By Scott Ronalds

Don Cranston and Sheila Norman, both partners at CGOV (the manager of our Equity Fund), stopped by our office this week to give us a review of the fund. We’ll report on the portfolio in detail in our Q2 Report (early July), but in the interim we felt it would be useful to share a few of the points of discussion.

Performance

The fund has fared well throughout the volatility of the past year and a half. Over the short term (1 and 2 years), it is well ahead of a comparable benchmark (60% S&P/TSX Composite Index; 40% MSCI World Index). Over the past 5 years, it is beating the same yardstick. That said, CGOV’s focus is on generating strong absolute returns (as opposed to benchmark-like returns) and the longer-term returns have been meager in this regard.

Asset Mix

The portfolio’s weighting in Canadian stocks has come down from 64% at the end of 2010 to about 53% today. Over the same period, U.S. stocks have steadily comprised about 25% of the fund's equities, while overseas companies have seen their weight increase from 10% to over 20%.

The shift from Canada to overseas has been a result of (1) strong performance from the fund’s foreign holdings, and (2) the manager’s strategic positioning towards emerging market growth in the form of consumer-focused companies such as Asia Pacific Breweries (Tiger Beer, Heineken), Dairy Farm (7-Eleven, IKEA) and Unilever (Dove, Lipton).

The fund’s broad geographic diversification is reflected in the origin of revenue of its holdings. Although over half of the fund’s holdings are headquartered in Canada, many generate a meaningful proportion of their revenues outside our borders. Consider Ritchie Bros. Auctioneers and Franco-Nevada. These companies are based in Burnaby and Toronto, respectively, but only generate about one-quarter of their revenues in Canada. Collectively, the portfolio’s holdings generate about 1/3 of their revenues in Canada, 1/3 in the U.S. and 1/3 overseas.

Company Updates

Asia Pacific Breweries continues to execute well. It has achieved annual revenue growth of 14% since 2008 and raised its dividend another 36% this year. The stock has doubled since late 2010. The manager will look to trim the holding on further strength.

Mead Johnson (maker of baby formula and infant nutrition products) has grown its sales at an impressive pace in Asia and Latin America and its balance sheet continues to improve. It has been a strong performer and was recently trimmed.

Suncor Energy is generating strong free cash flow and increased its dividend 18% this quarter. The stock has been weak, but the manager feels it’s one of the most undervalued companies in the portfolio. It continues to be one of the largest holdings.