Manager: James Dutkiewicz, Sentry Investments
Fund: Sentry Tactical Bond Fund
Description: Go-anywhere yield-seeking fund able to hedge currency risk
AUM: 5-million
Performance: 1-year: 9.4% (as of March 28, 2013)
MER: 2.11%

Despite some brief periods of relief from the risk-on, risk-off trade that has dominated markets since the Lehman Brothers collapse in September 2008, James Dutkiewicz is confident the investing environment remains intact.

“Until the economies and markets are operating without extraordinary assistance from both governments and central banks, we do not know what the final outcome of the financial crisis will be,” the portfolio manager at Sentry Investments said.

Dutkiewicz, the firm’s head of fixed income and portfolio manager of the Sentry Tactical Bond Fund, stressed the importance of staying both nimble and humble given the significant amount of policy uncertainty and risk.

In general, he anticipates that below-trend growth – assisted by enormous efforts by central banks and governments – is the most likely outcome for the next 12 to 18 months.

After recent “hiccups” such as the Cyprus crisis, U.S. sequestration and the plunge in gold prices, Dutkiewicz sees a huge sense of complacency emerging.

“Given the past four-and-a-half years, I see no reason why we won’t get another growth scare or spike in risk aversion in the next few months,” he said. “Then, all of a sudden, fiscal issues become a much more difficult mountain to climb.”

As a result, the manager is looking to take profits when risk aversion is low and prices are high, and buy those bonds back again when they are re-priced as sentiment weakens.

“Until a more self-sustaining growth pattern emerges, there will be only a modest upward bias to yields,” Dutkiewicz said.

“While I think we’re now at the low end of where yields can sustain themselves, I also don’t think we’re going to be at 3 or 4% for 10-year government bonds in in the next 12 months.”

BUY

Denbury Resources Inc. (4.625%, matures July 15, 2023)

The position: Bought at issue, recently added

Why do you like it? Denbury uses carbon-dioxide injection to extend the life of oil reservoirs, mostly in the Gulf of Mexico and the Colorado area. Dutkiewicz took advantage of the sell-off in oil to buys these bonds a couple of dollars below par.

“The company has relatively low risk since it has no exploration costs, and it’s in a growth phase so debt levels are rising,” he said. “They also own a lot of carbon dioxide, an important ingredient that is in relatively short supply.”

Biggest risk: Weaker commodity prices.

Sea Trucks Group Ltd. (9%, matures March 26, 2018)

The position: Converted holding in previous bond

Why do you like it? This Netherlands-based private company provides drilling services to the energy sector, with a focus on West Africa. Dutkiewicz acquired these bonds when the company paid US3 for par value of a previous issue to get investors to convert.

“The company is exposed to political risk in Nigeria, but we have good collateral protection because the company owns its vessels, is building more and they have a long lifetime,” he said. “The covenant package is very good, so we feel comfortable that we could ride out a dip in oil prices or an increased in geopolitical risk.”

Biggest risks: Political instability; weaker commodity prices.

Banco Santander S.A. (4.625%, matures March 21, 2016)

The position: Purchased in fall of 2012

Why do you like it? Dutkiewicz added this Spanish bank as it and other European banks raised billions of dollars at the senior level to take out lower-rated and higher-coupon debt. Santander’s senior paper was as good or better quality that Spain’s sovereign bonds, he adds.

“It’s exposed to the abysmal Spanish economy, but they also have a number of valuable Latin American franchises and in the U.K,” the manager said. “When I ventured into peripheral Europe, I wanted to go to one of the best banks and I was only comfortable at the senior level due to unknown policy risk.”

Biggest risk: If Santander needs capital from its wholly-owned subsidiaries, there is a limit to how much it could extract.

SELL

Peripheral Europe

The position: Recently reduced exposure

Why don’t you like it? Dutkiewicz was adamant that peripheral Europe was a buy this time last year. For example, he owned Irish sovereign bonds and subordinated debt from UBS, but that has all been sold as the risks are no longer worth the potential reward.

“Ultimately, I’m a believer that the euro hangs together, but you want to own it when it’s for sale and cheap.”

Potential positive: The ECB continues to get private pools of capital to pour money into the periphery.

Financial Post | Business » Buy & Sell

Manager: Lieh Wang, Empire Life
Fund: Empire Dividend Growth Fund
Description: Focused on long-term growth, investing in undervalued equities that pay a dividend or are expected to
AUM: -billion (assets in mandate)
Performance: 1-year: 7.25%; 3-year: 5.22% (as of April 30, 2013)
MER: 2.66%

Like many investors these days, Lieh Wang sees better prospects in the U.S. equity market than in Canada, but the Empire Life portfolio manager has still been a buyer of both Manulife Financial Corp. and Sun Life Financial Inc.

“Since the financial crisis, the easy trade has been to overweight Canadian banks and sell or underweight life insurance exposure,” he said. “But that all began to change last year because we’re kind of past the point where lifecos will surprise investors with write-offs and greater-than-expected sensitivity to interest rates and capital markets. And they’re still cheap stocks.”

Both Canadian lifecos are overweight positions in the Empire Dividend Growth Fund, but he generally sees better value in the U.S., particularly when it comes to stable, high-quality dividend payers. He attributes this to both the smaller Canadian market and its high concentration in resources.

Wang has even been reducing his exposure to Canadian banks, but it’s more of a relative valuation call than any concerns about the housing market and domestic economy.

“These are solid franchises that continue to show good results from all segments, so you will continue to get the share buybacks and dividend increases,” he said. “But when you compare valuations to U.S. and global banking peers, it’s hard to make a strong case for Canadian banks at this point.”

Wang expects the money that has gone to Canadian banks as a “place to hide” will start looking for better return potential elsewhere.

This shift is partly responsible for the fund’s 30% exposure to foreign names – primarily U.S. names – up from about 5% 18 months ago.

“Payout ratios in the U.S. are very low compared to history and companies have a lot of cash on their balance sheets,” Wang said. “That increases the probability of higher dividends, or, at the very least, share buybacks.”

BUY

Microsoft Corp. (MSFT/NASDAQ)

The position: Recent addition

Why do you like it? Wang thinks old technology names like Microsoft are coming back in vogue. He also expects it will continue to generate strong free cash flow since 70% of revenues and 90% of profits are coming from the enterprise side.
“I really think this company is misunderstood because a lot of people focus on the consumer side – Windows smartphones, the Bing search engine, tablets and Xbox,” he said.

“But this is really a powerhouse enterprise software company, whose products are not going to be displaced anytime soon.”

Biggest risk: PC segment slowdown accelerates.

Metlife Inc. (MET/NYSE)

The position: Added late in 2012

Why do you like it? Wang expects Metlife to benefit from some of the same themes as Canadian lifecos, but noted it trades at a cheaper valuation.

“It has a strong U.S. franchise and a growing foreign business, especially in Asia, where most lifecos are looking to for growth,” he said.

Metlife recently raised its dividend by 49%, and Wang expects share buybacks to resume next year.

“The management team is very focused on reducing its earnings sensitivity to capital markets, in favour of more stable underwriting businesses,” he said.

Biggest risk: Interest rates remain low.

Quebecor Inc. (QBR.B/TSX)

The position: Added early in 2013

Why do you like it? Quebecor has lagged the popular Canadian telecom sector because of its low dividend yield, currently around 0.4%. But Wang notes the company’s wireless buildout is complete so capex should decrease and he anticipates the Caisse de dépôt et placement du Québec will eventually sell its 25% position in Quebecor Media, which should act as a catalyst for a higher dividend.

“It’s been easy to overlook this stock because of the high yields and dividend growth of Telus, BCE and Rogers, but if there is a stock I would hold from now to 2015 and not worry, Quebecor would be it,” Wang said.

Biggest risks: Competition with BCE in Quebec; a major acquisition.

SELL

Canadian National Railway Co. (CNR/TSX)

The position: Recently sold

Why don’t you like it? Wang has owned CN Rail since its IPO in 1995 and has nothing against the company, but the stock’s valuation is at the upper end of its historical range.

“The only time this stock has been more expensive was back in 2004, when CN and Burlington Northern proposed to merge,” Wang said, adding he would buy the stock back when it’s cheaper.

Potential positive: Better-than-expected economic growth.

Financial Post | Business » Buy & Sell