One year into build-ing a line of mutual funds for Toronto-based Brandes Investment Partners & Co., Kim Shannon can point to $651 million in assets in the new fund family, a respectable haul.

Shannon, who made a name for herself by achieving strong results with balanced, careful trading, most recently at Toronto-based CI Investments Inc. , is continuing this approach while taking extra care. As well as being in building mode, she is steering her newly created Brandes Sionna line of funds along a carefully calibrated route, leaving plenty of room for growth but keeping a sharp eye out for potential shoals.

Shannon, president and owner of Toronto-based Sionna Investment Managers Inc. , is the moving force behind four Brandes Sionna funds that are part of the strategic alliance she established a year ago with Brandes. The funds include Brandes Sionna Canadian Balanced, Brandes Sionna Canadian Equity, Brandes Sionna Canadian Small-Cap Equity and Brandes Sionna Diversified Income.

Supported by a team of analysts, Shannon manages the equity portion of the funds; Brandes provides the fixed-income and global expertise. For the balanced fund, for example, Brandes manages the fixed-income and global equity portions. The 10% global component of the Canadian equity fund is also managed by Brandes. The diversified income fund can have up to 25% of assets in fixed-income, and Shannon would do this by buying into Brandes’ corporate fixed-income portfolio.

The Brandes/Sionna partnership has passed the break-even point and, Shannon says, continues to grow at a healthy pace. She is pleased that money has come her way when Canadian equity funds overall have been suffering net redemptions.

“My whole career has been about proving myself and building,” she says. “Our goal is not to steal assets from anyone but to earn our own way. ‘Give us your new money’ — that’s what we’re asking for.”

Assets in the four funds Shannon managed for CI before her sudden departure have held relatively firm, standing at $7.8 billion, compared with $7.9 billion when she was in charge. Industry analyst Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc., says it was unrealistic to expect that a mass of assets would follow her to her new post. Investors would have faced tax consequences, redemption fees and sales charges if they had made the change.

“Besides, CI replaced Kim with a highly competent manager who has a similar value-oriented style and a strong track record of his own,” Hallett says of Dan Bubis, president of Winnipeg-based Tetram Capital Partners Ltd. , who was hired by CI to replace Shannon at the flagship CI Canadian Investment Fund.

Shannon has been picking holdings for her new funds at a time when she believes that market indices are not reflecting the risks and uncertainties in the marketplace. The S&P/TSX composite index recently traded at a price/earnings ratio of about 18, based on 12-month trailing earnings, while the historical average is almost 14, she says.

“Right now the market is not pricing in the hazards,” she adds. “It is pricing in enthusiasm. But there is a certain je ne sais quoi about risk. Because of its resources exposure, Canada could outperform other markets if there was a global downdraft, but we would still feel it if it happened.”

The funds’ cash positions are hovering around 15% of total assets — high for Shannon, who is usually close to being fully invested. But, given the recent problems in the U.S. subprime mortgage and housing markets and liquidity issues in other global credit markets, she fears there may still be some cracks in the system. So, she is treading lightly, and giving herself room to manoeuvre.

“There will be continuing challenges in the U.S. banking system during the next six months,” she says, “and Canada has had its own challenges with non-bank, asset-backed commercial paper. I’m sitting back and making sure we come out on a solid footing before getting aggressive again.”

Canadian banks are still the most expensive in the world. Although they are well capitalized, Shannon expects they will feel the chill if there is a global liquidity crunch affecting bank valuations globally. But in the longer term, she says, Canadian banks will attract increased business following the death of the market for non-bank-sponsored asset-backed commercial paper.

@page_break@“The Canadian banks will come out of this with greater market share, as business people who might have turned to alternative sources of financing return to the banks,” she predicts. “But credit costs will be higher and people may borrow less, and that will be a suppressant to the economy.”

Although Shannon has major bank holdings in her funds, she has underweighted this sector relative to the S&P/TSX composite index.

When it comes to assessing individual stocks, Shannon starts with a quantitative process — evaluating factors such as price/book value, sales, earnings and cash flow. She also takes a hard look at dividends, which she believes are a major contributor to returns over the long term, looking for companies with higher yields than the market average.

She relies on a structured set of 20 questions to give her a 360-degree view of companies but waits until she is comfortable before making a move. Making decisions gradually relieves some of the emotional stress of picking the absolute perfect points at which to buy and sell.

Her strategy assumes that most stocks trade in a range that typically falls between 70% and 130% of intrinsic value; Shannon is a buyer at the low end and a seller at the high end. With riskier companies, she will sell as soon as the share price hits intrinsic value. For less risky companies, she’ll hang on a little longer. Aside from the financial indicators, her antennae sense trouble in the management ranks when she sees signs of boastfulness, overcompensation in salaries or aggressive accounting practices.

Ideally, Shannon prefers to stay fairly close to the market indices in her sector weightings and rely on superior stock-picking for her outperformance. Because her style is “relative” value rather than “strict” value, she is usually diversified across most market sectors. However, her individual stock-picking decisions can lead her to being overweighted in a sector if it is rich in stocks that offer the potential for appreciation. At the same time, she may be underweighted or move entirely out of a sector that does not offer value.

Shannon isn’t afraid to dip heavily into her favourite companies, believing that concentration in the right stocks adds to the upside. The $446.3-million Brandes Sionna Canadian Equity Fund — the largest of the four Brandes Sionna funds — has 6% of its assets in both Encana Corp. and Petro-Canada, as well as 5% in Royal Bank of Canada.

In Brandes Sionna Canadian Equity Fund, she concentrates on large-cap stocks. Her universe of possibilities has been distilled to about 140 stocks, of which the fund will own 35 to 60 at any given time.

Sector-wise, Shannon is overweighted in energy and materials and particularly likes energy-drilling stocks, which are relatively inexpensive. They are benefiting from conditions that require energy companies with depleting fields to drill wells in search of new reserves. As a group, energy stocks have used high cash flow to pay down debt, she says, and could benefit from the takeover activity already being seen in metals and steels.

“Some significant global energy companies are facing declining reserves, and a solution may lie somewhere in the Canadian oilsands,” she says. “Someday, these global players will be drawn to Canada as non-conventional oil becomes a more important component of world resources. Ultimately, non-nationalized world resources are available to the highest bidder, no matter where this bidder resides.”

Although gold has traditionally not played a major part in Shannon’s value-oriented portfolios, she holds Barrick Gold Corp., Goldcorp Inc. and streetTRACKS Gold ETF, which represents bullion ownership.

“Gold represents a flight to safety for many investors,” she says. “With the weak dollar policies we are seeing in the U.S., the global liquidity situation and the risk of a credit crunch biting in the next several months, it’s prudent to be closer to market weight in gold.”

Shannon came into the investment industry by a somewhat roundabout route. She graduated with a B.Sc. in zoology and anthropology from the University of Toronto in 1980. But she realized her financial prospects were limited in a career dissecting animal bones, and decided to apply her strong analytical and organizational skills to business. After a few short-term jobs, she entered the investment industry as an analyst for United Canada Insurance Co., later obtaining a B.A. in finance and economics, an MBA and the chartered financial analyst designation.

She founded Sionna, which is Gaelic for Shannon, in 2002. At that time, she was lead manager of Spectrum Canadian Investment Fund. When CI took over Spectrum Investment Management Ltd. in 2002, Shannon seized the opportunity to run her own show with the support of CI as a bread-and-butter client.

Shannon believes stock markets reflect human nature as much as fundamental value for companies, but she strives to be as objective as possible when it comes to controlling her own emotions about stocks.

“It’s difficult to buy when things are out of favour, and when something has lots of hair and pimples on it, it’s scary,” she says. “But we try to make ourselves as rational as we can be, and take advantage of the emotion in the marketplace.” IE