Montrusco’s Chiadmi Top in Canadian Stocks With Valeant
Ismael Chiadmi is the top fund manager in Canada’s lagging equity market this year by picking stocks such as Valeant Pharmaceuticals International Inc. (VRX) that have rallied and are likely to entice other investors.
Chiadmi, manager at Montrusco Bolton Investments Inc., has returned 12 percent including dividends for the Quantitative Canadian Equity Fund (MONTBQCE) this year using a price momentum strategy. That puts him first among a group of 14 Canadian funds with at least 90 percent of holdings in Canada and assets of C$100 million ($96 million) or more, data compiled by Bloomberg show.
Chiadmi has quadrupled the 3.1 percent total return of the benchmark Standard & Poor’s/TSX Composite Index (SPTSX), highlighting how the right strategy can succeed even in underperforming markets. The S&P/TSX is the worst-performing among Group of Seven countries this year amid bear markets in commodities from copper to silver.
“It’s based on investor behavior,” said Chiadmi, 55, who has managed the fund for Montrusco Bolton since 2006. ’’People tend to keep buying stocks that were bought during a certain period. If a stock rallies they will keep buying it, which is what my strategy is capturing.’’
The fund, created in 1996, holds about C$150 million ($143 million) in assets including Canadian Pacific Railway Ltd. (CP) and Methanex Corp. It has beaten 84 percent of peers over the last year and 86 percent of comparable funds in the past three years, according to data compiled by Bloomberg. Montrusco Bolton, based in Montreal, manages about C$5.6 billion ($5.4 billion).
The Quantitative Canadian Equity Fund invests in 10 of the 100 largest stocks in the benchmark S&P/TSX, using a model based on momentum, which measures acceleration in trading price or volume of a stock. The more investors drive a stock price higher or lower, the greater the momentum, creating a snowball effect that can be used to pick stocks.
“It’s a relatively simple, straightforward strategy that works,” Chiadmi said by phone Aug. 19. “If the weakness in the market is in slow trading, then the strategy will adapt and become more diversified.”
Keith Richards, a fund manager with ValueTrend Wealth Management in Barrie, Ontario, said the price momentum approach is “technical analysis 101” and works well in a volatile, choppy market such as Canada’s. His firm manages about C$110 million ($105 million).
“It’s a great strategy,” Richards said by phone yesterday. “It’s like when you’re on the on ramp of a highway, you’re going at 60 kilometers an hour and everybody else is going at 120. What he’s trying to do is catch the car that’s accelerating to 120.”
Chiadmi came to Canada in 1980 from Morocco and studied econometrics, which uses mathematics to analyze economic data, at Sherbrooke University in Quebec. His schooling coincided with the rise of personal computers, which revolutionized the potential for data analysis in the industry, he said.
“I was very interested in quantitative methods, using computers to analyze that data,” he said.
Chiadmi said the fund’s strategy is based on research originated by Narasimhan Jegadeesh, finance chair at Emory University’s Goizueta Business School in Atlanta, and Sheridan Titman, a professor at the University of Texas at Austin. Chiadmi’s model adjusts the time frame of the analysis and the frequency of the price changes.
The fund is rebalanced once a quarter, with a turnover rate of about 35 percent of companies each year. All 10 stocks are equal-weighted at 9.5 percent at the beginning of the quarter. The remainder is held in an S&P/TSX 60 (SPTSX60) Index exchange-traded fund instead of cash to minimize the effects of index movements. The fund charges a performance of 20 percent of any cumulative return above the S&P/TSX. If it falls short of the index in a given month, fees are not charged until the cumulative return in subsequent months tops that of the index.
The S&P/TSX has struggled this year as commodity prices slumped. Gold has dropped 19 percent this year and copper 10 percent as economic growth in China, the world’s largest consumer of raw materials and Canada’s second-largest trading partner, slows.
China’s economy is projected by analysts to grow 7.5 percent in 2013 and 2014, the lowest annual increase since a 3.8 percent expansion in 1990, data compiled by Bloomberg show.
The fund’s top holdings include Valeant Pharmaceuticals, Canada’s largest drug maker and the best-performing stock in the S&P/TSX this year with a 76 percent gain, and Magna International Inc. (MG), which has climbed 70 percent, the fourth-best performance in the index. Valeant shares were little changed at C$104.43 at 4 p.m. in Toronto today.
Valeant, based in Laval, Quebec, has rallied following a series of acquisitions including an $8.7 billion deal for eyecare products company Bausch & Lomb Inc.
The stock has 17 buy ratings from analysts, two holds and two sells, with an average 12-month price estimate of C$117.37, implying a potential return of 12 percent from current levels.
Laurie Little, a spokeswoman with Valeant, could not be reached for comment.
Magna International, North America’s largest auto-parts maker, has posted earnings that topped analysts’ estimates for seven straight quarters, according to data compiled by Bloomberg.
“We’ve been revising our outlook for production volume in North America, and higher sales translates to higher profit,” Vince Galifi, chief financial officer of Magna, said on the phone from Aurora, Ontario, yesterday. “We’re getting credit for increasing our outlook each quarter, not only on the sales side but also the operating margin.”
Magna has raised its 2013 forecasts twice this year, in May and August. The stock rose to a record C$84.37 on Aug. 13.
Other equities in the fund include BlackBerry Ltd. (BB), which has climbed 19 percent this month after the company said it would consider joint ventures, partnerships or a sale; Canadian Pacific, up 23 percent in 2013; and Methanex, the second-best materials stock in Canada with a 52 percent gain.
In its most recent re-balancing, the fund sold its positions in Manulife Financial Corp., WestJet Airlines Ltd. and Gildan Activewear Inc., Chiadmi said. Manulife and WestJet have underperformed their respective industries since the end of the second quarter.
Another fund in Canada which also uses a momentum model is the First Asset Morningstar Canada Momentum Index ETF (WXM), which has returned 10 percent as of July 31 with a market value of about C$23 million. The ETF charges a management fee of 0.6 percent.
One of the flaws of the momentum strategy is that it can be difficult to tell if a stock is still accelerating or has already reached its peak speed, said ValueTrend’s Richards.
“If you floor your car forever the engine will blow,” Richards said. “Nothing can experience perpetual motion. The key is knowing when to get out.”
The price momentum strategy is a risky one, and should be used in combination with fundamental investing, Chiadmi said.
“It’s a high-volatility strategy,” Chiadmi said. “The advantage comes in how you mix it with your portfolio.”
One example is when the fund rebalanced in March 2009, near the start of a post-recession market rally, Chiadmi said.
As the fund had rebalanced under to much more “defensive” positions, Chiadmi watched helpless as the fund missed out on a 21 percent gain in the S&P/TSX during the quarter between March and June.
“We spent the rest of the year trying to catch up, to re-adapt to a bull market,” he said. “Because we’re re-balancing every three months, for three months we have to live with names that might not necessarily be the right ones.”
Chiadmi considers the three-month re-balancing a “trade-off” that allows for active management without trying to outsmart the market and penalize investors with transaction fees.
“There’s very nice behavior in a sideways market, it tends to be more diversified,” he said.
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