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McLean Budden Canadian Equity Growth

The McLean Budden Canadian Equity Growth fund fell 16.3% during 2002 which was an uncharacteristically poor showing for a better than average fund. The fund benefitted in 2000 and 2001 from having pared back its exposure to information technology in the final run-up of the tech bubble. However, according to portfolio manager Bruce Murray, the fund was too quick to move back into technology stocks in 2001, and the generalised drop in the markets last year did nothing to help performance.

A suitable benchmark for the fund is formed by including 75% S&P/TSX Composite Total Return, 7.5% S&P500, 10% MSCI World, and 7.5% MSCI EAFE indices. Over ten years the Mclean Budden Canadian Equity Growth fund returned an average of 8.5% annually, which compares favourably with its benchmark return of 7.8%.

The fund is managed by McLean Budden's Canadian Equity team of Bruce Murray, Bill Giblin, Mary Hallward, and John Durfy. The Canadian component of the fund, which generally accounts for about 75% of assets, is made up of large and mid-cap stocks listed on the TSE. Stocks are selected for the fund using a bottom-up aggressive growth style. The focus is on well-managed companies that have a record of strong earnings growth and return on equity, as well as solid potential for future earnings growth. In-house fundamental analysis is complemented by computerized earnings modeling. The resulting forecasts play a role in establishing buy and sell targets, and they are also reflected in a stock's relative weighting.

Mr. Murray notes that the team generally aims to construct a portfolio containing no more than about forty Canadian stocks. Of these, none may have a weight greater than its weight in the S&P/TSX Composite Cap Index plus 5%, which effectively limits the fund's exposure to any single stock to a maximium of 15% of assets. Since the managers identify Information Technology, Telecom, and Consumer Products as growth sectors, these sectors' weights in the fund are generally 100% of their index weight. Once stocks are purchased the managers like to take a long-term outlook, as demonstrated by the fund's low 29% five-year average turnover. This is not unexpected since McLean Budden (MB) has traditionally managed pension funds.

As of the end of the second quarter, the fund's Canadian holdings reflect its growth strategy and this part of the portfolio is expensive. It's 3.5% earnings yield translates to a P/E of 28.5, which is high compared to the S&P/TSX Composite's median of 21.2. The portfolio's dividend yield of 1.7%, though better than the Composite's 0.7%, is modest in absolute terms. On a price-to-book basis the fund is on par with the index at 1.9, and it is valued at a modest one times sales.

On June 30th the fund's portfolio included 41 Canadian stocks, which accounted for almost 77% of assets. A further 6.4% was invested in the MB American Equity fund, and the fund held 8.6% and 8.5%, respectively, of the MB International Equity and Global Equity funds. Cash and short-term notes represented 2.6% of assets. Among the Canadian stocks, the top three sectors were Financials, Materials, and Consumer Discretionary. When combined, these accounted for just over 53% of the Canadian portion of the fund. The fund's top three stocks were TD, CIBC, and Scotiabank, which together represented just over 13.5% of the fund's assets.

The fund moved to lock in gains during the second quarter. In the technology sector, for example, significant reductions were made to the fund's holdings of Nortel, Research In Motion, and Zarlink. The fund also sold about 75% of its Brascan stock. The proceeds were used to buy new positions in Four Seasons Hotels and Shoppers Drug Mart as well as to significantly increase the fund's holdings of MDS, Dofasco, and Bombardier. Looking forward, the managers continue to favour information technology and consumer discretionary sectors while playing down the banks, at least in relative terms. A slow economic recovery is foreseen, and good valuations are perceived in the current market.

Although not a spectacular long-term performer, the McLean Budden Canadian Equity Growth fund has provided slow and steady returns. Since the beginning of this year it is up 5.8%, on a par with the index. Over the last five years the fund's MER has been reduced by 30% and now sits at a low 1.3%. A commitment to low fees, a long-term outlook, and a record of reliability makes the Mclean Budden Canadian Equity Growth fund suitable for the growth component of a well-balanced portfolio.

FF: Q2 2003

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