One of Canada's Biggest Stock Managers Says Bond Spike No Threat

  • ‘Stocks are still very compelling,’ Investors’ Downie Says
  • Looking for bargains in Canada after oil-induced sell-off

The head of one of Canada’s biggest equity funds says the bull market in stocks has room to run because dividend yields will remain attractive even if bond yields move higher.

Martin Downie, manager of the C$17.2-billion ($12.8 billion) Investors Dividend Fund, said there’s a persuasive case to be made for investing in stocks, even as the rise in bond yields provides an alternative for income-seeking investors. The fund jostles with the RBC Dividend Fund for title of the biggest Canadian mutual fund, according to data compiled by Bloomberg.

Martin Downie

Photographer: Cole Burston/Bloomberg

"Stocks are still very compelling even with the backup in interest rates," Downie, 55, said in an interview at Bloomberg’s Toronto office. Ten-year Canadian government bonds yield about 1.7 percent, compared with the 2.7 percent dividend yield on the S&P/TSX Composite Index., Canada’s main equity gauge. That one-percentage point gap is about three times more than the average over the past decade, Bloomberg data show.

Downie said he wouldn’t be surprised to see a short-term pullback in stocks, but he forecasts longer-term annual returns of 6 percent to 7 percent even if the yield on the 10-year U.S. Treasury note rises above 3 percent. It was quoted at 2.4 percent at 4 p.m. on Thursday.

"That will be quite a bit better than bonds," he said. "We’re not looking to shoot out the lights but we do think we’re in a secular bull market."

The S&P/TSX is among the worst-performing stock markets in the developed world this year but Downie, who also manages Investors Group’s Canadian Large Cap Value Fund, said that means there’s bargains to be found north of the border, even if the U.S. has a stronger economic outlook.

"If I was shifting assets, I would be shifting probably a little bit more towards Canada because of the opportunities," Downie said. "I would still be overweight the U.S., but that preference has migrated a bit more towards Canada."

Stocks Sink

The S&P/TSX briefly slipped into negative territory for the year on Wednesday. Since its high on Feb. 21, the Canadian index has lost 3.1 percent due in part to a 12 percent decline in the price of oil over the same period.

Downie isn’t worried about falling oil prices -- two of his top 10 holdings are pipeline companies TransCanada Corp. and Enbridge Inc., both of which have carried out multi-billion acquisitions in the U.S. giving them more exposure to the stronger U.S. dollar.

He describes himself as a bottom-up stock picker who looks for high-quality stocks that trade at a discount to their intrinsic value. He has been trimming banks from his dividend fund because he sees them as fully valued, although they’re still a core part of the portfolio. As of Dec. 31, Royal Bank of Canada, Bank of Nova Scotia and Bank of Montreal made up three of the four top holdings in the Investors Dividend Fund.

The dividend fund, which is part of Winnipeg-based IGM Financial Inc.’s group funds, has returned 14 percent over the past 12 months, compared with 17 percent for the S&P/TSX, according to Bloomberg data. IGM Financial is majority owned by Power Corp. of Canada, part of the Montreal-based Desmarais family empire.

Downie, who manages C$22.1 billion in total, won’t disclose what individual stocks he likes now except to say that he’s looking at opportunities among industrials and consumer staples and is staying away from materials on the belief commodities are in a secular bear market.

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