Whoa, Canada! A market's quiet boom

Mutual-fund manager Steven Bender is happy. His fund, Fidelity Canada, has relatively more shares of Nortel Networks Corp. in his portfolio than his fund-managing peers in Canada.

Nortel is one big reason why funds invested in Canadian stocks have been doing so well this year. As of Aug. 1, the price of the Canadian telecommunications-equipment firm is up 237 percent from a year ago.

So what? After all, the value of all Canadian shares exceeds US$600 billion. There are hundreds of different stocks.

Well, the value of Nortel's stock amounts to 35 percent of the value of all stocks listed on the Toronto Stock Exchange (TSE).

"When that stock goes up, so goes the Toronto Stock Exchange index," says Scott Mackenzie, vice president of Morningstar Canada, a Toronto affiliate of the Chicago-based mutual-fund tracker.

As a rule, so do Fidelity Canada shares. They are up about 20 percent this year - a better performance than most funds in the United States.

"The Canadian stock market has outdistanced the US market in the past six months," notes Paul Bates, president of Charles Schwab Canada in Toronto.

"We are making up for lost ground," says Mr. Mackenzie. "The Canadian market has lagged the US market big time for the last few years."

"Canada is the best-kept secret in the investment community," says Andrew Pilara Jr., portfolio manager of San Francisco-based RS Global Natural Resources. He has 66 percent of his fund's $25 million in assets invested in Canada. It's "safer" than investing in natural resources elsewhere, he says.

Nortel is Fidelity Canada's biggest stock holding, probably more than 11 percent of its portfolio. That means, in relation to the overall Canadian stock market, the fund is underweighted in Nortel.

Boosted by Nortel, the TSE 300 Index is up about 23 percent, a bit more than Fidelity Canada shares.

Canadian-based mutual funds have also been underweighted in Nortel. They are limited by law to a maximum of 10 percent of the value of their portfolio in one stock - a measure to assure diversification. American funds can put as much as 25 percent of total assets in one stock.

Asked if Canada was still a good place to invest, Mr. Bender was cautious. "I certainly hope so," he says.

But there aren't many ways Americans can invest in Canadian stocks, other than buying the stocks themselves directly. Most big companies are listed both in New York and Toronto. But Americans can't buy shares in any of the 2,000 Canadian mutual funds easily. (Nor can Canadians buy American mutual funds easily.)

"There is no ... reciprocity of prospectus approval," explains Mr. Bates. The Securities & Exchange Commission in Washington, for example, doesn't automatically approve the sale of Canadian mutual-fund shares in the US, even though Canadian regulators have approved them.

Several other American funds, mostly funds invested primarily in gold stocks or other natural resource stocks (such as Mr. Pilara's), have 50 to 66 percent of their money invested in Canada. Only Fidelity Canada has as much as 87.5 percent.

Americans can also buy EWC MSCI Canada Index fund ishares. It's a basket of Canadian shares that trade like a single stock on the American Stock Exchange. The stock is not redeemed at net asset value at the end of a day by a mutual fund, but trades at whatever price demand and supply set during the day. The portfolio is constructed to follow the MSCI index.

Standard & Poor's Corp. has set up similar stock-like funds on the TSE. One is based on an index using the largest 60 companies on the TSE.

One factor for such funds and Fidelity Canada will be the price of Nortel shares. They are selling at about 100 times earnings. "Very expensive," says Bender. Yet he sees the company's fundamentals as "quite favorable."

Last month, The Wall Street Journal reported that Nortel was negotiating sale of its fiber-optics business to Corning Inc., for perhaps more than $100 billion. But the talks were later called off.

Several other factors have boosted Canadian stocks this year, according to the experts. One is the boom in the US, Canada's biggest market. Another is the improved fiscal health of Canadian federal and provincial governments. They are racking up surpluses, cutting taxes, and paying down debt.

A third is the recovery of the Asian market, boosting the demand for Canadian resources.

The stability of the Canadian dollar in relation to the US dollar has helped. So has the rise in oil and gas prices and, to a lesser extent, in other commodities. "Oil and gas have done well," says Bender, who has 12.4 percent of Fidelity Canada's portfolio invested in energy stocks.

Americans have tended to think of the Canadian economy as based on trees and minerals. Technology stocks, says Bender, have "taken over" the Canadian stock markets. Not one of the top 10 companies on the Toronto Stock Exchange is a resource company. Beside Nortel, there is JDS Uniphase Canada, BCE, Rogers Communications, and Montreal-based Bombardier, the world's third-largest aerospace firm.

The TSE is almost like the technology-laden Nasdaq in the US, says Bender.

Outside tech stocks, the price-to-earnings ratio tends to be lower in Canada than in the US. Canada's economy also has more room to grow than the US economy. It has an 8 percent unemployment rate, twice that of the US. "We have a much lower risk of inflation than the US," says Mr Bates.

Canada has about the same size of output and population as California. It's small enough to be neglected by investors. With all the excitement in the American tech market in the last few years, Canada hasn't been alluring to Wall Street.

But nowadays, Fidelity Canada enjoys more buyers of its shares than sellers, though not by a huge amount, says Bender. It has a modest $92 million under management.

Fidelity, as a management group, is now the fourth-largest mutual-fund manager in Canada. Its Fidelity Investment Canada Ltd. has $4.9 billion under management in 41 mutual funds serving the Canadian market.

Bender and a dozen other analysts help manage those funds from Boston, travelling frequently to Canada to seek information. Other American mutual-fund management groups have been moving into Canada, too.

(c) Copyright 2000. The Christian Science Publishing Society

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