Asia, trusts to lead in 2005, fundco says

(December 14, 2004) Investors should expect modest returns on both North American debt and equity investments in 2005, according to fund managers from GGOF Guardian Group of Funds. The prediction is based on slower economic growth in the world’s most developed nations.

“GGOF believes 2005 is a year that will most likely see modest absolute returns for North American bond and equity markets, with conventional bonds doing well to earn the coupon of four or five per cent,” says Gavin Graham, vice-president, director of investments at GGOF. “Equities are likely to, at best, achieve similar returns to this year, i.e., five to seven per cent.”

Speaking in a conference call on Tuesday, Graham said interest rates and inflation are both expected to rise throughout 2005, limiting North American GDP growth to between two and three per cent. He added that Europe and Japan will likely experience even slower growth.

“GGOF feels that non-traditional asset classes are likely to deliver similar or superior returns with less volatility than the major bond or equity indices,” Graham said.

Investors looking for that superior performance would do well to look back on two of the top sectors in recent history, he says, as Asia will continue to benefit from China’s expansion and income trust funds are seen maintaining their streak.

“It’s not been a particularly easy year for financial markets in Asia, based on the expected slowdown of the economy of mainland China,” says Paul Matthews, chair of Matthews International Capital Management (MICM) and lead manager of GGOF Asian Growth and Income Fund. “We think that China has been successful in slowing its economy without bringing it to a grinding halt. But it has had some knock-on effect on other economies in the region.”

Matthews says China will likely try to assure the world that it is serious about reforming its banking sector, with Beijing possibly listing one of the major banks on the equity markets, or a transaction with a major foreign bank. But he does not expect China to address its currency issue in any meaningful fashion, possibly widening its trading band but not allowing it to trade freely.

As a result, Chinese domestic inflation should increase as the U.S. dollar continues to underperform, pressuring the margins on export-reliant manufacturers.

“We tend to favour companies in China and the rest of the region that are more focused on domestic-lead growth than they are on the export sector,” he says. He points to investments such as dividend-paying telcos and real estate investment trusts as possible outperformers.

In this respect, China reflects GGOF’s investment advice for North America, as the firm believes income trust portfolios will continue to outperform traditional common stocks.

“We’re very much on the same track as Paul is in managing his equity portfolios,” says John Priestman, managing director at Guardian Capital LP and co-manager of GGOF Monthly High Income Fund II, GGOF Monthly Dividend Fund, and GGOF Canadian Diversified Monthly Income Fund. “We’re looking for a period of pretty solid economic growth and very good economic growth outside of North America which will bode well for the economically sensitive trusts.”

Priestman says he expects trusts to continue to offer returns in a range of nine to 10 per cent.

“That doesn’t mean they have a past as prologue, and we are expecting more moderate returns,” he says. “But I think what’s also interesting about income trusts is that they have some very nice diversification features. During the last 10 years, they’ve had a very low beta, or correlation to the S&P TSX Composite Index.”

Most trusts also have a shown a low correlation with the fixed income market as well, with utilities being the exception to that rule. He describes his portfolio as underweight in these trusts, with about two-thirds in business and resource trusts and 25% in REITs.

Of course, not all trusts are winners, just as not all common stocks are winners.

“We’re trying to buy the biggest, the best and most liquid trusts while avoiding trusts that are highly competitive, highly cyclical or highly seasonal. That’s where most of the problems have come from in the trust market,” he says. “There are over 100 income trusts that we don’t think are worthy of being in a portfolio.”

His fund holds about 50 names from a field of about 175.

“For conservative investors, a position in income trusts is important to have,” Priestman says. “We’re not saying bet the ranch on an income trust, but we think they’ll continue to be a very good diversification vehicle.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(12/14/04)

Steven Lamb