12/10/98 Nat'l Post D03
1998 WL 22955637
National Post
(c) Copyright 1998 Financial Post from National Post (formerly The Financial
Post Company). All rights reserved.
Thursday, December 10, 1998
Financial Post Investing
Fund Focus
Stone Flagship Stock seeks opportunities outside resources: 'Radical Economic
Change': Fund's 'pure growth' style provides added diversification
Susan Heinrich
Financial Post
A slogan like "no rocks, no trees, no gold" may seem an odd choice for
an equity mutual fund that focuses on Canada and its resource-based
economy.
But it is this approach that makes Stone & Co. Flagship Stock Fund
worth considering for those who want to diversify their portfolios by
investment style, the fund's managers say.
Value-style managers look for shares that are underpriced compared
with what the manager believes is the true value of the issuing
company. Growth-style managers look for companies where they believe the
earnings and therefore stock price will rise at a rate that is faster
than that of similar companies.
Since so many mutual funds are managed using a value approach to
investing, Toronto-based Stone & Co.'s "pure growth" style offers
further diversification, says Richard Stone, the company's president and
founder.
"There has been a radical change in the Canadian economy in the last
10 years," Mr. Stone says.
And the Toronto Stock Exchange 300 composite index has changed to
reflect that. The TSE 300's natural-resource-sector weighting has fallen to 25% from about 33% in 1988, he says.
Meanwhile the proportion of growth stocks, such as industrial
products, has risen to 17% from 9% over that period. Financial services
stocks have experienced a similar increase in weighting.
The exception to the no-resources rule is energy stocks, which are
purchased for Flagship Equity as a hedge against inflation.
Stone & Co. sells only two other funds, a balanced fund and a money
market fund. Of the three, Flagship Stock is by far the largest with
assets of $120.3-million at Nov. 30. The portfolio is managed by a team
at McLean Budden Ltd. headed by Lewis Jackson, vice-president and
director of the Toronto-based money management firm.
This fund uses a specific style known as "pure growth," which the
managers believe provides high returns over the long term.
"Pure growth means not having any cyclical companies in the
portfolio," Mr. Jackson says. "We define a growth stock as a company
that can grow its earnings at an above-average rate, and cyclical
companies, by definition, cannot do that. They have very strong earnings
at some point in the cycle and then they have negative return."
Flagship Stock had underperformed its peers during the three-year
period ended Oct. 31. But since McLean Budden began managing it two
years ago, Mr. Jackson says it has beaten the TSE 300 by an average of
about four percentage points. And that out-performance is expressed
excluding the annual management fee. That fee is 2.88% a year, compared
with 2.2% for the average Canadian large-cap equity fund.
Mr. Stone recommends Flagship Stock be held in addition to value-style
funds, so investors benefit from style diversification. Growth stocks
tend to do well at different times in the economic cycle than value
stocks.
The key, according to Mr. Stone, is finding a fund that does not stray
from its stated style.
Many managers say they use a specific style and then deviate from it
in an effort to boost returns when market conditions fail to favour
that style.
Mr. Jackson says Flagship Stock is managed with a strict discipline.
"We do not deviate from our growth style at all," he says. "We live
through the tough periods. What generally happens [is that] about one of
every four years we underperform. And that is usually a period of time
when value managers outperform."
Value-style funds have outperformed growth funds in the last year, Mr.
Lewis says. But he expects that to change. What's more, the market
correction in August presented buying opportunities.
"With the market correction the whole list of growth stocks took a
pretty good hit and [that] gave us a lot of opportunity," he says.
The McLean Budden team added to the fund's positions in Northern
Telecom Ltd. (NTL/TSE), Newbridge Networks Corp. (NNT/TSE), Laidlaw Inc.
(LDM/TSE), Magna International Inc. (MGa/TSE), Thomson Corp. (TOC/TSE),
Mitel Corp. (MLT/TSE), Loblaw Companies Ltd. (L/TSE), and MDS Inc.
(MDSb/TSE).
And most of those stocks still are trading at prices that are about
half their 52-week highs, he says.
Next month, McLean Budden will begin managing a new fund for Stone &
Co.: Flagship Global Growth. Mr. Stone says introduction of this fund
has been planned for some time.
The company has resisted the temptation to continually create new
funds to compete in the latest hot sectors, he explains. "We didn't want
to launch another fund until we felt people really understood what our
existing funds were all about."
Measured by assets as well as by number of funds, Stone & Co. is a
tiny player. At Nov. 30, it had $146-million under management.
Mr. Stone says he is not fazed that there are no less than 44 mutual
fund shops in Canada larger than his. But he is happy with the progress
the firm has made and has deliberately chosen a slow and steady
approach.
Mr. Stone laughs when asked if competition among fund firms is even
tougher now than three years ago when he launched his own company.
"Tougher? It's always been so tough, so I don't know."
STONE & CO. FLAGSHIP STOCK:
Data at 11.30.98:
Total assets: $120.3 million
Portfolio manager: McLean Budden Ltd.
Load: front or back
Management expense ratio: 2.88%
STONE & CO. FLAGSHIP STOCK: Data at 11.30.98: Asset allocation (% of
portfolio):
Growth 43.4%
Interest sensitive 38.1%
Energy 9.5%
Cash 7.1%
Foreign 2%
STONE & CO. FLAGSHIP STOCK: Data at 11.30.98: Top 10 holdings (% of
portfolio):
Toronto-Dominion Bank 7.2%
Royal Bank of Canada 7.0%
CIBC 5.5%
BCE 5.0%
Northern Telecom 4.7%
Magna International 4.6%
Laidlaw Inc. 4.6%
TransCanada Pipelines 4.3%
Bombardier 2.9%
Newbridge Networks 2.9%
TABULAR OR GRAPHIC MATERIAL SET FORTH IN THIS DOCUMENT IS NOT DISPLAYABLE
List: Stone & Co. Ltd. / STONE & CO. FLAGSHIP STOCK: Data at 11.30.98: (Online); Chart/Graph: Stone & Co. Ltd. / STONE & CO. FLAGSHIP STOCK: Data at 11.30.98: Performance %: (See print copy for complete chart/graph.); Ranking table: STONE & CO. FLAGSHIP STOCK: Data at 11.30.98: Asset allocation (% of portfolio): (Online); Ranking table: STONE & CO. FLAGSHIP STOCK: Data at 11.30.98: Top 10 holdings (% of portfolio): (Online);
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