Transcript: Taking the emotion out of portfolio management

Where Canadian equities fit in the current picture

VT: There has been kind of a dislocation where the general equity market has ignored anything that’s not U.S. and anything that’s not U.S. growth. And that has been questioned, especially at points where U.S. equities, U.S. bonds and the U.S. dollar were also being weakened. So Canada is a phenomenal market with some global champions, domestic leaders, and a very stable economy. So it does present very interesting opportunities. But we are more specific to individual companies, because we also recognize that Canada as a whole, and the Canadian equity market is about 30% commodities, energy and materials, including gold, and maybe about 30% financial. So it can be a more concentrated market. So we believe a more selective portfolio that looks at these opportunities that are more micro in nature rather than macro, can offer diversification benefits outside of what was predominantly, you know, ‘There is an alternative to U.S. exceptionalism.’

Portfolio positioning

VT: We are bottom-up value investors. What that means is we are not macro investors. We’re not thematic. It is one stock at a time, focused on the quality of the franchise, free cash flow and discounted valuation. These individual decisions build up to the positioning of the portfolio, which reflects sector weights and geographic allocation. In the North American portfolio, from a sector perspective, we have higher weights in the consumer, healthcare and industrial sectors versus our benchmark. And we have a lower weight to commodity sectors like energy — mainly on sustainability of free cash flow — and the technology sector on valuation. There are some themes that we think are critical to investing in the current environment, especially in individual companies. I think the first is a focus on pricing power to weather any of the inflation risks that we may have. And the second is just to find resilient moats or franchises with a strong balance sheet and also really astute management teams to take advantage of the crisis and strengthen the earnings power coming out. The key theme that we’ve observed in Q1 of this year is a flight-to-safety trade. For example, in the Canadian equity market, the top-performing sectors included gold, grocery stores, utilities and defensive business models, which have that common link. Next year’s earnings may be a peak, it may be a trough. It does not really reflect the true earnings potential of a company when you go through shocks in some way or form. So in every company that we look at, we’re looking to model it out three to five years to get a sense of what normalized earnings will be. And that also aligns to our long-term perspective of not just looking at the next quarter but looking to see where others are not yet looking but clearly will be as we move forward.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Vim Thasan of Beutel Goodman. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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