Gavin Graham joins Excel Funds

Graham left his position as director of investments at Toronto-based BMO Asset Management on December 31, 2009. He had joined BMO when it acquired the Guardian Group of Funds in July 2001.

His interest in emerging market investments flows from several major premises, which all play into not only direct emerging markets investments, but indirect exposure through Canadian equity funds that will feel the impact of these high-growth economies.

Starting from a macro-economic perspective, he believes emerging market economies generally have better fundamentals than many developed economies, including the United States. These fundamentals include trade surpluses, better foreign exchange reserves and stronger financial positions than most developed economies. The finances of most emerging markets are in better shape than most developed countries, with the possible exceptions of Canada and Australia.

Emerging market investing also includes understanding the impact that economies such as India and China exert on Canadian equities, especially in natural resources, he argues. Investors should look outside the developed economies to emerging markets to understand much of what can happen to Canadian stocks.

“Why has the price of copper gone up when the United States is still mired in recession,” he asked rhetorically during a recent conversation with Advisor.ca. “[It’s] because the Chinese are now the setters of the price.”

Looking to European economies, Graham views European-focused investment funds as generally clear of the problems currently plaguing the recently-dubbed “PIGS” bloc — Portugal, Italy, Greece and Spain. (The acronym is sometimes expressed as “PIIGS”, to include Ireland.)

Most European funds do not have many holdings in those countries, he explained, but most have holdings in what he describes as “big blue chip companies you don’t have in Canada and don’t get in the emerging markets” — companies such as liquor supplier Diageo and consumer goods giant Unilever, both based in the United Kingdom.

Looking to emerging markets economies also means seeing the impact they have on these funds, he believes. “As you start getting wealthier consumers in the emerging markets, they will start buying aspiration goods,” such as Diageo’s Chivas Regal, he says.

In the post-financial crisis world, some investment dollars that might otherwise have gone to American investments will now flow to emerging markets investments. Canadians have largely held back from emerging market investing, due to a lack of familiarity with markets outside of North America, a shortfall he believes he can address at Excel Funds.

“[Foreign] exposure was the U. S. because it was close and familiar and three-quarters of our exports went there. That was what drove the Canadian economy, so that’s what we needed to know about,” he said, paraphrasing what he sees as a popular attitude.

Now, the downward spiral of the American market has at least partially whetted Canadians’ appetite for investing outside of North America.

Moreover, the rising Canadian dollar has been expensive and costly for Canadians investing in the U.S., he argues. A Canadian investor starting with Canadian dollars and converting to American dollars might have lost as much as half of his or her portfolio value during the market crisis, he says. That sobering fact will also lead to increased investing in emerging markets and emerging markets funds.

And the cost may continue pulling down American portfolios, he predicts, pointing to U.S. President Barack Obama’s avowed goal of doubling American exports to create jobs, a goal that would seem impossible without a serious devaluation in the American dollar.

“You do it by cutting the price and the way you do that is to let the currency slide,” Graham says, suggesting that the U.S. dollar could depreciate by as much as 25% to 30% in the next few years.

Graham’s emerging markets proposition includes looking closely at the concept of the BRIC bloc — Brazil, Russia, India and China. In some ways, investing in Brazil or Russia may overlap Canadian investments, especially resource-based investments, since Brazil and Russia have what he terms “the same set of resource assets that we have here in Canada.”

However, the other half of BRIC — India and China — increasingly need those same Canadian resources.

Al Emid, a Toronto-based financial journalist, covers insurance, investing and banking.

(03/03/10)