are available. With that in mind, we remain disciplined growth investors and will not buy stocks simply because they are cheap on a historical basis. The stocks we have bought in consumer staples have exceptional growth potential even within a slower growth economic environment. We have also found some strong US health care companies and increased exposure there as well.
Have you changed the asset allocation of Dynamic Power Balanced Fund?
For most of the past 12 months, the Fund had a higher allocation to fixed-income securities than equities. We have gradually moved to a more balanced allocation between the two asset classes. Given the dramatic market correction, we believe equity investments provide better long-term return potential than fixed-income securities and we will be making measured shifts to overweight the equity position.
Fund flows across the mutual fund industry have declined. Are the mutual funds you manage experiencing high redemptions?
We have had some redemptions in October, but overall we continue to receive positive flows. It is gratifying to see that investors have conviction in our ability to recover and I appreciate all the support.
Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any funds managed by Goodman & Company, Investment Counsel Ltd. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.
