Turchansky: Traditional argument of value versus growth investing enters new phase

EDMONTON – Everybody has a plan, until they get punched in the ce.

Mike Tyson, former world heavyweight boxing champ

The above quote, resurrected by Canadian equities portfolio manager Dan Dupont, during Fidelity Investments presentation to financial advisers in Edmonton, reflects what investors have been going through lately.

In ct, the Fidelity road show brought back memories of an Ali-Liston pugilistic dust-up.

In the macro corner was Jurrien Timmer, a top-down money manager from Massachusetts, heading up Fidelitys Tactical Strategies Fund. He said that increasingly the world is a macro world, alluding to the idea that stock markets are now moved by governments and finance ministers.

In the micro corner was Dupont, a bottom-up investor who manages all or part of Fidelitys Canadian equity funds. He selects investments based on fundamentals, like individual company revenues and profits.

Round One.

Timmer steps in, saying that were in a sideways-moving stock market for another 12 to 18 months, and he isnt adding risk to his fund. He believes major countries will try to bolster their economies through inflation. Jab! That reduces currency value. Jab! So hes bullish on investing in gold. Uppercut!

Dupont, reeling, retorts: I have not bought a material stock in the equity portion of the fund for income in the last three years. Block! That means no precious metals, no base metals. Haymaker!

Ding!!! End of Round One.

Indeed, the traditional argument of value versus growth investing, and of large-cap versus small-cap companies, has entered a new phase.

Timmers suggestion that investors are now at the mercy of governments, instead of corporate chief executive officers, was quickly demonstrated when Greek Prime Minister George Papandreou announced that his country would hold a referendum on whether to accept austerity measures as part of a financial bailout from other European countries. The move, a gamble to solidify Papandreous teetering political strength, raised the spectre of a referendum defeat that would bring down Italian banks that loaned Greeks money they cant pay back. That prospect, in turn, caused stock markets around the world to plummet early this week. (On Thursday, Papandreou called off the referendum.)

Timmer says that volatility is here to stay for at least two years, and markets are going to remain turbulent due to structural imbalances caused by asset misallocation. That created the macro world, where its manic-depressive, its either great or its terrible, but nothing in between.

One such asset misallocation was the United States central bank, the Federal Reserve, lowing interest rates too much during an over-reliance on credit, that led to the sub-prime housing crisis.

Another misallocation of capital came when the euro currency was launched in 1999, and all of a sudden countries like Greece, Italy and Spain, that had high interest rates and high inflation, were handed a gift; where they could borrow not at their own interest rates, but at Germanys (lower) interest rates and Germanys credit rating. So those countries went on a binge.

Timmer says another concern is China, which doesnt have a currency with an open exchange rate.

The aftermath is that the cycle goes on too long, it creates inflation (in China), it also creates a surplus of dollars that have gone from the U.S. to China, and those dollars get recycled back into the U.S. treasury bond market, and that creates imbalances. Thats why our interest rates are much too low.

Timmer thinks the U.S. Federal Reserve is planting the seeds for a third round of money printing and spending, called quantitative easing, or QE3, which could produce a temporary stock market rally.

In China, a major issue driving the economy is the automobile. In developed countries the number of vehicles has remained relatively constant at 400 to 600 per 1,000 people, while during the same time the number in China has grown from 30 to 128 per 1,000 people.

The car is the No. 1 status symbol in China, even if you never drive it and it sits in the driveway for everyone to see. Anyone who wants to bet against China you do it at your peril.

Timmers feeling is the stock market rally that began nearly a month ago will end during the last five weeks of 2011, then markets will trend downward.

Meanwhile, back to Dupont, being sponged down and recuperating on his stool in his corner.

Rather than trying to predict whether there will be inflation or deflation, Dupont tries to set up his portfolio so its able to handle both extremes.

My job every day is to distinguish between Pfizer and Yellow Pages, Dupont said. Both of these companies have high returns on capital, both have been good businesses in the past, but one of them has a future and one of them looks like its going to be a little tough.

Yellow Media, as its now called, has suffered from technology changes to its marketplace, as well as accounting restructuring of yields from an income trust to a corporation.

Dupont knows that some holdings hes added, like BP and Microsoft, cause other money managers to furrow their eyebrows.

He is a little concerned about Canadas high consumer debt. And hes nervous that real estate levels are a little high, saying the ratio of house value to annual mily income should be 3.0, and our current ratio of 4.5 is virtually what it was in the U.S. in 2006, before now dropping to 2.8. He says Canadian mortgage debt could hurt financial institutions with large consumer loan portfolios.

Hes also underweight in oil and gas stocks for the short term, but likes them in the long run.

Ray Turchansky writes Fridays in The Journal.

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