Correlation Breaks for Canada Phone Stocks Rising Most Since ’99
Canadian telephone stocks are beating the Standard & Poor’s/TSX Composite Index by the most in 12 years, providing a haven for fund managers whose returns are trailing benchmark indexes by the most in a decade.
An index of companies from BCE Inc. (BCE) to Telus Corp. (T) gained 14 percent in 2011 to a 42-month high, compared with a 9.2 percent decline in the benchmark measure of Canadian equities, data compiled by Bloomberg show. Phone companies’ correlation with the Canadian index, a measure of how much assets are moving in tandem, has declined over the past four months, while the other nine groups have moved more in sync with the S&P/TSX.
Phone companies are avoiding the lockstep moves that have prevented money managers from profiting through stock selection. Fewer than 24 percent of 542 global fund categories tracked by Morningstar Inc. have topped their benchmark indexes this year, the fewest since at least 1999, as speculation about the European debt crisis outweighed company news such as earnings.
“People wake up in the morning not knowing what’s going to happen in Europe or in the U.S.,” Jason Gibbs, co-manager of the C$506 million ($496 million) Dynamic Dividend Fund, said in a telephone interview last month. With telecommunication shares, “you can own a business where you know you’re going to get paid something every month,” he said. “It’s a business where you know they’re going to be around in a year, two years, five years.”
BCE, Canada’s largest phone company, and Telus, the country’s third-biggest wireless carrier, moved in the opposite direction from the S&P/TSX each of the four weeks ending Nov. 11. The companies climbed after reporting earnings that beat average analyst estimates in a Bloomberg survey.
Out of Lockstep
The link between price moves in telecommunications stocks and the S&P/TSX has weakened in the past four months, while it has grown among the nine other industries in the index. The so- called correlation coefficient for phone companies is 0.53, compared with an average of 0.79 for the other S&P/TSX groups. In the 10 years ending in July, the average correlation for the other nine groups was lower than that 98 percent of the time, data compiled by Bloomberg show. A reading of 1 means two assets are moving in the same direction all the time.
Equity prices worldwide have been more closely tied since July than in any time since at least 1995, data compiled by Bloomberg show. None of the 10 industries (SPX) in the S&P 500 has a 60-day coefficient with the index below 0.85, according to data compiled by Bloomberg. For the MSCI World Index of shares in developed nations, the lowest value is 0.92.
‘Risk as Binary’
“It’s a world where investors see risk as binary,” said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees $350 billion. “They either see today as one to take on more risk or not depending on the news flow.”
The dividend payments of phone companies reduce their risk, Gibbs said. Telephone stock dividends averaging 4.26 percent compare with payouts of 2.76 percent for the S&P/TSX Composite. Dividends have accounted for 66 percent of the industry index’s total return over the past 10 years, compared with 43 percent for the broader gauge.
“Investors are increasingly placing more value on stocks that give you above-average dividend yields, stocks that are easy to understand and businesses that are stable and defensive,” Gibbs said.
Gibbs said he owns a greater proportion of telephone stocks than their representation in the S&P/TSX, including shares of BCE, Telus and Rogers Communications Inc. (RCI/B)
The group has fared better than others during some previous bear markets. During the 2000-2001 dot-com crash, Canadian telephone stocks dropped 29 percent, and the S&P/TSX’s predecessor, known as the TSE 300, declined 43 percent. In the 2008-2009 bear market, the industry index lost 33 percent, while the broader gauge plunged 50 percent.
Telecommunications companies have less room for growth than other industries in Canada, said Mathieu Roy, investment manager at Louisbourg Investments Inc. in Moncton, New Brunswick, which oversees about C$1.5 billion.
About 80 percent of Canadian households have Internet access and mobile phones and 89 percent have cable or satellite television, according to government agencies. Analysts forecast earnings for the industry index will increase 3.9 percent next year, compared with 14 percent (STTELS) for the S&P/TSX Composite.
Telecommunications companies’ earnings are more stable than other industries’. Annual earnings for phone companies fell no more than 11 percent between 2003 and 2010. Among the S&P/TSX industries, only consumer staples did not have a larger annual drop in profits. Neither BCE nor Telus has had a quarterly loss since 2001.
All five S&P/TSX telecommunications stocks have had positive risk-adjusted returns in both the last six months and the last three years, according to Bloomberg data. Among the other 251 companies in the S&P/TSX Composite, 16 percent have done the same. The gauge measures returns balanced against the degree of risk given a stock’s historical volatility.
“With telecom, you have a true staple,” Paul Taylor, chief investment officer at Bank of Montreal’s BMO Harris Private Banking unit, said in a telephone interview from Toronto. The unit oversees about C$14.5 billion, with a larger proportion of some portfolios invested in telephone stocks than the industry’s share of the S&P/TSX. “You may lose your job. You’re still going to need your cellphone.”
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