Encounter

Financial and energy stocks are among Signature team's cyclical plays, says CIO Eric Bushell.
By Sonita Horvitch | 22/02/17

Eric Bushell, chief investment officer at Toronto-based Signature Global Asset Management, says that investors should be less defensive in their asset allocation and increase their equity exposure.

About the Author
Sonita Horvitch is a Morningstar columnist who specializes in reporting on money managers and their strategies. A veteran financial journalist, she was formerly with the National Post and its predecessor, the Financial Post. At the Post she was best known as the author of the popular Buy & Sell column, which she wrote from its inception in 1994 to December 2008. She holds a master's degree in business economics from the University of the Witwatersrand in Johannesburg, South Africa.

The global economy is in far better shape than it has been since the global financial crisis, says Bushell. "The outlook for rising global economic growth in both the developed and developing world is promising." Granted, he says, the equity market has priced in a lot of good news, "but we are anticipating an earnings growth spurt." Also, he notes, "investors remain skeptical about equities, which is positive."

Bushell and his team are responsible for managing some $53 billion at Signature, a separate portfolio-management group under CI Investments Inc.'s umbrella. The assets are in both equities and fixed income.

"Since the summer of 2016, we have positioned our portfolios for a rebound in inflation expectations and corporate earnings and for weakness in the bond market." The 35-year bull market in bonds is at an end, says Bushell.

In the balanced funds, Bushell and his team have boosted the equity component. The bond component of balanced funds and the stand-alone bond portfolios remain underweight government bonds, he says, and "emphasize corporate, high-yield and emerging-market bonds."

In the equity portfolios, the Signature team increased its weightings in select economically sensitive areas. "Industrial stocks have had a huge run and became too expensive, so we avoided them," Bushell says.

While emphasizing growth in Signature's equity portfolios, the team has continued to maintain "a healthy weight in a number of attractively valued defensive sectors, such as health care," says Bushell. "We are advocating a balanced approach between growth stocks and defensive stocks."

Tracing the turnaround in the fortunes of the global economy, Bushell says that the Brexit vote in the United Kingdom on June 23 "sowed the seeds for more robust global economic growth." Post-Brexit, British Prime Minister Theresa May unveiled her strategy of putting greater emphasis on fiscal policy and on infrastructure investment, rather than on monetary policy, Bushell says. "Her goal is to create more jobs in response to the UK's political wake-up call."

The Brexit vote also changed attitudes in the European Union, says Bushell. "The prospect of the UK leaving the Union, plus the number of 2017 elections in key member countries, prompted the Europeans "to abandon their emphasis on fiscal restraint and to call for increased fiscal spending as well."

Last July, U.S. presidential candidates Hillary Clinton and Donald Trump added weight to this emphasis in that they both identified the importance of fiscal spending during their campaigning, says Bushell. "This was pivotal, as the United States had been placing heavy reliance on monetary policy to stimulate the economy."

The result, says Bushell, is that inflation expectations troughed in the summer of 2016 and began to rise in anticipation of higher economic growth. "The election of Trump to the White House on Nov. 8 last year reinforced this upbeat trend." Trump's commitment to infrastructure spending, lower tax rates and less regulation "is seen as further impetus to the potential for synchronized profit and economic growth globally."

Trump's goal to unshackle the U.S. economy from some of the more stringent regulations introduced by his predecessor, Barack Obama, will benefit key sectors such as financial services and energy, says Bushell. "We are using financial services as one of our cyclical plays," he says. "These companies benefit from a rising interest-rate environment."

Furthermore, Bushell says the decade-long process of recapitalizing the world's banking system is drawing to a close. This will remove some of the restraint on bank-credit creation, which is good for both bank profits and for the economy, he says. "Less stringent capital requirements will also allow the banks to return more money to shareholders in the form of dividends and share buybacks."

Eric Bushell
Eric Bushell

In addition to his role in determining the overall strategy for Signature, Bushell is also lead manager of CI Signature Select Canadian (assets $2.5 billion) and CI Signature Select Canadian Corporate Class ($1.1 billion), which is the same mandate.

CI Signature Select, with some 100 holdings, had some 52% in Canadian-based companies at the end of January. "We are finding it challenging to identify new ideas in the Canadian equity market, which had such a strong performance last year," says Bushell.

For some time now, the financial-services sector has been the biggest sector weight in this portfolio.  Bank of Nova Scotia (BNS) is both the biggest financial-services holding and the largest holding in the fund. "Of the Canadian banks," says Bushell, "we have the most conviction about Scotiabank, given its commitment to cost management and to digital banking." It is also the best capitalized among its peers and the most international, he adds.

Scotiabank has a long history of operations in emerging economies, says Bushell. Of late, its franchises in Peru are gaining traction. "Latin America stands to benefit from the stabilization in commodity prices." Scotiabank's operations in Mexico have caused some concern, "but therein lies the opportunity."

South of the border, two bank stocks in the portfolio that Bushell is highlighting are  Citigroup Inc. (C) and  Wells Fargo & Co. (WFC). Citigroup has maintained its strong presence in emerging markets while other banks, notably the Europeans, have retreated, says Bushell. "This has increased its market share and its pricing power." Domestically, Citigroup has a large credit-card operation. "The U.S. consumer is reinvigorated given the strong job market and wage growth, while the Canadian consumer is tapped out."

Of Wells Fargo, Bushell notes that the earlier fake-accounts scandal has been acknowledged and addressed and is "unlikely to damage the bank's strong domestic franchise longer-term."

Turning to energy, Bushell says support for the U.S. energy sector "plays directly into Trump's economic agenda." Bushell's concern is that the revival in U.S. energy activity will negatively affect Canadian natural-gas producers, which have a higher cost structure. "U.S. natural gas could replace Canadian imports into the United States."

Bushell is more optimistic about select Canadian oil producers such as  Canadian Natural Resources Ltd. (CNQ), a major heavy-oil producer. "Its Horizon Oil Sands is a long-life project." He also likes  Encana Corp. (ECA). "The company has been transitioning itself into more of a U.S. operation." At the same time, Encana is transforming its asset base from natural gas to include more oil in its product mix. The company's investment in the Permian Basin in West Texas is a distinct plus, says Bushell. "The Permian is a most prolific oil and gas producing region in the United States."

Turning to the Canadian energy-infrastructure companies, Bushell applauds the move by  Enbridge Inc. (ENB) to acquire U.S.-based Spectra Energy Corp., which has an "extensive natural-gas pipeline system in the United States." Announced last September, this purchase "will be hugely beneficial" to Enbridge and Trump's energy-export plans make this acquisition even more compelling."

Bushell says the Signature team has sold its holding in  TransCanada Corp. (TRP). "Its prospects are closely tied to the relative competitiveness of Canadian natural-gas producers versus those in the United States."

Finally in the energy sector, Bushell reports that the team has allocated money to energy-services companies. "The stocks have had a good run, but we are sticking with them." These holdings include  Halliburton Co. (HAL),  Nabors Industries Ltd. (NBR) and  Patterson-UTI Energy Inc. (PTEN). "This recovery in the energy-services sector is, in part, being fuelled by the extensive demand from the U.S. shale producers and the technology associated with their operations."

Bank of Nova ScotiaEnbridge Inc.Encana Corp.
Feb. 20 close$81.82$54.97$16.20
52-week high/low$82.17-$51.91$59.19-$41.01$18.13-$4.14
Market cap$98.8 billion$51.6 billion$15.8 billion
Total % return 1Y*50.725.6205.41
Total % return 3Y*12.58.2-5.9
Total % return 5Y*12.110.9-1.6
*As of Feb. 20, 2017
Source: Morningstar

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