Altamira Sees Value In Canadian Wireless
October 25, 1999
Ask the average junk bond buyer to talk about industry sectors, and you're likely to get an earful about the merits of cable and telecom, undoubtedly the hottest industries in the high yield universe.
But talk to Toronto-based Altamira High Yield Bond Fund, and you'll end up discussing sectors like forest products. Indeed, forest product companies make up one of the biggest portions of this 350 million Canadian dollar fund, in large part because of one factor: These companies reside in Canada.
One of several fixed-income funds held by Altamira Financial Services Ltd., the fund is required to invest 80% of its assets in companies based in Canada, regardless of where their operations are, to comply with the restrictions dictated by Canada's pension laws. Thus, its holdings are weighted toward those industries with a strong presence in the Canadian economy.
"We have an enormous bias for investing in Canadian companies," said Barry Allen, lead portfolio manager at Altamira. "We tend to know the Canadian companies better than the U.S. ones... we know the management and we're probably a shareholder on the equity side."
Investing in Canada doesn't mean Altamira has to ignore hot sectors. Wireless telecom, along with forest products, comprise up to 40% of the fund's holdings. However, what it does mean is that Allen often ignores what U.S. investors might see as a great bargain.
"Even if something's cheap, if they're not a Canadian company, we may not care, especially if they're in an industry where there's a large number of companies in Canada," he said.
Focus On Wireless
While forest product issuers in Canada have a history of strong performance and will probably continue to do well in the coming months, Allen expects his wireless holdings to outperform anything else in his portfolio.
That's because, according to Allen, the Canadian wireless providers have more room for growth than even the U.S. issuers, combined with a lower cost of entering the market.
"For wireless PCS companies, the environment in Canada is really, really attractive relative to other places around the world," he said. "The penetration rate of PCS and wireless phones is around 20%, while in the U.S. it's around 27% to 28%."
More than 5% of Altamira's investments are in Microcell Telecommunications, while another 3.4% is held in Rogers Cantell. Allen also favors Clearnet in the wireless-PCS sector.
Not only does Allen favor these three names for their dynamics and consistent growth, but also because they are prime takeover candidates. Because Canadian ILECs (incumbent local exchange carriers) are structured provincially, any wireless provider with a nationwide reach is a takeover candidate whose bonds may surge at any time.
"The industry is growing more rapidly in Canada because it's earlier in its development and there's only four competitors with national licenses, whereas most U.S. markets have two to eight competitors," he continued. "Also, in Canada, there's no upfront cost for licenses like in the U.S., so you pay as you go. So you don't have to raise nearly as much capital, and there's less financial risk in investing in these companies."
Allen uses a "fundamental-based, top-down macroeconomic approach" to create an investment portfolio. Each year, the Altamira fund formulates a macroeconomic model, and over-weights those industries it expects to do well.
Then, the fund uses a bottom-up approach to pick the best companies in sectors it expects to outperform. It analyzes a company's management team, whether cash flows are improving or declining and then assigns a liquidity rating to the bond.
Year-to-date returns indicate the strategy is a winning one. This year, the Altamira fund has posted 6.88% returns (after a 1.94% fee). Three-year returns are at 8% and four-year annualized returns stand at 10.25%.
But while Canadian high yield bonds have been quite profitable for investors like Allen, the market there is limited, most noticeably in terms of industry sectors.
The healthcare system, for example, is nationalized, which means there are few private sector healthcare providers. There are also no private sector casinos in Canada, other than those owned by Indian tribes. And supermarkets, another common high yield issuer in the U.S., are considered investment grade in the Canadian market, often maintaining very strong credit ratings.
"Given that there's such a small universe of companies to invest in, liquidity is poor in the market, so it's hard to make changes in the portfolio even if you want to," said Allen.
The fund currently avoids emerging markets. And given the current weak state of the corporate high yield market, Allen is holding higher-than-normal levels of cash in his portfolio. Instead of investing new money that comes into the fund, he's letting it sit as reserves.
Before the end of the year, Allen plans to increase his weighting in bank loans, shifting money away from high yield debt while maintaining the same sector weightings, up from a current level of 3% to 4% to 15%.
He believes this will be a buffer against any downturn in the business cycle and that the Altamira fund will continue to outperform similar Canadian high yield funds.
"Our assets were growing rapidly over the last two to three years, and mid-year this year that growth started to slow," he said. "We're not losing money, but we're not getting money either."