Manager Monitor: Looking to the U.S. for performance

A greater emphasis on foreign content was part of the manager transition, something that Rohit Sehgal, who has stepped back to manage hedge funds after 14 years as this fund’s lead manager, had already started. Foreign content accounts for 47% of the fund, of which the bulk is invested in the U.S.

“We didn’t change things thematically, nor did we change the sector allocation. One big change was a strategic allocation to the U.S.” says Lane, adding that about 20% of the fund is in units of Dynamic Power American Growth and another 27% in individual U.S. and international holdings.

Turning to Canada, Lane argues that resources and so-called interest-sensitive stocks have had their day. “We believe that we are at the start of secular bear markets in government bonds and commodities— and at the start of a secular bull market in equities, led by the U.S.”

Lane is focusing on Canadian companies that have significant exposure to non-Canadian revenues and benefit from a weak dollar or weak commodity prices. “It’s reminiscent of what worked in the 1990s. The strategic use of our foreign content is very important because we expect that Canada will be an under-performing market. The easiest way to do that is to get out of that market as much as you can.”

What’s behind Lane’s conviction that it’s time to accentuate U.S. stocks? “The average U.S. stock has been in a bear market since 1998, or 15 years. The typical bear-market duration is 13 to 16 years, going back to 1907,” says Lane. “What we have now is the start of a 13- to 16-year equity cycle where we will revert to the mean. You should get double-digit returns over the next decade.”

In a parallel move, Lane wants to concentrate on sectors such as industrials, technology, consumer-related (staples and discretionary) and health care.

One representative holding is Catamaran Corp. (TSX:CCT), which manages drug plans for governments and corporations. “The two drivers of their business are rising numbers of prescriptions as the population ages, and the amount of generic drugs that can be used to lower costs,” says Lane. “Catamaran uses its size to lower the cost of drugs — it’s a high-growth company”

Health care represents only 3% of the TSX, although Lane believes that can more than double within five years. “One of the names that will get you there is Catamaran.”

A Montreal native, Lane is a 15-year industry veteran whose father, John, worked for more than four decades in the investment department of Sun Life Financial. After Lane graduated from Queen’s University with a bachelor of commerce in 1997, he started working as a technology and small-cap analyst at TD Asset Management Inc. From 1998 to 2000, Lane was assistant manager for TD Canadian Small-Cap Equity Fund.

In September 2000, Lane was hired by GCIC. After about a year, he began working with Sehgal on the Power brand of growth funds.

“Where my father was a value guy, my tendency was to be a growth guy,” says Lane. “I like great businesses that grow a lot as well as highly profitable businesses with defensible models. That’s my mantra.”

Today, Lane is responsible for about $2.4 billion in assets under management, including the three-star rated Dynamic Power Small Cap Fund, which he has overseen for a decade. That fund has an annualized 9.1% return for the 10-year period ended Aug. 31, versus 3.6% for the median return in the Canadian focused small/mid cap equity category. Effective Sept. 1, following a transition period, Lane also replaced Sehgal as the lead manager of Dynamic Power Balanced Fund.

With its two-star Morningstar Rating, the flagship Dynamic Power Canadian Growth Fund has been a chronic laggard. For the five years ended Aug. 31, it has an annualized 5.6% loss, vs a gain of 1.7% for the median fund in the Canadian focused equity category. Over the last 12 months it returned 10.1%, compared to 15.4% for the median return.

The fund has also been hurt by high volatility, which caused a fair amount of redemptions. “A lot of that was due to the damage done in 2011 and 2012, which were difficult years for growth managers,” says Lane. “Going forward, however, we will have tailwinds helping us. There will be more optimism which will fuel a return by investors.”

One U.S. holding that he believes will benefit from rising optimism is the life insurer MetLife (NYSE:MET). Based on his view that government bonds will have a tougher time, “the best way to play that trend is through life-insurance companies because they benefit as interest rates rise,” says Lane, adding life-insurance firms also benefit from rising equity markets because they invest their float in stocks.

Lane argues that MetLife’s shares are undervalued and may catch up to Canadian peers that have already seen an upward move. “We will keep our Canadian insurers because there is still more upside. But we will add to stocks like MetLife.”