Manulife Financial (MFC.TO)

This continues to struggle with very, very low interest rates, and he expects we are going to have low interest rates for a very long period of time. CRM2, the new regulatory environment, is potentially going to put pressure on mutual fund fees. Pricing on their insurance products is under pressure. Expanding into Asian market places, which is a slow, long slog, and not without its risks. At this price you can own it, but it would be a Sell at $18-$19.

Getting beaten up because of the yield curve collapsing, certainly negative in certain countries around the world, and collapsing in the US, with the 10 year touching 1.37, which is incredibly bad. The Government of Canada 10 year is going to go to at least 1%, which will drag this company down with it. He is Short this.

They will benefit when interest rates go up, but it will be 25 basis points at a time. Apart from the US the rest of the world has been taking interest rates down, though. You need to see global interest rates going up. MFCT-T rates in the bottom third in his ranking. He does not see it forming a base, but he is watching it.

Financials do not rate high on a Buy list in these markets. Has pretty much been Short financials since starting his fund 18 months ago. Insurance companies in particular are in a tough bind. With these low rates, putting premiums to work and earning a decent return without a lot of risk, is very tough. This doesn’t have much European business. Asian and wealth management businesses have been great, but offsetting those 2, they have had some issues with energy debt. The good thing is that it is really cheap. If you take an 18-36 month view, you can be okay.

This has exposure to the overall equity market, and people love to play it on the way up, and love to short it on the way down. The expectation for rate hikes is being pushed out right now, so they are out of favour. He would use $13-$14 as a floor and would wait for it to pull back a little.

(A Top Pick June 22/15. Down 28.5%.) He likes companies that have great operations offshore, and the Asian growth for this one has been quite dramatic. Hadn’t thought rates would stay down for as long as they have. With the current drop, he would Buy more.

It is hard for him to get excited about this company. Just when it seems that they are out of the woods, something else happens. The issue for life insurance is the weak Cdn$, low interest rates and that the stock market hasn’t taken off. Trading at 0.9X BV, which would probably be of interest to a deep value investor.

Switch to something better? If you own, stick with it for the time being. Shares are still moving sideways, but starting to inch up. It is still technically below the 200 day moving average, which is not a great long-term signal, but since Feb-April, it is trying to move higher, and he is seeing higher highs and higher lows. A cheap stock at 10X earnings. Dividend yield of 3.95%.

In terms of life insurers, this is arguably one of the best. Under the new CEO, they have separated into 2 focuses, their core business and their investment side. With lifecos, low rates are very detrimental to them and volatility in the stock market is not good. With a company like this, they really need to focus on the core business. A good place to be and a good company.

He owns this because of earnings, valuation, the global diversification, growth, etc. However, it has underperformed. The market concept is that life insurance companies benefit more in a higher or rising interest rate environment. Janet Yellin and Central bankers globally have taken any chance of US rate increases down dramatically. The stock is fine. You go through these hiccups. Thinks it is a better play today than Canadian bank stocks.

Got quite constructive on this after they reported that energy was making up a bigger part of their portfolio and they were seeing some write-downs and things that were impacting their overall Book. This means they have to reserve more which is good for their capital measures or for their ROE. He saw it as a buying opportunity. Relatively undervalued and is a strong dividend paying stock that will continue to grow its dividend as we come out of this cyclical low in energy.

(A Top Pick June 18/15. Down 21.22%.) This has been disappointing, because operationally they did exactly what he thought, but their energy book has really hurt them. Have been up about 12%, and he models that they continue to grow 12% over the next couple of years operationally. They have dividend growth and he continues to see it growing at 11% annually with a 42% payout ratio. Very cheap relative to its peers. Still a Hold.

This would benefit from higher interest rates. Of the 3 biggest Canadian lifecos, this is his least favourite. Thinks the management and its assets is the weakest of the 3. His preferred choice is Sun Life (SLF-T) followed by Great West Life (GWO-T). If you own this he would switch into Sun Life.

Insurance businesses are not expensive stocks, and they certainly pay very strong yields. The tough issue is with lower rates. These companies have a very, very difficult time. This company not only has a good asset management business, but has grown a very strong franchise in Asia, which is a strong growth area for them. However, he doesn’t see where growth comes from and doesn’t think they can change dramatically in this low rate environment over the next little while.

This has been under a little pressure over the last few weeks after a nice rally off the lows in February. A concern for the life sector is, what is going on with interest rates. There is $10 trillion or more of sovereign debt that now pays a negative yield. A lot of the returns that insurance companies get to pay their obligations, comes from buying and holding sovereign debt. When interest rates are very low, it makes it hard for them to generate the kind of return they need to meet their obligations. As a company, it is doing a great job and growing in multiple markets, but right now it is being negatively impacted by a little cloud over the insurance group. Prefers something that would benefit in the current environment.