On the offence: Where to invest in a down market

Saturday, July 19, 2008


The most common, and most ignored, piece of investment advice ever? Buy low, of course.

We know this to be true because there was a stunning $70-billion sitting in safe but low-paying money market funds at midyear, almost 45 per cent more than in the same period last year. Investors aren't buying low as the stock markets fall; they're buying safety.

Problem is, safety pays a mere 2.5 to 3 per cent these days. Long term, well-chosen stocks, mutual funds and exchange-traded funds bought today should beat that return by a huge margin. For some guidance on where to start buying, Portfolio Strategy asked for suggestions from five people in the business of providing investment advice.

The understanding here is that the stocks and funds would be purchased by risk-tolerant investors who can live with the possibility that the markets will fall further before they recover, and that it could take years before purchases made today look good.


Before offering some suggested stocks, Sheryl Purdy of Leede Financial Markets in Calgary wanted to reinforce the idea that patience is required if you put money in the market right now. Specifically, she insists her clients take a long-term perspective of five years or more.

"When someone says, 'I'm ready to dive right in, let me at it,' I scale back their expectations," said Ms. Purdy, a vice-president at Leede.

Her first stock pick was Bank of Nova Scotia, which she calls her favourite of the big banks. It happens that several of the advisers consulted for this column mentioned financial stocks in one way or another, which is significant because they're among the hardest-hit market sectors of the past year.

Scotiabank looks good to Ms. Purdy because of how careful it is spending money on acquisitions and deal making. "That's the type of corporate attitude that I'm quite delighted with. If they go out and do something, they've bloody well done their homework."

Another stock pick was Shoppers Drug Mart, which sells the kind of staples that people have to buy regardless of economic conditions. In the current market decline, concern about a weakening economy is one of the big worries, along with a resurgence of inflation.

Ms. Purdy is impressed with Shoppers because the way its stores are evolving is helping the chain take business away from other retailers. "I was preparing my kids for going to camp earlier this year and I dropped a significant amount in Shoppers Drug Mart on things I would normally have to go to four different stores for."

A third pick is Hanfeng Evergreen, which is listed on the Toronto Stock Exchange but operates in China as a producer of slow-release fertilizer. This fits in with her belief in the continued growth in the Chinese economy.


Andrew Pyle, an investment adviser with Scotia McLeod in Peterborough, Ont., said blue-chip stocks that offer a dividend are a good place to start if you're willing to put money in the market today.

"You want something in your portfolio that is going to pay you to be there, just in case we're not at the market bottom and you have to go through this [market volatility] for another three or six months," Mr. Pyle said.

Financial stocks are a good place to start looking for dividends, he added. He figures that investors who feel the worst of the current financial turmoil has passed could buy any of the Big Five banks today. For those who are reluctant, he suggests waiting until the banks start reporting their earnings for the quarter ended July 31. At that point, it should become clearer whether there is more trouble ahead for the banking sector.


Bank stocks were also suggested by Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver. But instead of choosing individual stocks, he suggested buying a diversified basket through an exchange-traded fund called the iShares Cdn Financial Sector Index Fund. "Keep it simple," he said. "Just buy the basket and salt it away."

Canadian financial companies have been pummelled lately, but they've been treated mildly in comparison to their U.S. counterparts. American banks have much more exposure to the sickly U.S. housing market, so this is understandable. And yet, Mr. Mastracci suggested some exposure to the U.S. banking sector through ETFs. His reasoning: U.S. banks have fallen harder and thus have more bounce-back potential.

If you're tempted to wait a bit to see if the banking sector falls even more, Mr. Mastracci understands. "You can afford to wait," he said. "Even if you paid 5 per cent more than you did today, it's not a huge thing. You're still in bargain territory."


David Shymko, an investment counsellor in Vancouver with Macdonald Shymko & Co., suggested three sectors that investors can buy into directly through ETFs. One is infrastructure, which means companies that build and maintain roads, bridges, airports and utilities.

The rationale here is that the infrastructure in many countries requires major upgrades, and that this kind of investment has a spinoff benefit in building economic competitiveness. "If I look down the road, I'd say this is a place where we should definitely be putting some money," Mr. Shymko said.

There are two infrastructure ETFs listed on U.S. stock exchanges, the most popular of them being the iShares S&P Global Infrastructure Index Fund. Mr. Shymko noted that infrastructure stocks tend to be dividend payers, a point that is borne out by the 1.8-per-cent dividend yield on this ETF.

Two other sectors Mr. Shymko suggested for investing right now are energy, which he buys for clients through the iShares Cdn Energy Sector Index Fund, and uranium, which is a big component of the new Market Vectors-Nuclear Energy ETF listed on the American Stock Exchange.


Opportunities outside Canada were the focus of suggestions made by David Paterson, an independent mutual fund analyst who provides guidance to investment advisers. His first selection was AGF European Equity Class, which was almost half invested in financial stocks as of its last report to

Mr. Paterson said he was part of a recent conference call in which the manager of this fund spoke about how European financial companies have been penalized along with U.S. banks, even though they have not been involved in the same risky mortgage lending.

"As soon as confidence returns in the markets, there's going to be some definite opportunity here," Mr. Paterson said.

Two other funds he suggested were CI American Value, which has held up comparatively well in the recent decline for U.S. stocks, and the Trimark Fund (SC version, sold with or without an upfront sales charge).


Damn the torpedoes!

The stock markets have plunged over the past month, which presents an opportunity for investors to do some bargain-hunting. The Portfolio Strategy column asked five investment professionals for suggestions on where to put money now, and here's what they came up with:

YTD Price
Stock/FundTickerChg (%)*
Sheryl PurdyBank of Nova ScotiaBNS-T-5.4
Leede Financial MarketsShoppers Drug MartSC-T-0.5
Hanfeng EvergreenHF-T-24.2
Andrew PyleCanadian banks
Scotia McLeod
Adrian MastracciiShares CDN FinancialXFN-T-15.4
KCM Wealth ManagementSector Index Fund
David ShymkoiShares S&P GlobalIGF-N-16.1
Macdonald, Infrastructure Index Fund
Shymko & Co.iShares CDN EnergyXEG-T10
Sector Index Fund
Market Vectors-NuclearNLR-A-9.6
Energy ETF
David PatersonAGF European Equity Class-21.3
Paterson & AssociatesCI American Value-10.2
Trimark Fund (SC)-10.6

Ticker Key: T=Toronto Stock Exchange; N=New York Stock Exchange; A=American Stock Exchange

*to July 17