Van Arbor sees flat market; safer stocks to star

By Claire Sibonney

TORONTO (Reuters) - Canadian fund managers Andrew Parkinson and Youssef Zohny are buying cheaper safe-haven stocks like utilities instead of banks and resource firms, betting shares that profit most from a growing economy will lag as governments drain stimulus spending.

The Van Arbor Canadian Advantage Fund, which beat the market by almost 70 percent in 2009, started cashing out of "overvalued" energy and materials stocks last year and shifting into defensive sectors such as utilities that didn't participate in the rally.

"If you look at utilities versus the market in terms of valuation on a book level, on cash flow, also on an earnings side, it's very reasonably priced," Zohny, the 29-year-old associate portfolio manager of Vancouver-based boutique firm Van Arbor Asset Management Ltd, told Reuters.

Comparing the S&P/TSX Composite Index's utilities index .GSPTTUT to the financial index .SPTTFS, Zohny points out they both have dividend yields of over four and a half percent, but he thinks earnings growth for banks will be constrained.

"Credit growth and credit demand is just not what it used to be," said Zohny.

Zohny and managing director Parkinson, 54, say utility companies such as Canadian Utilities Ltd CU.TO, TransAlta Corp TA.TO and Fortis Inc (FTS.TO: Quote), have more potential for earnings and price growth. They see the Canadian dollar weakening, which would boost manufacturing and electricity demand.

They said the cost of the oil and coal that fuel these companies may well be less than many investors are pricing in, making utilities even more valuable.

The Canadian Advantage Fund rose more than 100 percent last year and beat a 31 percent rise in its benchmark, the S&P/TSX Composite index .GSPTSE.