Bifurcated market reminds these fund managers of the dotcom bubble

MacNicol & Associates Asset Management Inc.'s portfolio manager Ross Healy (left), president David MacNicol (centre), and portfolio manager Joseph Pochodyniak.Peter J Thompson/National Post

When it comes to valuations, the market appears to have split itself into two parts: stocks that are extremely expensive, and those that trudged along and still offer decent upside potential.

That reminds the portfolio management team at MacNicol & Associates Asset Management of the peak of the tech bubble in 2000.

“The dot.coms crashed and burned, but the rest of the stock market actually held in fairly nicely, until the final plunge in 2002,” said president David MacNicol.

The Toronto-based firm, which has approximately $400 million in assets under management and advisement, has a value-oriented investment philosophy, and therefore tends to focus on stocks that may have been left behind.

“Going forward, we expect that the willingness of investors to take outlandish risks will diminish substantially, so these kinds of stocks should shine,” said senior portfolio manager Ross Healy. “We are also cognizant that overall risks are significant — from interest rates to Trump — and we want to be investing to minimize our equity risk exposure.”

That doesn’t mean avoiding equities, but rather ensuring that the fundamentals are sound and improving, and volatility and risk are contained. The portfolio managers have also raised cash recently, which they believe will provide the opportunity to invest at lower levels in both the equity market and in the alternative asset space.

MacNicol noted that recent movements in the bond market suggest that U.S. deficit spending will “borrow” the American economy into prosperity. At the same time, Chinese demand for U.S. Treasuries has waned.

“Taken together, inflation can thus be defined quantitatively as a devaluation of the U.S. dollar,” he said.

The portfolio manager also noted that foreign investors couldn’t have been pleased by the greenback’s eight per cent decline in 2017 or the meager yields they were receiving. As a result, he believes the market may be anticipating fewer participants in upcoming treasury auctions, and pushing rates up sharply as a result.

“Perhaps more pressing than the direction of the movements in U.S. 10-year yields was their speed,” MacNicol said. “In an environment where equity valuations are elevated, the bond market may have caught equities looking the other way.”

MacNicol & Associates is offering its clients a new way to achieve stable yields in what now appears to be a rising rate environment through a new Alternative Asset Debt Fund.

“The safest asset class used to be bonds, but that has all changed recently,” said portfolio manager Joseph Pochodyniak. “We like the alternative space a lot, and feel that it is an asset class that is insufficiently represented in the portfolios of Canadian investors. So clearly it’s an opportunity for investors.”

The firm also has investments in private equity, private real estate, and hedge funds. Private real estate currently makes up the largest portion of the alternative investments, with multi-family residential being particularly attractive.

Pochodyniak highlighted this segment of the market for the recurring cash flow that comes from a well-executed value add strategy.

The firm focuses on underperforming assets in healthy markets, like the Texas Triangle (Houston, Dallas/Fort Worth and Austin), the Greater Miami area and select neighbourhoods in Toronto and Ottawa.

MacNicol & Associates continues to believe in precious metals as a store of value, as well as a hard asset that performs well against inflation, and government debt/deficit challenges.

One related holding, B2Gold Corp. (BTO/TSX), is trading at a discount relative to its closest peers on a market cap per ounce basis.

MacNicol noted that the company had record output of 630,000 ounces last year, and is among the lowest-cost producers.

“We expect B2Gold shares to get a rerating upwards,” he said.

After being a longtime investor in Berkshire Hathaway Inc., the firm moved out of Warren Buffett’s conglomerate due to its relatively high valuation, and into Fairfax Financial Holdings Ltd. (FFH/TSX).

“We like the management team, and respect the fact that they are able to see that they had made a mistake concerning the markets, and have removed all of their extremely expensive hedges,” MacNicol said. “Their insurance business is also flourishing globally.”

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