Mawer’s Hall Tops Peers as Fed Fuels Manulife

James Hall is the top manager among mutual funds focused on Canada’s biggest companies this year as rising interest rates fuel wagers on insurers such as Manulife Financial Corp.

The Manulife Canadian Investment Class Fund, managed by Hall, has returned 21 percent this year through yesterday, the most among 13 equity funds with assets greater than C$250 million ($239 million) and 75 percent or more of their investments in Canada, according to data compiled by Bloomberg. The Standard & Poor’s/TSX Composite Index has gained 8 percent in the same period.

“This year’s been good because as interest rates have gone up, that’s helped insurance companies,” said Hall, 45, who helps manage C$16 billion as a portfolio manager at Mawer Investment Management Ltd., including the C$435 million Manulife fund. “They’re allocating capital more effectively now, and the prices are inexpensive.”

U.S. monetary policy has helped. The U.S. Federal Reserve’s $85 billion of monthly bond-buying has pumped up global equity markets, boosting returns for asset managers which the fund also owns. Signals from the Fed it could slow the stimulus has lifted interest rates, fattening margins between life insurers’ income and payouts to beneficiaries.

Financial Overweight

Among funds defining themselves as so-called large-capitalization, the second-best performer was the Franklin Bisset Canadian Equity Fund which has returned 20 percent while. The C$385 million IG Franklin Bissett Canadian Equity Fund, which has returned 17 percent, was third.

The fund plans to add to insurance holdings which, along with Toronto-based Manulife, include Industrial Alliance Insurance & Financial Services Inc. based in Quebec City and Winnipeg-based Great-West Lifeco Inc., Hall said in a phone interview Nov. 12 from Calgary, where he is based.

Manulife has gained 45 percent this year, Industrial Alliance has gained 55 percent and Great-West has gained 34 percent.

Including bank stocks, 44 percent of the fund is comprised of financial firms, more than the 36 percent weighting in the S&P/TSX index.

While macroeconomic themes have supported his strategy this year, Hall says they don’t figure into his picks. He focuses instead on individual companies with a particular eye to their core business model, return on capital and management.

Cheese, Smartphones

His “be boring, make money” philosophy helped him pass on Waterloo, Ontario-based smartphone maker BlackBerry Ltd. while holding a stake in St. Leonard, Quebec-based cheese maker Saputo Inc. since the company’s 1997 initial public offering.

“When you think about the business models 20 years from now, or even 10 years from now, I don’t know how I’m going to be watching the Super Bowl, it might be new technology,” he said. “But I do know when I’m watching the Super Bowl, I’m going to have cheese pizza beside me. And the chances are really good the cheese is going to be made by Saputo, because cheese making hasn’t changed.”

Saputo, embroiled in a three-way bidding war for an Australian cheese maker, has gained 107 percent in the last five years, while BlackBerry has dropped 86 percent as the company struggles to revive its business in the face of declining market share and intense competition.

Hall said Saputo’s long-term prospects are solid whether or not its bid for Allansford, Australia-based Warrnambool Cheese & Butter Factory Co. is successful.

Eschews Mining

Similar thinking is leading him to purchase shares of Canada’s largest grocer, Loblaw Cos. Ltd., which he believes is due to see benefits after years of restructuring and is poised for growth after the purchase of Canada’s biggest pharmacy chain, Shoppers Drug Mart Corp. Ltd.

Brampton, Ontario-based Loblaw is up 5 percent this year.

About 17 percent of the Manulife Investment Class fund is spread between consumer-focused companies.

Hall has no investments in mining companies, so was spared one of the pitfalls of the Canadian market this year, the first annual drop in the price of gold in 13 years.

Hall doesn’t claim to have predicted gold’s tumble. Analysis of individual gold companies led him to believe they were over-investing and not producing enough returns on the capital, he says.

Slim Representation

The fund manager says he has looked for investments in companies from industries that are slimly represented in the Canadian market, like drug developer and distributor Valeant Pharmaceuticals International Inc., which has gained 87 percent this year, and software-holding company Constellation Software Inc. of Toronto, with its 68 percent gain.

“It’s all about going one-by-one and buying businesses that have good business models that earn good returns themselves,” Hall said. “If we invest in those businesses we should grow along with them.”

(Corrects name of funds in fifth paragraph in story published Nov. 15.)
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