Money Managers Have Confidence In 2010

Roseman: Two money-making stock portfolios

It has been a lost decade for stocks, from the tech bubble's implosion in early 2000 to the credit crunch and recession of the late 2000s.

Investing in U.S. stocks was worse than keeping your money under the mattress, as the S&P 500 index lost an average 2.5 per cent a year.

International stocks were also a money loser, as the MSCI world index fell 0.7 per cent a year during the decade.

But you could have earned handsome returns sticking with Canadian stocks.

The S&P/TSX index (in U.S. dollars) had a compound annual growth rate of 7.8 per cent a year from August 1999 to August 2009, according to research by Scotia Capital.

"Canada is rising because Asia is rising," says portfolio manager John Stephenson, senior vice-president of First Asset Funds Inc.

In emerging markets, such as China and India, you can find masses of people moving from the country into the city, becoming middle-class consumers, buying fridges and cars for the first time.

"The secret of investing is looking forward, seeing where world growth is coming from, not where it's been. The future will be dominated by a rising Asia," Stephenson says.

But Asia's loosely regulated stock markets can sting you if you're not an expert. "Where you want to invest is in Canada, the supply chain to global growth," he says.

Stephenson got his MBA at INSEAD in France, moved to the United States and worked at Enron Corp. for almost four years. This was before the energy trading firm failed and its executives were charged with criminal activity.

He still admires the U.S., but feels it's no longer innovative.

"About 40 per cent of the S&P 500 index's earnings growth at the end of 2007 came from financial services," he says. "And a lot of that growth came from securities linked to subprime residential mortgages. They seemed to offer a perpetual profit machine, one we now know was largely a sham."

I liked Stephenson's strategy, which he lays out in a book, Shell Shocked: How Canadians Can Invest After the Collapse (Wiley, $32.95), published last fall.

But I also wanted to know more about finding large-cap Canadian stocks that should benefit from Asia's rise in the coming decade.

So, I asked him to put together two $50,000 stock portfolios – one for investors who don't plan to retire for years and another for those who want income to live on or reinvest.

The growth portfolio has a dividend yield of 1.33 per cent and a 12-month target return of 19.16 per cent. While focused on commodity stocks, it also has technology (Research In Motion, Bombardier and CAE) and financials (Manulife and Sun Life).

The defensive portfolio has a dividend yield of 4 per cent and a 12-month target return of 9.4 per cent. It includes more high-yield bank stocks (TD, RBC), utilities (Enbridge, Emera, Fortis) and telecommunications (BCE, Rogers).

Precious metal stocks (Barrick and Goldcorp) show up in the growth portfolio, but are not recommended for income investors.

Stephenson endorsed the broad-based S&P/TSX composite index exchange-traded fund, as well as ETFs linked to energy, materials and financial indexes.

I'll check on these two portfolios, built on the idea that Canada is a supply chain for Asian growth, in three months to see how they're doing.