By Tom Bradley

On my recent trip to Toronto, I spent some time at the CGOV office, meeting with Gord O’Reilly, the manager of the Equity Fund, as well as other partners of the firm.

Out of all the conversations, pizza and beer came very little that was new – even though they’re a fun group, their management approach is boring. Indeed, there are few changes to report, although the strength of the market rally has changed their outlook slightly.

They added one new name to the list (I can’t mention it because they are still buying) and sold Tim Hortons on recent strength. With few exceptions, the market position and competitiveness of the 24 companies in the fund have improved over the year. The hostile operating environment exposed the weaknesses of Manulife (unhedged market exposure) and Birchcliff Energy (balance sheet), both of which were forced to raise capital at low prices, but the other companies will come out of the recession in a better position.

Gord is still making sure the portfolio has some balance to it, including companies that will do well in a slow or bumpy recovery – drug store chains Shoppers Drug Mart and CVS Caremark, Diageo (booze) and Ritchie Bros. (auctioneers). This part of the portfolio has held back performance during the rally, but could prove beneficial when growth is harder to come by.

The fund has had a nice recovery (up 12% for the year to August 31st and 33% from its low), but hasn’t kept up with the rocket ship called the S&P/TSX Composite Index (up 24% so far in 2009). There are a few reasons for this: (1) The quality of the companies gives the fund less recovery potential – this rally has been described as the ‘Dash for Trash’ and there is no trash here; (2) The fund has healthy exposure to resources and banks (this year’s market leaders), but not as much as the TSX does; and (3) The returns from the U.S. and international stocks have been dampened by the strong loonie, even though stock selection has been quite favourable.

As for the outlook, the Tim Horton’s sale is indicative of what Gord and the team are thinking. They sold the stock on strength and haven’t re-invested the proceeds yet. Their bottom-up analysis shows that stock valuations are still attractive, but the market has come a long way and has been carried along by momentum in a number of sectors. They are inclined to keep some powder dry and be ready for any opportunities the fall may bring. The Tim’s sale has increased the cash level from 4% to 7% of the fund.