This week, I was fortunate enough to sit down with two money managers with Capital International Group. Roger Mortimer, the former manager of the AIM Canadian first Class Fund and Lars Reierson, an eight year Oil and Gas Analyst with the firm. Here are some thoughts from Mortimer and Reierson.
Canadian Banks are expensive relative to the world
When you compare Canadian Bank valuations compared to other banks around the world, Mortimer thinks that you are paying a premium for the Canadian Banks. The premium that you pay for a bank in Canada may be justified given the oligopoly environment that we are in. Others will argue that the premium is justified on the strength of the Canadian Dollar.
When you look at the Canadian dollar, there is very significant correlation between the dollar and oil prices. When oil prices rise, so does the value of the dollar. One of the key drivers of oil prices is the demand coming out of China. According to Mortimer, “Canadians need to be careful about becoming increasingly dependent on the trend line for Chinese Economic growth.”
Canada has become concentrated on three sectors.
So then what you have is three areas of the Canadian financial landscape that are very dependent on one another. In fact, one would argue that it all comes back to energy and materials – two of the hottest sectors in Canada. Throw in the banks and you have 3 sectors making up 75% of the Canadian stock market driving prices and providing the direction of the overall market. The Canadian economy is being hollowed out by a few sectors.
According to Roger Mortimer, “It appears that investors buying into Canada are chasing after pennies and nickels in an environment of higher risk and volatility.” The Canadian market is being driven by a very cyclical commodity.
Oil and Gas
If you asked Lars at the end of 2004, what would happen in the Oil and Gas sector in 2005, he would have told you that inventories would go up, demand growth would slow and prices should moderate. Everything has occurred except for price moderation.
According to Lars, “Prices could very well continue to appreciate but currently it is not based on fundamentals. This is clearly a concern and a risk for a price adjustment.” Demand shock has occurred in the past and Lars is quick to remind us again that oil and Gas is a cyclical commodity that is not immune to cyclical patterns. In his response to the questions of could it be different this time Lars suggests that the micro details are different. They are always different. But the cyclicality of oil will never change. The worst case is that price shock could be very severe given the financial leverage in the system.
A new fund to Canada
Roger and Lars are out promoting their new fund the Capital International Canada Growth and Income Fund. Roger describes this fund as a conservative Canadian Equity fund with the ability to move to cash and bonds if necessary. He considers it an equity fund because that is where the portfolio should be to earn decent returns for investors. He certainly has a tremendous track record to back up the talk.
Capital International Group is a huge organization that manages over $1.4 trillion dollars world wide. They have built this company 1 client at a time since 1934 with no advertising or marketing. As a result, one of their mandates is to ensure that investors get low management fees. Capital International Group has a culture that fosters loyalty and tenure as the average portfolio manager has 17 years of experience with the company. They all seem to strum the same tune where if investors are taken care of, then everything else falls in line.
The new fund is positioned well with the recent changes to foreign content limit. The fund is designed for Canadian investors who earn and spend money in Canadian dollars. All investment decision, whether inside Canada or outside Canada are made to reflect that this is priced and sold in Canadian dollars. That being said, it will be predominately Canadian investments but with the open mandate ability to go outside of our borders to take advantage of global opportunities.