A fund manager’s who’s outperformed his peers the last 10 years and is rated five stars by Morningstar is naturally worth listening to.

For details on this manager’s investing style and what he currently finds compelling, attractive and/or cheap, here are excerpts from a Morningstar article.

by Michael Ryval

Although Canadian equity markets have had a strong run this year, veteran investor Steve Belisle, at the helm of the $749.1 million 5-star, silver-medalist, Manulife Canadian Dividend Growth Fund F, is reluctant to characterize stocks as expensive or middle-of-the-road.

For him, it’s a stock-picker’s market and there are still equities worth buying.

“When we look at the Canadian market we don’t necessarily see it as one entity but one with many different baskets of securities,” says Belisle, managing director and senior portfolio manager at Toronto-based Manulife Investment Management and a member of the eight-person Fundamental Equity team that oversees $8 billion in assets under management.

“We still find some companies that offer compelling valuations for the quality of the business.


Some stocks are over-valued, but the Canadian banks are attractive at this point.


And the oil companies are really cheap.”

Year-to-date (Dec. 9), Manulife Canadian Dividend Growth Fund F has returned 25.56%, versus 23.32% for the Canadian Dividend and Income Equity category.

The fund has also outperformed on a longer-term basis.

Over the last five years and 10-years, the fund returned an annualized 9.52% and 9.21%. In contrast, the peer group returned an annualized 7.57% and 8.37%, respectively.

“A lot of the market focuses on ‘adjusted measures’ that are not in accordance with accounting standards,” Belisle adds.

“There is a lot of freedom for management to make these numbers look good.

Lots of investors say they care about cash flow. In our case, it’s the sole focus.”

In assessing management, Belisle focuses on the return on invested capital, which is determined by dividing the cash flow measure by invested capital.

“This really reflects management’s quality and their ability to allocate capital. Is that company generating a high rate of return?


If the answer is yes, then it’s creating more value for their shareholders every year.


So we stay agnostic as to management’s ability as a promoter. We try to focus on what management is delivering for shareholders.”

One top Canadian name in a portfolio with 50 holdings is TMX Group Ltd. (X), the owner of the Toronto and Montreal Exchanges.

“This is a good quality company because it has a sustainable advantage and very high barriers to entry. There have been attempts to compete but the company continues to grow.

It benefits from sticky pricing and is able to pass through inflation,” says Belisle, adding that the firm has expanded into data services and analytics, through the acquisition of Trayport Holdings Limited’s energy trading platform.

The stock is trading at a free cash flow yield of 5.5%. “That’s compelling for this type of company,” says Belisle, adding that his team’s base case is for 25% upside on the stock.

The stock pays a dividend of 2.4%, which is slightly below the portfolio average of 2.95%.

On the U.S. side, the team likes Qualcomm Inc. (QCOM), a leading maker of semiconductors.

“The stock was particularly cheap, compared to other semiconductor makers,” says Belisle.


“It was overly dependent on Apple Inc. [AAPL] for its main customer. But with the roll-out of 5G we see Qualcomm diversifying. 5G will be used not just in cell phones, but also the internet-of-things.


That will drive outsize revenue growth. Their target is 30%. The roll-out of 5G will also diversify their business away from the cyclical handset market and from Apple.”

Qualcomm’s stock is up about 22% year-to-date. “But our estimates of free cash flow yield have also gone up.

So it’s still attractive,” says Belisle, adding that the firm generates a 5.4% cash flow yield, versus 4% for competitors such as Texas Instruments Inc. (TXN)

“Our base case [for capital appreciation]  is 48% upside. We think the stock is really under-valued.”


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