I was in Toronto this week and met with the crew at CGOV to talk about the Equity Fund.  We covered lots of ground, which we’ll report on in our Quarterly Report that will be published on or around April 10th.  In the meantime, I thought the discussion we had on the banks was worth a posting.

As background, CGOV holds two banks – TD and HSBC – in addition to Manulife and Home Capital.  Like everybody else, they are watching the goings-on in the sector and trying to figure out what’s going to happen.  Their assessment so far?  The sector has more skeletons in the closet and needs more time to heal.  They’re not going value hunting just yet. 

So, what position did they add to recently?  TD Bank. 

Given what I just said, this trade may seem a tad inconsistent, but it’s really not.  There are no guarantees obviously, but TD is not involved in most of the war zones in the banking and credit markets.  It has its problem areas for sure (some analysts are concerned about its commitment to help fund Ontario Teachers’ purchase of BCE), but compared to CIBC, BMO and the global banks, it’s very clean. 

For portfolio managers who feel the worst is over for the banks and who want to take advantage of low valuations, the TD is not going to be the bank they buy.  It hasn’t gone down nearly as much, so it’s not going to give them enough zip as a turnaround/bounce-back candidate.  When the recovery comes, TD will go up a lot, but it will almost assuredly lag behind the lower quality banks. 

The issue for Gord O’Reilly and Roy Hewson, the managers of our fund, is that they don’t know where the bottom is.  If they knew, they might buy one of those other banks.  In the meantime, they’re happy to add to one of their favourite holdings at a sale price of $59.  As Roy said, “we’re buying these shares for the next 6 years, not the next 6 months.”