McLean Budden American Equity
Over the past fifteen years the Mclean
Budden American Equity fund has gained an
average of 11.7% each year, beating the S&P 500
Total Return index (in Canadian dollars) by 0.5%
annually. The fund was fortunate to have sold
many of its technology stocks in early 2000, as
well as Enron in early 2001. It thus avoided much
of the initial market downturn but was unable to
avoid the general decline that followed in 2002.
Since then the fund has performed well compared
to the index dropping an average of 4.9%
annually in the last three years to the index's 6.3%
average decline. The loss is largely the result of
the decline in the value of the American dollar,
which dropped an average of 8.6% annually
against the Canadian dollar over the past three
The fund is managed by a team of five
portfolio managers, including Mr. Bruce Murray,
and focuses on shares of large and medium-sized
U.S. companies with a market capitalization of at
least $5 billion. Stocks are selected using an inhouse
bottom-up approach that emphasizes a solid
financial position, good business prospects, and
strong return-on-equity. The management team
also spends a great deal of time trying to
understand a company's business before buying
its stock. According to Mr. Murray the fund's
overall style is largely driven by the stock
selection process (not the other way around) and
can vary between value and growth. In recent
years it has been in the value camp but the fund
has recently been drifting back towards
To ensure adequate diversification the fund
will generally not be overweight in any single
stock (with respect to the S&P 500 index) by
more than 5%. Stocks that are not members of
the index are restricted to a 5% maximum weight.
At the end of the first quarter, the fund was
marginally more expensive than the S&P 500
index. Taken in aggregate the fund's portfolio had
an earnings yield of 4.7% (or a P/E ratio of 21.2)
and a dividend yield of 1.7%. In comparison the
index had an earnings yield of 5.0% and a 2.0%
dividend yield according to Barra.com. On a
price-to-book-value basis the fund's 2.7 was
marginally more attractive than the index's 2.8.
Overall the fund's characteristics are consistent
with a blended growth style.
At the end of the first quarter the fund held
fifty stocks and a 1.3% cash position. The top
three sectors represented in the fund were
consumer products, industrial products, and
financial services. The fund's top three stocks
were Citigroup, Pfizer, and Fannie Mae.
Illustrating its more active management style, the
fund sold eleven stocks and purchased fifteen new
companies during 2004. During the first three
months of 2005 the fund had already sold four
stocks, including Allstate and Bank of America,
and added three new names including AIG.
However, despite a high level of recent activity,
the fund's five-year average turnover remains
reasonable at 52%.
Mr. Murray points to the fund's oil company
holdings, such as Apache and Valero, as examples
of the fund's good picks. These stocks have
performed handsomely as the price of petroleum
has increased. Tyco Industries also gets a
favourable nod. The fund purchased Tyco two
years ago after it determined that the company's
problems did not extend beyond the boardroom.
On the other hand, Superior Industries
International is mentioned as a disappointment
where a deterioration in management has
undermined a once solid company. The fund
exited its position in Superior during the first
quarter. In contrast, another disappointment,
Viacom, remains in the portfolio. The fund's
management team still likes the company and
anticipates an improvement in Viacom's business
in the near future.
Going forward the fund team believes that
U.S. dollar weakness has all but come to an end -
at least with respect to the Canadian dollar. Mr.
Murray anticipates that the American markets will
yield at least single-digit returns over the short to
With a MER of 1.25%, the McLean Budden
American Equity fund offers exposure to U.S.
stocks at a very modest price. Its minimum
investment of $10,000 is a relatively low
threshold and it is available in all provinces
except Alberta. A low MER and a very attractive
long-term record of index-beating performance
makes the McLean Budden American Equity fund
worthy of notice by those seeking U.S. exposure.
The fund is best suited, as a U.S. equity
component, in the portfolio of slightly more
aggressive frugal investors.
FF: Q1 2005