Murray Leith, Odlum Brown | BCBusiness
Murray Leith of Odlum Brown.
Investors have never faced more confounding markets: stocks defied traditional wisdom last year by soaring despite sluggish economic growth, and interest hovered near zero— for yet another year. To help make sense of the options available to investors today, we turned to local experts for some definitive direction
Vice-President and Director, Investment Research, Odlum Brown Ltd.
Look to the U.S. to capitalize on its improving economy
One-year return, Odlum Brown Model Portfolio: 28.23%
Murray Leith is known for worrying about downside risk, but he didn’t spend much time following last fall’s budget battle in Washington. “The really important thing is that the U.S. deficit has gone from 10-and-a-half per cent of GDP at its worst in 2010 to four per cent today,” says Leith, creator of the Odlum Brown Model Portfolio, a hypothetical equity portfolio whose holdings typically include between 40 and 50 large-cap stocks.
“The U.S. economy is making forward progress, and that’s what matters,” Leith asserts. “We’ve always been in the camp that the recovery is going to be long and drawn out,” he says. “That’s what we think we’ll continue to have in 2014.”
Leith has no time for what he calls today’s obsession with macroeconomics. “You would think with that obsession that there’s actually a strong correlation between the economy and the stock market,” he says. But Leith argues that there’s an inverse relationship between the two. He cites China, which has had one of the world’s worst-performing stock markets over the past few years but also one of the fastest-growing economies. “The reality is that stocks can do just fine in a muddle-through economic environment, as they have ever since the bottom in March of 2009.”
As of October 15, 2013, the Model Portfolio, which advisers and portfolio managers at $8-billion Odlum Brown might track closely or mine for investment ideas, had delivered a 15.3 per cent compound annual return since its 1994 inception. Over the previous year, it had gained 24.3 per cent, a performance that long-term investor Leith says was driven by decisions made before the 2008 financial crisis. Back then the portfolio diversified out of Canada by investing in U.S. multinationals at attractive prices.
Leith believes that if the Chinese economy loses steam, it could be positive for the U.S. and for stocks that Odlum Brown likes. “It’s going to mean less inflation, and less inflation means a tax cut at the pump for consumers,” Leith says. “It means less pressure on interest rates, which helps keep the recovery alive.”
Three Recent Investment Picks
JPMorgan Chase & Co. NYSE: JPM
Despite its legal troubles, u.s. bank JPMorgan chase was still the largest position in the Model Portfolio as of October. year-to-date, its stock had gained 30 per cent, notes Leith, who thinks there’s still plenty of upside.
“This is a company that’s increased its book value from $36 [per share] pre-crisis to $53, despite $30 billion in legal costs that have been put through their income statement over that period,” he says. “There’s recovery upside in the u.s., and yet you have a bank like JPMorgan trading at half the price-to-book valuation of a canadian bank.”
Proctor & Gamble Co.
The Model Portfolio added 1,100 shares of u.s. consumer-goods giant Procter & Gamble and unloaded its entire position in London-based Diageo, which makes whisky and other alcoholic beverages. “What we’ve seen as we went through the asian crisis in the ’90s and other cyclical downturns in emerging markets is that scotch is pretty discretionary,” Leith says. The worry is that those economies might suffer a deeperthan- expected downturn this time around, he adds. a good alternative to Diageo was P&G, which has the same global reach and emergingmarkets exposure. “There’s also a turnaround element to the company, with some new management and a chance to manage the business better,” Leith says.
Air Products and Chemicals Inc.
“They sell industrial gases, and it’s a very profi table industry, very concentrated; something like four players control about 80 per cent of the market,” Leith says of allentown, Pennsylvania-based air Products. The company has under-performed, but Leith believes that will change, thanks to activist investor bill ackman, who took a stake of almost 10 per cent last september. The company announced it has appointed three independent directors and the current will retire in 2014. “This is an inherently good business,” Leith says. “if we can improve the margins through better management, that will be a bonus. and if none of that works, the downside shouldn’t be too bad because it’s a good business that throws off a lot of cash fl ow.”