A Market That Even a Skeptic Can Like

01/04/2012 11:07 am EST


Rob Carrick

Columnist, The Globe and Mail

Vito Maida, one of Canada's most picky money managers, has been on a buying spree in the US market, writes Rob Carrick, reporter and columnist for The Globe and Mail.

One of Canada's pickiest and most careful money managers has been on a buying spree lately.

Early in July, Vito Maida had the maximum 25% cash he's permitted to hold in running the Horizons North American Value ETF (Toronto: HAV). Today, while many individual investors are paralyzed with indecision about where to put their money, he's fully invested.

"I would say that this is the first time in a long time that we've been able to construct a portfolio of high-quality companies at very attractive valuations," Maida said. Translation for non-hardcore investors: There are some good companies available right now at attractively low prices.

But what about the downside, cautious investors will say. Few money managers are more mindful of the risk in the stock market than Maida, who runs money through a firm called Patient Capital Management Inc. "That's the basis of our investment philosophy," he said. "We always look at how much we can lose before anything else."

Nervous investors, give some thought to Maida's market view as we head into a new year. In the portfolio he runs for clients of Patient Capital clients, Maida has made 7.7% a year since he began on March 31, 2000, compared with 4.1% for the S&P/TSX composite and a loss of 3.5% for the S&P 500 in Canadian dollars (those are before-fee returns).

The composite index has done better than Maida in seven of the past 11 years, sometimes dramatically better. And yet, his long-term results are higher, because he has consistently avoided the kind of stock market crashes that have fractured investor confidence.

Maida is an investment industry veteran who has worked for the Trimark family of mutual funds as well as Hamblin Watsa Investment Counsel and the Ontario Municipal Employees Retirement System (OMERS). He's a value investor, which means he looks for companies that are trading below their true value.

Bargains are so few in the Canadian market right now that he has all of one TSX-listed stock in the Horizons North American Value ETF. It's Encana (ECA), the natural gas giant that went into late 2011 with a year-to-date loss of about one-third.

The rest of the portfolio is in US stocks, because even after a year in which the Dow and S&P 500 both outperformed the Canadian market, that's where the bargains are. (Note: The Horizons North American Value ETF is one of only a small group of exchange traded funds that uses a stock-picking manager rather than a passive index-tracking approach.)

Maida uses the financial-services sector as an example of how there are better bargains south of the border. "In Canada, because banks have done well and have ridden out the financial crisis extremely well, the valuations have held up...relative to the US financials," Maida said.

Technology is another sector where he has done a lot of buying. The largest position in the Horizons North American Value ETF is Cisco (CSCO) and Intel Corp. (INTC) and Linear Technology (LLTC) are also in the top ten.

Cisco hit $82 back in early 2000, and had an astronomically high price-to-earnings ratio of around 100. "Our average cost is in the teens, and the valuation we purchased it at was under ten times earnings," Maida said.

Cisco shares were down about 10% for the year through late December, which represents just the kind of results investors dread after the stock market ups and downs of the past year. You're supposed to buy low, but what if the stock market takes what you've just bought even lower?

Maida doesn't much care what happens in the short term after he buys a stock such as Cisco. "Our approach is that we're buying these things over a three- to five-year timeframe, and over that timeframe is where we look at the potential for loss," he said. "Anything that happens in between is market volatility, and that's irrelevant to us."

There may be decent bargains in the US market right now, but Canadian investors have good reason to be cautious about buying American after a decade in which US equity mutual funds lost an average 2.1% annually. That dismal record is partly a result of the effects of a rising Canadian dollar (it reduces the value of US-dollar assets) and partly because of the fact that the US market was just plain struggling.

Today, looking at the broad US and Canadian markets, Maida doesn't see either as a massive bargain. But in terms of offering select opportunities to buy low-priced stocks, he likes the US option. "At this point, the US market offers the potential for better returns long term than the Canadian market does."

He holds that view even after a year in which the Canadian stock market got a lot cheaper overall, as a result of slowing global demand for the resource products that drive about half our market. Economic forecasts call for more of the same in 2012, which suggests commodity stocks may at some point hit bargain territory.

But they're not there yet, in Maida's eyes. "It's getting to the point where the valuations are leading us to start getting prepared in case they do reach our prices. They're not close, but they're not outrageously high."

Curious how a safety-conscious value investor such as Maida approaches resource stocks? By focusing on low-cost producers with strong balance sheets and substantial operating assets (no speculative exploration companies).

The start of a new year and the close proximity of registered retirement savings plan season means a lot of people will be thinking hard about their investment approach. They'll be stuck between two unappealing realities—an outlook for stocks that's as uncertain as ever, and dismal returns of 1% to 2% on safe investments, such as bonds, term deposits and high interest savings accounts.

Meanwhile, one of Canada's most picky and careful money managers has been on a buying spree in the US market. If you're of a mind to increase your exposure to stocks in 2012, you now have an idea of where to start looking.

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