By Jonathan Ratner
Manager Rob Edel, Nicola Wealth Management
Fund NWM Strategic Income Fund
Description North American equity fund focused primarily on Canadian dividend-paying companies
Performance 1-year: -3.3%; 3-year: 8.3%; 5-year: 1.3% (as of May 31, 2012)
MER 0.45% to 2.05%
Rob Edel, chief investment officer at Vancouver-based Nicola Wealth Management, typically focuses on companies that have a sustainable competitive advantage and consistent dividend increases, but he also uses covered calls to supplement that income, particularly in flat-return yet volatile markets such as the current one.
“Even for stocks that do pay dividends, because we believe equity market returns will remain moderate while the deleveraging cycle runs its course, we selectively look to write covered call options against a portion of the portfolio,” he said. “The amount depends on the current market volatility and our view on valuations.”
The manager of the NWM Strategic Income Fund avoids writing options more than three months in length and aims to write them slightly out of the money. For companies that pay little or no dividend, he may write covered calls against half the position to generate a kind of synthetic dividend.
While the attractiveness of call options has improved since early 2012 when low volatility indicated little upside, Edel is still probably writing fewer of them than normal. However, all of the portfolio’s gold positions are covered, although the primary way Nicola clients get exposure to the sector is through a separate fund.
“The gold sector is attractive at these levels,” he said. “Gold stocks, given the recent pullback, provide some opportunity.”
The manager has a similar view on the energy sector and natural gas in particular.
“We like natural gas for the long term. We just think it makes a lot of sense, even though it could go down more in the short term as the supply-demand equation needs to balance out a little more,” Mr. Edel said.
While the fund has historically underweighted financials — particularly bank stocks — and overweighed REITs, Mr. Edel is looking to lighten up on REITs and move more into Canadian bank stocks.
“From an interest rate point of view, the REITs have done very well,” he said. “From a valuation point of view, it might be time to take a bit of profit.”
Canadian National Railway Co. (CNR/TSX)
The position 1.5% of portfolio.
Why do you like it? “An investment in CN is a low-risk and defensive way to gain exposure to the general growth in the economy,” Mr. Edel said. “Increasing bulk commodities transportation, intermodal and increased market share versus trucking provide very good earnings visibility in the near term.”
The manager also highlighted the company’s superior margins compared to its peers, growth projects and history of consistent dividend increases.
Biggest risk A general economic slowdown; talent being poached by Canadian Pacific Railway Ltd.’s new management.
Methanex Corp. (MX/TSX)
The position 1.6% of portfolio.
Why do you like it? As methanol production from Iran is removed from the market, Methanex, already the leading supplier with 20% of the market, is expected to make up a large portion of the supply gap. It has restarted a plant in New Zealand and plans to relocate a plant in Chile to Louisiana.
“Methanex has a history of being shareholder friendly by returning capital through dividend increases and share purchases, which we expect will continue,” he said.
Biggest risks Methanol prices are typically tied to Brent crude oil; a supply disruption from one of its plants would impact cash flows.
Shaw Communications Inc. (SJRb/TSX)
The position 2.5% of portfolio.
Why do you like it? Due to margin pressures on its core cable product, Shaw is currently valued inline with competitors such as Telus Corp., Mr. Edel noted. “We would expect the competitive landscape to start to normalize in the near term,” he said. “Longer term, we believe cable has a technology and capital investment advantage over the telcos and should be valued at a premium.” The manager also believes Shaw can continue growing its dividend, currently around 5%.
Biggest risk Telus continues to aggressively promote its IPTV product, forcing Shaw’s cable margins lower.
Metro Inc. (MRU/TSX)
The position Exited in recent months.
Why don’t you like it? Mr. Edel considers Metro one of the best-managed grocery retailers in Canada, but believes this is already reflected in the share price.
“We feel the environment for food retailers could deteriorate over the short term with a weaker Canadian dollar hurting margins, especially produce,” the manager said. “Increased competition from Walmart’s planned entry into Quebec and Target’s Canadian market roll out could further reduce volumes and margins.”
Potential positive More visibility on the situation in Quebec.