by Scott Ronalds

Last month, we hosted a lunchtime investment discussion with Nessim Mansoor, the manager of our Equity Fund. Nessim shared insights into his investment approach and discussed several of the fund’s holdings.

We’ve held similar events in the past, “pre-Covid”, and wanted to gauge interest in face-to-face events again now that virtual meetings have become so popular.

Your participation confirmed there is still a strong appetite for in-person events. We plan to host more of these sessions in the future, with the next one scheduled for Vancouver in February. Connor, Clark & Lunn’s Carolyn Kwan (the manager of our Income Fund and Savings Fund) will lead a discussion on interest rates, inflation and all things bonds. More details to come.

For those who were interested in Nessim’s discussion but couldn’t attend, here’s a recap of the key topics.

A new U.S. president and potential tariffs

“The companies we own have been through recessions; they’ve been through all sorts of tough times.”

Many investors are curious how President-elect Trump’s return to the White House might impact our investment decisions. Nessim explained that the impact is expected to be minimal. His team focuses on building a portfolio of strong businesses with good long-term track records that have done well regardless of the administration in power.

A prime example is S&P Global. The company provides credit ratings, market data, and analytics to a wide range of industries. With roots dating back to the 1860’s, S&P Global has thrived through many presidencies and economic policies. Its success is due to the high value it provides to customers and its expertise in what it does. Moreover, S&P Global operates in an industry with very few competitors and high barriers to entry (building 160 years of trust and expertise doesn’t come easy). So regardless of who is in the oval office, the company remains well positioned to succeed.

Turning to tariffs, where there is perhaps the most uncertainty, Nessim doesn’t foresee widespread impacts on our holdings. This is because we don’t own a lot of companies that are shipping physical goods to the U.S., like auto supplies, oil, or lumber.

Rather, our Canadian investments that conduct meaningful business in the U.S. tend to operate in the service industry. Examples include Thomson Reuters and CGI. Thomson Reuters is the world’s largest supplier of legal software and generates three-quarters of its revenues in the U.S. but doesn’t ship anything across a border. Likewise, CGI is a software company that has business contracts with the U.S. government but isn’t moving nuts and bolts potentially subject to tariffs.

Two exceptions are our railroad holdings, CN Rail and Canadian Pacific Kansas City. Both companies transport goods across the border and would be affected by tariffs or a trade war. Yet, because the talk is still aggressive rhetoric at this point, it’s difficult to forecast any potential impact. Of note, the two companies’ operations and earnings weren’t significantly impacted during Trump’s previous term.

Focus on companies that provide compelling value to their customers

“We look for companies with durable competitive advantages and strengths that will endure over time.”

A key trait that Nessim looks for in a business is an edge in the value proposition it offers its customers. Dollarama, Costco, and TJX Companies are examples.

• Dollarama: Known for its low prices and operational efficiency, Dollarama has doubled its revenues and quadrupled its net income over the last decade without spending a dime on advertising. How? It offers great value. What it sells is 30-50% cheaper than anywhere else. Dollarama is obsessed with low prices and is very shrewd about sourcing products. Management is also smart with real estate: the company has figured out a formula for fitting stores anywhere.
• Costco: The bulk retailer has an obsessive focus on lower prices; it’s the source of its competitive advantage. The company has doubled its revenues over the last 10 years and tripled its net income. Its balance sheet is rock solid, with no net debt. Half of its operating earnings come from membership fees, which is a powerful recurring revenue stream, so it can afford to take lower margins on its products. And with 900 stores globally, the company still has lots of room to grow. 
• TJX: The parent company of Winners, Marshalls, HomeSense, and TJ Maxx is the world’s leading off-price retailer for apparel and home goods. Like Dollarama and Costco, it offers great value and has been very astute and flexible on how it sources products (it taps 21,000 vendors across four countries and has a very sophisticated supply chain). The company has grown its earnings per share by more than 20% per year for decades and has maintained a consistent culture. When you walk into a TJX store, you always know it will be good value.

All three stocks have performed well this year, rising 30-50%.

A few words on debt

“We don’t like debt.”

Nessim prefers companies with low or no debt. Examples include Microsoft, S&P Global, Costco, and Keyence, all of which have more cash than liabilities; while Constellation Software and CGI are examples that have very little debt.

This bias is rooted in Nessim’s approach, which favours businesses that have proven they can operate well regardless of the prevailing interest rate environment.

Weaker performers

“We don’t like to make knee-jerk decisions, because we never want the stock price to tell us what we should do. That’s a recipe for buying high and selling low.”

While the fund has had a solid year since Nessim took over in January, not everything has worked out.

Nestlé and McDonald’s are two holdings that have struggled due to aggressive price increases that alienated customers. The question Nessim and his team ask when a company has a misstep is, “What are they doing about it?” In other words, does management understand where they went wrong, and are they taking action? In both cases, the answer is yes. McDonald’s is going back to its popular value menu, and Nestlé fired its CEO, replacing him with a long-time executive who knows the company culture well. Nessim is cautiously optimistic that both companies can right the ship but will be keeping a close eye on their results.

In situations where questions arise over whether an investment thesis on a stock is still intact, Nessim will have one of the analysts on his nine-member team conduct a fresh review. Sometimes, a fresh set of eyes can reveal faults about a company that may have been missed or overlooked. “We try to never keep our head in the sand”, is the mindset.

The Equity Fund’s place in your portfolio

As a reminder, the Equity Fund is a core component of the Founders Fund (20% of the portfolio) and Builders Fund (35%). You can always view its performance, composition, and latest commentary on our website.

If you have any questions about the fund or how it fits into your portfolio, please contact us at 1-888-888-3147 or book a meeting with one of our Investor Specialists.

We’re excited to invite you to a special event featuring Nessim Mansoor, the manager of our Equity Fund. This “fireside chat” (minus the fireside) will take place in Toronto on Wednesday, November 13, at Queen’s University Smith School of Business’ downtown facility.

Details:

Date: Wednesday, November 13
Location: Smith School of Business (Simcoe Place; 200 Front Street West, 30th Floor)
Time: Mingling and sandwiches: 11:30am; Discussion: 12:00 – 1:00pm

Our Chief Investment Officer, Salman Ahmed, will lead a conversation with Nessim, touching on a range of timely topics, including:

• The impacts of changing interest rates on stock prices 
• Reasons why Canadian stocks aren’t getting the same love as their U.S. counterparts 
• The complexities of valuing AI and technology stocks 
• Overlooked factors that investors should consider

The session will be a great opportunity to gain deeper insights into what Nessim and his team look for in a business, where they’re seeing opportunities, and areas of the market they’re approaching with caution. You’ll also have an opportunity to ask Nessim and Salman any questions you may have.

Please RSVP by November 8, as space is limited, and we will not be recording the event. Feel free to call us at 1-888-888-3147 if you have any questions about the session or would like to reserve your seat(s).

by Scott Ronalds

Electric vehicles are the future, despite a recent slowdown in sales. They’re better for the planet, have fewer parts and lower maintenance costs (no oil changes, less brake wear), and offer excellent performance. Governments are also mandating their increased adoption.

To no surprise, they’ve piqued the interest of investors in recent years. Tesla has a legion of fans and has generated enormous returns for early shareholders. Yet, many investors have also been burned. Indeed, the stock is still down more than 50% from its 2021 high. The same can be said of Rivian (the high-end maker of trucks and SUVs) and BYD (the Shenzhen-based firm that for a brief time overtook Tesla as the world’s top-selling battery electric vehicle manufacturer).

To say that EV stocks are volatile is an understatement. Because of the excitement and hype around the prospects of an enduring shift towards electrification, there’s been speculation around the stocks at times that has led to big share price swings. Investing in the sector is made more challenging by the fact that the manufacturers require significant amounts of capital, profit margins are erratic, and demand has shown signs of inconsistency (Tesla and BYD recently reported disappointing sales figures).

Yet the EV story is compelling, nonetheless. Many investors are focused on picking the company that will win the race (Tesla, Rivian, BYD, Hyundai, or one of the other emerging players), hoping their bet will pay off. But there’s another, arguably safer, way to participate in the industry’s growth: seek out best-in-class suppliers of parts and components.

One such company is Michelin. The French firm with the famous mascot is the technology leader in tires for electric vehicles, and is consistently recognized as one of the world’s most reputable brands. EVs are more demanding on tires because of their heavier weight and faster acceleration. Michelin has developed solutions to address these issues (its tires offer a high load capacity, the lowest abrasion rates, and low rolling resistance) and 8 out of 10 EV manufacturers use its tires as a result.

Michelin stands to benefit from the overall growth in the EV market, regardless of which firm comes out on top. It’s a more stable business (than the EV makers) and has a 135-year history of innovation and profitability. Granted, it’s not going to grow at the pace of a Tesla or BYD, but it’s a steady cash generator with a lower level of risk.

We own Michelin in our Global Equity Fund, which means you also own it if you hold our Founders Fund or Builders Fund. The EV race is sure to be a fascinating one, with more twists and turns to come, and we’ll be watching with interest. (As a side note, 20% of our staff own an EV.) Our money, though, is on the wheels that make it go round.

In this video, I talk to TimesSquare Capital's Magnus Larsson, the manager of our Global Small-Cap Equity Fund, about his outlook for global small-cap stocks and how he has positioned the fund.

This is one of four videos we filmed with Magnus and his team; below are the links to the rest of the series.

Europe Energy Crisis and Investing in the Region
China, Asia, and Emerging Markets
The Future of Global Tech Stocks

A war in Europe has caused a humanitarian, political and energy crisis across the region. Despite these challenges, the Steadyhand Global Small-Cap Equity Fund continues to hold on to many of its existing European investments and has added new positions as well.

In the below video, I talk to David Hirsh about why he sees potential in small-cap stocks in Europe. David is a Director and Partner at TimesSquare Capital (the manager of our Global Small-Cap Equity Fund) and has been researching European stocks for over two decades.

China, Asia, and emerging markets have long shown promise but have produced mixed investment results recently. In the video below, David Oh, Head of Asia at TimesSquare Capital (the manager of our Global Small-Cap Equity Fund), takes us through the opportunities and challenges the region faces and why he's excited about the potential he sees. In the interview, David talks about two stocks in the Steadyhand Global Small-Cap Equity Fund to give investors a flavour for the kinds of investment ideas he is seeing today.

Technology stocks have taken a beating in 2022. The narrative on the sector has shifted significantly compared to just a year ago when tech companies were the ‘darlings’ of the market. Is it time to look for opportunity in the rubble?

In the below video, I speak with TimesSquare Portfolio Manager Sonu Chawla (TimesSquare manages our Global Small-Cap Equity Fund) about the global technology sector at a high level while also narrowing in on certain sub-sectors and companies. With two decades of experience covering tech stocks, Sonu provides some context on the potential of these companies in the current environment and what she’s focusing on when looking at these businesses today.

by Tom Bradley

It’s been a volatile start to the year. The list of issues on investors’ minds is long, topped by inflation, rising interest rates, COVID, supply chain problems, and of course, Vladimir Putin’s invasion of Ukraine and the resulting exodus of western businesses from Russia.

Both stocks and bonds have had a rough quarter. U.S. and global markets are in correction territory (down 10%), with the technology sector down closer to 20%. The Canadian market has fared better due to its heavier weighting in resource stocks (the price of oil, industrial metals, and agricultural commodities have soared), but many domestic stocks are down sharply as well. Shopify, for example, has lost two-thirds of its value in just four months (we do not own the stock). Emerging markets have also suffered significant losses, led by Russia. We do not own any stocks in the country (see our recent post on the topic here).

Bonds, which are typically a safe haven when stocks are falling, have not held up their end of the deal. The Canadian bond market is down around 6%, as yields have risen on the back of an uptick in inflation (when yields rise, bond prices fall). Our Founders Fund is down 5.6% in 2022 (as of March 16). Our Canadian investments have helped buoy its performance, and our large cash weighting (10% of the fund) has also helped. While negative returns are always off-putting, the fund has held up well all things considered. Our Builders Fund is down 7.4% this year.

Our advice to clients hasn’t changed: stick to the plan. In any market pullback, the worst course of action is to panic and make sweeping changes to your portfolio. A well-diversified portfolio will recover over time. The world is a scary place right now, but there are always things to worry about. Stocks have endured many geopolitical conflicts and recessions. The current issues are real and distressing, but we have no reason to believe individuals and businesses won’t pull through again.

As has been the case throughout our 15-year history, we’ve been a net buyer of stocks during the recent weakness. Most of our purchases have been in shares of existing holdings that our managers know well and are still keen on. The companies are typically best-in-class businesses that are highly profitable, well financed, and whose fundamentals and longer-term growth prospects haven’t changed. Examples include:

• Toromont (heavy equipment dealer)
  
• Thomson Reuters (information services)
  
• Brookfield Renewable Partners (renewable power)
  
• S&P Global (financial information and analytics)
  
• Magna International (global auto parts manufacturer)
  
• Rentokil (pest control services)
  
• Sony (consumer electronics, movies, music, and games)
  
• Adobe (software developer)
  
• Kion Group (manufacturer of forklifts, warehouse equipment and automation technology)
  
• Amplifon (global leader in hearing aids)
  
• Sleep Country Canada (mattress and sleep products retailer)
  
• Northland Power (renewable energy)

We’ve also purchased a handful of new businesses, including Zoetis (world’s largest producer of medicine and vaccinations for pets and livestock), CNH Industrial (manufacturer of agricultural machinery and construction equipment), FMC (maker of insecticides, herbicides, and crop protection products), Grafton Group (home and garden retailer in the U.K.), Dolby Laboratories (leader in audio technologies for movies, TV, music, and gaming), and Hudbay Minerals (copper and zinc mining).

To fund these transactions, we trimmed some of our stronger-performing investments. These have primarily been in the resource/commodity sector, including Nutrien (fertilizers), MEG Energy (oil producer), Franco-Nevada (gold), and Ag Growth International (grain handling and storage). Our managers have also moved on from a few stocks where the outlook has weakened or the valuation is no longer compelling. These include Koninklijke Philips, Orpea, and Dassault Systèmes.

In the Founders Fund, we’ve been active in adding to the underlying equity funds. Despite the market weakness, the fund’s stock weighting has increased 2-3% to 62%, which is slightly above the long-term target (60%). If the market weakness persists, we will likely get more aggressive in adding to stocks. We still have a healthy cash position in the fund that allows us to act on such opportunities.

We’ve also used the weakness in the bond market to add to the Income Fund holding (although Founders remains under committed to bonds). Fixed income securities are more attractive with higher interest rates.

Our Q1 Report will be coming out in a few weeks and will provide further colour on the transactions we’ve made this quarter and the positioning of our funds. If you have any questions about your portfolio in the meantime, I encourage you to book a call or video chat with one of our Investor Specialists (just click the ‘Book now’ button), or you can reach us at 1-888-888-3147. I assure you, we don’t go into hiding when our clients need us the most.

[Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.]

by Scott Ronalds

Rising wages and tight labour markets are a hot topic. Coupled with employee absenteeism due to COVID, it’s all taking a toll on companies around the globe. For manufacturers, one solution to these problems is greater automation. Have robots do the work, in other words.

Japan rules the roost here. It’s the leader in industrial robots, the world’s stock of which has tripled in the past decade according to a recent article in The Economist. The country makes almost half of all new equipment, which includes everything from robotic arms to laser sensors and inspection machinery. And business is booming.

The auto industry is a big consumer of these goods (ever seen a picture of a Tesla factory with all those robotic arms?). With more plants gearing up their electric vehicle production, the growth runway looks appealing. Consumer goods businesses and online retailers increasingly rely on robotics for picking, sorting, and packing products. And technology companies have a voracious appetite for sensors and inspection tools, especially semiconductor manufacturers. Demand for chips will only grow as the world continues to digitize.

Needless to say, makers of automation equipment are well positioned. The Economist piece notes: “Being indispensable has proved to be lucrative. All four stars of Japan’s automation-industrial complex [Keyence, SMC, Fanuc, and Lasertec] boast operating-profit margins of over 20%. That of Keyence, the most profitable of the lot, exceeds 50%.”

Of these four stars, Steadyhand investors own two: Keyence and Fanuc. The former is a leader in high precision laser sensors and vision systems used in manufacturing, while Fanuc specializes in robotic arms and has been around for more than 65 years.

Our managers like these companies because they have solid records of profitability and make products that take considerable intellectual capital to design, manufacture, and service (i.e., they have high barriers to entry). They are also a gateway to gaining exposure to fast-growing industries, like EVs and emerging technologies, that tend to trade at higher valuations.

Keyence, in particular, has been a star for us (in spite of a recent pullback). It has been a top holding in our Equity Fund for four years, over which time it has doubled.

Fanuc is a newer holding in our Global Fund, which was added when we changed our manager to Aristotle Capital Management last fall. In a recent video we did with Aristotle, they told us an interesting analogy about the company: instead of looking for the next gold mine, which can be very speculative, they [Fanuc] are selling Levi’s to the miners. In other words, Fanuc is making steady profits by selling equipment to businesses that are taking on the greater risk.

At Steadyhand, our goal is to grow your capital prudently. This typically means staying away from companies and industries that have yet to prove their profitability, as well as those that trade at sky-high valuations. We absolutely see the potential in fields such as electric vehicles, artificial intelligence, and high-tech in general, but when we invest in these industries we often look to do so indirectly, through companies like Keyence and Fanuc. It allows for attractive returns with a greater margin of safety. Or to circle back on the Levi’s analogy, a little extra leg room.

Inflation is reaching multi-decade highs. Interest rates are on the rise. And central banks are reducing monetary stimulus. What does it mean for bond investors? Our Co-Chief Investment Officer, Salman Ahmed, recently spoke with Carolyn Kwan, a Portfolio Manager at Connor, Clark & Lunn (the manager of our Income Fund) about these top-of-mind issues.

Carolyn also provides an update on the positioning of the portfolio and where CC&L is finding opportunities.

by Scott Ronalds

As Russia continues its invasion of Ukraine, western powers have stepped up their economic penalties in an effort to choke the Russian economy, starving it of the capital, liquidity, and foreign investment needed to function effectively.

President Putin is increasingly isolating his country from the global community and his aggressive tactics appear to have little, if any, support outside the Kremlin. The situation is fluid, and the world is watching closely. One can only hope that cooler heads prevail.

We posted a piece last week that provides some context on how markets have reacted in the past to geopolitical crises. The takeaway is that the relationship is not always direct; stocks are truly unpredictable in the near term. Investors can also take some comfort in knowing that any negative impacts on the broader market tend to be short lived.

Regional markets, and those less diversified, may feel a greater impact. Indeed, Moscow’s exchange (the MOEX Russia Index) has suffered immensely, tumbling roughly 45% this year, and at the time of writing, has been closed for three days. The rouble has also seen a precipitous decline.

The situation has some Steadyhand investors asking whether we have any Russian investments in our funds. The answer is no. Our fund managers focus on high quality businesses with proven and trusted management teams. They avoid companies with poor shareholder protections and have struggled to get around the governance challenges that come with owning stocks in countries with high levels of government corruption and limited transparency.

Our funds do not currently own any stocks in Ukraine or eastern Europe either. This is not because our managers paint the region with the same brush, but rather because they are simply finding better opportunities elsewhere, which they believe carry a lower level of risk.

If you have any questions about our fund holdings or your portfolio in general, we encourage you to contact us.

After we replaced the manager of our Global Fund last fall, the portfolio underwent an overhaul. The fund has a new look under Aristotle Capital Management, with a greater focus on technology and consumer discretionary stocks.

Our Co-Chief Investment Officer, Salman Ahmed, recently spoke with Aristotle Portfolio Manager Aylon Ben-Shlomo about some of the new holdings.

The video, which runs 12 minutes, provides a look into Aristotle’s idea generation process and what they look for in an investment. Aylon also has a great analogy involving Fanuc, a Japanese robotics company we own, which sheds some light on Aristotle’s thinking on the electric vehicle (EV) industry. I won’t spoil it.

by Salman Ahmed

Last month we announced a new manager for our Global Equity Fund, Aristotle Capital Management. With the portfolio transition now complete, we wanted to provide an update on how the fund is invested.

Clients will notice a near-complete turnover in portfolio holdings. Under Aristotle, the largest investments now include tech giants Microsoft and Samsung, mid-sized German software company Nemetschek, building materials manufacturer Martin Marietta, diagnostics & life sciences leader Danaher, Japanese conglomerate Sony, and American homebuilder Lennar.

As for the industry makeup, the fund now owns more technology (23% of stocks) and consumer cyclicals (14%), and less in financial services (12%) and healthcare (13%) than it did at the end of September. A notable feature of the fund is that it now owns more faster-growing businesses than the previous manager (examples include Adobe, Microchip Technology, and PayPal) alongside a core group of mature, high cash-generating companies (such as Procter & Gamble, Coca-Cola, and GlaxoSmithKline).

U.S. stocks continue to account for roughly half of the portfolio. But like our other managers, Aristotle looks beyond corporate headquarters when assessing a business, and focuses instead on where revenues are generated. Currently, about one-third of aggregate revenues come from each of the U.S., Europe and Asia.

It’s worth noting that these characteristics might change over time. Our managers are continually examining their opportunity set and will buy or sell companies when their outlook or valuation changes.

If you’d like to learn more about the new composition of the fund, we’ve updated the Holdings page on the website with October 31 data which includes industry and geographic breakdowns, and a list of the top 10 holdings. And as always, you can contact one of our Investor Specialists if you have any questions.

by Tom Bradley

Earlier this week we emailed our clients to inform them of a manager change for our Global Equity Fund. Aristotle Capital Management has taken over sub-adviser responsibilities for the Fund, replacing Velanne Asset Management.

About Aristotle

Aristotle was founded in 2010 and is an independent, employee-owned investment manager backed by an experienced leadership team that has worked together for over 25 years. The Los Angeles-based firm has built an impressive, index-beating track record* over its 10-year history, and has attracted a team of experienced, like-minded investment professionals.

The manager has an investment process which we admire. They look for high-quality companies in great and/or improving businesses, and assess their value utilizing a private equity approach (i.e., as if they were buying the entire business). They also seek to identify catalysts that fall outside the market’s short-term focus, such as changes in leadership, divestitures/acquisitions, margin improvements and/or productivity gains.

While Aristotle places significant emphasis on a company’s valuation, they do not invest solely in businesses traditionally defined as “value stocks” (i.e., those with low P/E multiples and low price-to-book value ratios). They are a style agnostic manager with investments in both fast-growing and more mature companies. This is a feature of the firm that sets it apart from Velanne, and an attribute we think will help lead to smoother, more attractive returns.

We feel Aristotle has three key advantages that help set the firm apart and have enabled it to flourish:

1. Independence — Aristotle is controlled by their working partners, and they are not beholden to external shareholders and potentially competing interests.

2. Owner’s mindset — Similar to private equity investors, they take a long-term view, valuing the entire business and focusing on operating fundamentals rather than macroeconomic factors beyond management’s control.

3. High conviction — They build focused portfolios of businesses that they know well and do not “rent” stocks or trade pieces of paper based on a hunch.

More on the change

The timing of the change was precipitated by Velanne’s decision to wind down its business. A poor start to performance weighed on their growth. The environment for value stocks (Velanne’s area of focus) has been especially difficult over the past few years. The challenges brought on by COVID-19 have also been arduous for the young firm, notably the inability to get out and meet potential clients.

Nonetheless, we are always prepared to change a fund manager if circumstances require it. Salman and I continuously meet with and evaluate investment managers from which we develop a ‘bench’ for each fund. We were able to move quickly when we received the news from Velanne, narrowing down our list to a handful of firms and conducting extensive due diligence on each. From this process, we’ve found a world-class money manager whose investment philosophy is closely aligned with ours.

The transition

The Fund will go through a transition over the next few weeks and the changes will be fully reviewed in our Q4 Report. As part of this process, there will be capital gains realized on some of the stock sales and we anticipate that the December fund distribution will be higher than normal (remember, capital gains are exempt from tax if you hold the Global Fund in a registered account such as an RRSP, RRIF or TFSA). If you have any questions on how this might impact your personal tax situation, please reach out to one of our Investor Specialists.

Going forward, the Fund will consist of 45-55 companies and continue to look nothing like the index. Yes, Aristotle is an ‘Undexer’ to the core: they invest with a long-term view, build focused portfolios, and keep trading activity to a minimum.

For those who want more information on Aristotle, I encourage you to read the Fact Sheet we have put together and watch the video of Greg Padilla (one of the firm’s lead portfolio managers) in which he discusses the owner’s mentality they take when it comes to investing. And as always, we can be reached at 1-888-888-3147 if you’d like to speak with us about the change.

(*Aristotle’s track record is from 9/30/2011 – 9/30/2021.)

by Scott Ronalds

Ever seen a Boston Whaler? They’re beautiful. Clean lines, leading-edge design, and that famous red stripe. They’re also unsinkable. You can literally cut the boat in two and drive away in the half with the engine.

Growing up on the west coast, you see a lot of boats. The Whaler always stood out to me. I pined for a small one in my youth, but never sold enough newspapers or stocked enough shelves to make it happen. But I’m happy to say that I’m now a proud owner. Well, sort of.

We recently bought Brunswick Corporation in our Global Small-Cap Equity Fund (which is a big holding in my RRSP). Brunswick is a leader in the marine industry and along with Boston Whaler, owns SeaRay, Bayliner, Lund, Harris, Thunder Jet, and Mercury, among other brands. It generates more than USD$4 billion in annual sales and has a solid record of revenue and earnings growth.

I like this stock purchase not just because I’m a boat fan, but because the industry has a compelling trajectory. More than 125 million Americans now go boating annually (according to the National Marine Manufacturers Association), half of whom are under 40 years old. Further, more than 400,000 first-time buyers entered the market in 2020, and boating/fishing are the largest conventional outdoor recreation activities in the U.S., according to the U.S. Bureau of Economic Analysis. Here at home, there was a 67% increase in the number of pleasure craft operator cards issued in 2020 compared to 2019 (according to numbers from Transport Canada), dealers are sold out, and marinas have fast-growing wait lists.

Demand for marine products is forecasted to remain steady as people around the world are increasingly placing a high value on outdoor recreation, driven in part by the pandemic. Brunswick is well positioned, as it’s a leader in both building boats and aftermarket parts & services. This latter sector is lucrative (just ask any boat owner) and stands to benefit from the growing number of vessels on the water. As well, the company’s products are attracting younger and more female boaters than the industry as a whole.

It goes without saying that boating isn’t cheap. Someone once told me that BOAT stands for "bring out another thousand." The company is aiming to make the pastime more accessible, however, through new value products and its Freedom Boat Club, which is a boat-sharing program that now has over 40,000 members and 4,000+ boats. To be sure, Brunswick also caters to the high-end market, where profit margins are juicy and prices steep — one of their top-of-the-line models with all the bells and whistles will cost you seven figures.

My dream of owning a Whaler hasn’t gone away but given their premium pricing and high demand, I’m happy to be a shareholder for now. (Note: If you own our Founders Fund or Builders Fund, you also own a small piece of this world-class marine firm.)

by Scott Ronalds

You’re hosting a BBQ with friends this evening. You’re in charge of the shopping, but are known to be easily distracted at the store. So your wife jots down a list, clear as day:

• Burgers, smokies & buns
  
• Plant-based options (burgers & dogs)
  
• Cheese
  
• Corn
  
• Watermelon
  
• Sunscreen
  
• Batteries (AA, for garden lights and bug zapper)
  
• White wine
  
• Beer

Two stops – grocery store, liquor store – then Saturday is yours. You got this.

You pull into City Market and find a prime parking spot. Off to a good start. With mini shopping cart in tow, you start your mission. First up, the meat. You toss two packs of Schneiders Smokies and Maple Leaf Angus Beef Burgers into the cart. Anything else while you’re in this aisle? Out comes the list. Oh yeah, plant-based options and buns. Into the cart goes a pack of Lightlife Burgers and Smart Dogs, along with a dozen buns.

Over to the produce section, with a quick stop in the dairy aisle to grab cheese; Armstrong aged cheddar should do the trick. Two big watermelons and a dozen husks of corn are added to the bounty. Should’ve gone with the bigger cart, you think to yourself. Almost done though. Just a stop in the health & beauty aisle for sunscreen and home department for batteries. Uh oh, way more selection than you thought. You’ve seen Neutrogena around the house, so grab a bottle of SPF 30 (Ultra Sheer formula to win extra points with the wife), then buzz over to batteries for an 8-pack of Duracells. Finally, it’s through the cashier, into the car and off to the liquor store.

Promotions are abound as you walk down the wine aisle, but you remind yourself to focus on the task at hand — a nice, crisp chardonnay … wait, do you see what you think you see out of the corner of your eye? Limited edition bottles of Game of Thrones Johnnie Walker! Everyone at the BBQ will surely get a kick out of that, so you abandon the wine and grab a bottle of whiskey emblazoned with a dragon. Sticking with the cool label theme, a 12-pack of Landshark Lager goes under the other arm. Through the till you go, back to the car, and on your way home.

Ever-so-pleased with your shopping experience, you stop at the Timmies drive-thru and reward yourself with an Iced Cap. And some Timbits, obviously.

Mission accomplished. Your Visa got a workout, but you’ve got the makings of a successful evening with friends around the grill. It’s been a while, lockdown and all, and an outdoor social gathering is sure to be good for the soul. Turns out, it’s good for your portfolio too. Those shopping bags are full of Steadyhand businesses (all of which we own in the Founders Fund), and you just added to their top line.

First, there’s the ‘direct’ companies:

• Loblaws (City Market)
  
• Maple Leaf Foods (Schneiders and Litelife)
  
• George Weston (buns)
  
• Saputo (Armstrong cheese)
  
• Johnson & Johnson (Neutrogena)
  
• Waterloo Brewing (Landshark Lager)
  
• Restaurant Brands International (Tim Hortons)
  
• Visa
  
• Disney and Zynga (not explicitly mentioned, but the kids will be entertained by a movie on Disney+ or a Zynga video game while the adults adult).

Next, the ‘indirect’:

• Nutrien (one of the largest producers of potash and nitrogen fertilizers, which are key agricultural inputs for crops and produce such as corn and watermelons).
  
• CCL Industries (a specialty packaging company and the largest label maker in the world. Its Wine & Spirits division makes pressure sensitive labels, shrink sleeves and innovative designs, including the Johnnie Walker Game of Thrones bottle).
  
• Berkshire Hathaway (Warren Buffett’s conglomerate, which owns a number of consumer products companies, including Duracell).

Not that you needed further motivation to fire up the grill on a beautiful summer day, but now you’ve got it. Your portfolio will thank you.

PS: There’s a good chance you’ll have to go back to get the Chardonnay.

by Salman Ahmed

You may recall a feature in our Quarterly Reports known as the 'Stock Snapshot' where we featured a company in one of our funds. We've moved the feature from the Quarterly Report to our blog. Below is a snapshot of Cargojet, which is held in our Small-Cap Equity Fund.

Overview

Cargojet provides air cargo services across Canada. It transports shipments between 13 Canadian cities every night. It also moves cargo between Canada, the U.S., Bermuda and Germany.

The company sells 75% of its capacity to couriers like UPS and Purolator and large ecommerce companies like Amazon. The remaining capacity is used for ad-hoc deliveries or for existing customers that might need more space.

The stock is held in the Steadyhand Small-Cap Equity Fund (4.7% position size). It was first purchased in the summer of 2016.

Investment Case

Cargojet benefits from growth in ecommerce. As consumers increasingly embrace online shopping, more goods are transported between storage facilities and people’s homes. In mid-2019, Amazon purchased the option to buy a 15% stake in the company – a testament to Cargojet’s importance to the ecommerce giant.

Canada’s large landmass and dispersed population makes it more economical for couriers to use a third party for moving cargo between cities rather than use their own planes. For example, Purolator might only have half a plane full of cargo to send to Winnipeg. Instead of flying its own aircraft, it can tap Cargojet which has relationships with multiple couriers. Cargojet can fill the rest of its plane with freight from UPS, Fedex, etc.

The long-term shift to ecommerce has gained steam because of COVID-19. More businesses are selling their goods online and more consumers have taken up online shopping because of restrictions on movement.

Cargojet has benefited because more freight has needed to be shipped and because it currently faces less competition. In normal times, airlines like Air Canada offer part of their luggage hold to couriers. With airlines cutting routes aggressively, couriers have become more reliant on Cargojet.

Risks

Planes go through extensive maintenance to keep them safe. This work is usually scheduled well in advance. But an unexpected grounding of a plane can pose a logistical challenge for Cargojet, especially because its 99% on-time performance is an important attraction to couriers that run on tight timelines.

Cargojet must also keep a close eye on the well-being of its employees in these unusual times. One employee with COVID-19 can potentially infect or impact the shipment of multiple couriers.

There is also the risk that growth in ecommerce will eventually cause a tipping point for couriers to start using their own fleets to move cargo between Canadian cities. This risk currently appears distant.

Interesting fact: Cargojet moves 1.8 million pounds of cargo every night.

by Salman Ahmed

You may recall a feature in our Quarterly Reports known as the 'Stock Snapshot' where we featured a company in one of our funds. We've moved the feature from the Quarterly Report to our blog. Below is a snapshot of Brookfield Renewable Partners, which is held in both our Equity Fund and Income Fund.

Overview

Brookfield Renewable Partners owns and operates non-greenhouse gas emitting power facilities across five continents.

The company has over 5,000 power generating facilities, with nearly 20,000 megawatts of generating capacity, two-thirds of which come from hydroelectric plants, about a quarter from wind and the remaining from solar.

Investment Case

Voters and governments around the world are increasingly making renewable energy a priority as the effects of climate change become more apparent. Brookfield Renewable, with a track record of profitable investments and existing mix of high-valued assets, should benefit from policies supporting decarbonization.

With $3.4 billion of liquidity and willing financial partners, Brookfield has resources to put toward new projects, joint ventures and mergers. It often invests in out-of-favour areas to get better pricing. For example, it recently partnered on a $1.2 billion transaction in Spain. Because of regulatory and economic uncertainty in the country, Brookfield was able to buy the wind and solar project at a discount.

Making consistently profitable investments creates a network effect. The profits from existing investments can be put toward new projects. Moreover, investors are more willing to partner with Brookfield given its reputation as an astute operator.

The company also benefits from its existing mix of assets. The bulk of its holdings are hydroelectric power facilities which have a longer life-cycle than wind and solar. The higher quality gives it a valuation premium compared to its peers.

Risks

There is growing interest in renewable energy projects and more investors are looking to invest in this area. Less price-conscious investors may outbid Brookfield for projects, lowering its growth profile or forcing it to make lower-quality investments.

The supply and demand of energy can also create fluctuations in the company’s financial results. Renewable energy supply can be seasonal and depends on weather patterns outside of Brookfield’s control. Energy demand, in general, is also seasonal and impacted by the economic environment.

Interesting Fact: Though a Canadian company, Brookfield traces its roots to Brazil as the São Paulo Tramway, Light and Power Company, founded in 1899.

by Salman Ahmed

In March, I wrote that we were experiencing the most dramatic fall in stock prices in many years. This was swiftly followed by one of the fastest rebounds on record. Our managers have responded by adjusting their portfolios and we’ve done the same in the Founders Fund.

In the Founders Fund, we’ve rebalanced our weight in stocks to get closer to our long-term target – 60%. Our stock weighting drifted up to 67% as a result of purchases made during the market tumult and the subsequent recovery. Since mid-March, we’ve experienced the fastest market rebound in the last 50 years.

But that bounce back has been uneven. Technology, pharmaceuticals, and precious metals companies have left economically sensitive industries in the dust. For context, the U.S. market is now back in the black (in Canadian dollar terms) for 2020 as technology accounts for more than a quarter of the S&P 500 Index.

It won’t be a surprise to long-standing clients that the underappreciated areas have accounted for most of the recent additions in our funds. The Steadyhand Equity Fund purchased heavy equipment supplier Toromont and convenience store owner Couche-Tard. The Global Equity Fund bought aerospace equipment manufacturers Safran and Howmet. The Small-Cap Equity Fund repurchased engineering firm SNC-Lavalin and hydrovac firm Badger Daylighting, while the Global Small-Cap Equity Fund added to staffing agency en-Japan.

Our Income Fund has also made changes. Despite equity markets rising, safety is as expensive as it has ever been. For example, 10-year Government of Canada (GOC) bonds yield just 0.5%. The manager, Connor, Clark & Lunn, has shifted its GOC holdings to provincial and corporate bonds. Though they provide less protection if the stock market goes through another bout of turbulence, they are expected to do better as yields rise from these historic lows.

In the Founders Fund, we’re currently holding 25% in bonds – which is 10% less than our target. Instead of a full bond weighting, we’re holding 12% cash to balance out the economically-sensitive nature of our bonds and stocks. Cash also provides ballast if market volatility returns.

It’s impossible to know if the market rebound will continue or if stocks are poised for another dip. Rather than spend time on the unpredictable, we recommend investors rebalance to their target mix of stocks and bonds. If you own the Founders Fund or the Builders Fund, we’re already doing this for you. We also suggest our retired clients use the recent market lift as an opportunity to top up their cash reserves if they use one. If you’re not sure what a reserve is, book an appointment with one of our specialists to discuss if it makes sense for you.

We’re in the midst of the most dramatic fall in stock prices since 2008. Our fund managers have been responding to the volatility by adding to existing positions and making a few new purchases. They’ve also trimmed or sold select stocks where their outlook has changed. Below we’ve provided some details on what our managers are doing in these trying times. Given the nature of small-cap investing, however, we aren’t providing specific names of companies the Small-Cap Equity and Global Small-Cap Equity Funds have transacted in.

Founders Fund

Going into the recent melee, we held 58% of the fund in stocks and we’ve been happy to keep it there through much of the tumult. Very recently, however, we started gradually increasing the weighting to get closer to 60%.

Our increasing comfort with stocks reflects the fact that our managers are seeing more opportunities emerge and that stocks are more reasonably priced than they were three weeks ago. But stocks still aren’t screaming “buy” like they were in late 2008, and we’re reserving much of our cash as a defensive measure and to provide ballast if stocks become cheaper still.

Builders Fund

The Builders Fund has stayed close to its target mix of funds – 35% each in the Equity and Global Equity Funds, and 15% each in the Small-Cap and Global Small-Cap Equity Funds. We like the mix of Canadian versus foreign and large versus small companies in the fund. Its growth orientation means it feels more of the brunt from market declines than the Founders Fund, but also has more return potential once the uncertainty fades.

Income Fund

The fixed income portion of the fund has benefited from its conservative positioning. Bond yields have fallen sharply (which is positive for bond prices) and have acted as a buffer to stock market volatility. Connor, Clark & Lunn, the manager, has been slowly adding more provincial bonds in this environment. It has also added some real return bonds.

On the stock side, it’s maintaining the defensive tilt and looking at which companies will be able to maintain dividends in a slowdown.

Equity Fund

Fiera (the manager) has used volatility to build up positions in two stocks it initiated purchases in before the market decline - Brookfield Renewable Partners and Verisign. Brookfield invests in renewable power projects and Verisign builds internet infrastructure and offers cybersecurity services.

The manager also trimmed the fund's weight in Novartis and CME Group to make room for existing holdings and new purchases that offer better potential going forward.

Global Equity Fund

Velanne has been the most active of our managers in 2020. It added to some existing names, such as Elis and Stella-Jones, and in early February started buying Cerved Group, an Italian risk management and monitoring company; Argo Group, a U.S. insurer; and Dairy Farm International, a Hong Kong retailer.

In more recent days, Velanne has added to Schlumberger and Royal Dutch Shell, disposed of Ovintiv (formerly Encana), and trimmed Northern Ocean to upgrade the quality of its energy exposure. It also added metals manufacturer Arconic to the portfolio.

Small-Cap Equity Fund

The indiscriminate nature of the self-off might be most apparent in the Small-Cap Equity Fund. For example, deathcare operator Park Lawn is down more than 20% despite being in an industry that is not expected to be hurt by covid-19. But some of its holdings have also come under scrutiny. Consulting firm Fluor experienced a steep drop because regulators opened an investigation into its accounting practices. Galibier is doing its own review of Fluor.

The team added to a select number of existing positions and trimmed those that have held up better than others. It’s also been looking at high-quality companies that it doesn’t yet own. Stocks that were previously out of reach are now becoming more attractive. Of interest are companies with great assets and strong balance sheets but near-term issues due to travel restrictions and social distancing.

Global Small-Cap Equity Fund

TimesSquare (the manager) has used the cash it had on hand to add to a number of existing holdings in Asia-Pacific, Europe and the U.S. Moreover, many companies on TimesSquare’s watchlist have fallen in price due to covid-19 fears, including companies that have very little to do with its impacts. The manager sees this as an opportunity to selectively and cautiously add to companies that have been caught in the recent sell-off.

Savings Fund

Many of our investors use our Savings Fund to set aside money for near-term purchases or to pay themselves in retirement. The Founders Fund also uses it as a placeholder for cash. The fund saw its yield fall quickly after the Bank of Canada announced it was lowering its target lending rate. The fund still has a respectable yield, over 1% before fees, but is lower than it was prior to the central bank's move.

by Scott Ronalds

With the camera rolling, we recently sat down with our five managers for an update on the investment themes they’re pursuing and some of the compelling companies they’re finding. So, grab some popcorn and chardonnay (a fantastic combo, you’ll thank me later) and settle in for some stock talk. The videos each run 7-11 minutes in length.

Global Equity Fund (manager: Anne Gudefin)
Equity Fund (manager: Gord O’Reilly)
Small-Cap Equity Fund (manager: Joe Sirdevan)
Global Small-Cap Equity Fund (manager: Magnus Larsson)
Income Fund (manager: David George)

As a reminder, if you hold our Founders Fund, it’s comprised of the above five funds (plus the Savings Fund) in the following proportions:

Our other “fund-of-funds”, the Builders Fund, holds the Equity Fund (35%), Global Equity Fund (35%), Small-Cap Equity Fund (15%), and Global Small-Cap Equity Fund (15%).

If you have any questions about any of our funds or your portfolio, give us a call at 1-888-888-3147 or email us at info@steadyhand.com.

It’s been a year since we announced Anne Gudefin and Velanne Asset Management as the new manager of the Steadyhand Global Equity Fund. It’s fair to say that the fund has not gotten off to the start we hoped for, lagging the broad equity markets. A few people have asked about the causes of the slump and how Anne will be able to turn it around.

There are two main reasons why the fund hasn’t kept up: (1) its U.K. holdings, and (2) its energy investments. Few people expected Brexit to drag on as long as it has, and this has weighed on British companies of all types. The uncertainty has been a double whammy as the fall in stock prices has been accompanied by a decline in the British Pound, further reducing the value of our holdings in Canadian dollar terms. U.K. stocks have comprised 12-15% of the fund over the past year.

The fund’s energy stocks haven’t behaved the way the team expected either. The fate of resource companies is intertwined with investors’ outlook for global trade and growth. And since Velanne added to the fund’s oil & gas-related holdings in the late-2018 market pullback, the tensions around the economic issues have gotten worse. Many resource stocks have seen severe price declines and the sector is out of favour with investors. Yet, it is also one of the greatest areas of opportunity in Velanne’s view. Energy companies have comprised 14-17% of the fund over the last year.

Throughout this period Velanne has remained steadfast in its philosophy. It invests in companies that produce lots of cash. The fund’s cash-flow yield, which is the percentage of cash a company generates in a year in relation to its market value, is roughly 14%, well above the market’s 8.5% yield. This profile also means the holdings pay out more dividends. The dividend yield for the fund is 3.2% compared to 2.5% for the market.

This philosophy has been unfashionable this year. Companies with limited or no earnings today but high expectations for future growth have seen their stock prices surge this year. But not everyone has shunned our holdings. Five companies in the fund have been acquired at premiums over the last year.

Perhaps what gives us the most confidence in Velanne’s strategy is Anne’s experience. Anne has been managing global portfolios since the early 2000s and has built an enviable record over her career. She navigated the financial crises with fewer bumps and bruises than most. She has been in this situation before and has come out the other side favourably. It is the kind of experience we were looking for when we set out to make a change in the management of the fund.

There is no doubt our investors are disappointed at how Velanne has gotten out of the gate. But the attributes that have led us here are those that we believe will lead us out: an experienced manager that looks for a portfolio of high cash generating companies around the world. There are periods this approach doesn’t appear sexy, but while fads come and go, cash remains king.

Although the name of the fund manager changed when CGOV was merged into Fiera, the personnel has remained the same. Gord O'Reilly, the 'O' in CGOV, manages our fund in collaboration with four other portfolio managers and analysts.

The team have been more active than usual over the last six months. Turnover (trading) in this fund is generally low, but when markets are volatile and stocks go on big runs (in either direction), we expect to see more movement.

With the strong rally this year, the activity in recent weeks has mostly been on the sell side. They've been trimming back on stocks that have become expensive for the right reasons (i.e. they've gone up). One such stock is CAE which is up 35% this year.

There have also been three switches of note:

• Evertz Technology was sold and replaced with Microsoft.
• CBOE Global Markets was shifted into a more diversified securities exchange, CME Group.
• And Fiera is de-emphasizing Novozymes and adding to CHR Hansen, a comparable but more innovative company.

On the more defensive side of the ledger, Fiera initiated a position in Telus, their preferred choice from the "telco oligopoly". The valuation is similar to Rogers and BCE but, in Fiera's view, Telus offers more growth.

Gord and the team won't always be this busy, but the markets have given them more opportunities.

You may recall a feature in our Quarterly Reports known as the 'Stock Snapshot' where we featured a company in one of our funds. We've moved the feature from the Quarterly Report to our blog. Below is a snapshot of Philips, which is held in our Equity Fund.

Overview

Most of us have bought a Philips light bulb at some point. Today, however, Philips is more of a healthcare company than a consumer electronics manufacturer. The company is headquartered in the Netherlands and its annual revenues exceed $25 billion (CAD).

Philips offers health technology products and services. Its offering includes everyday health items like electric toothbrushes to complex diagnostic devices like magnetic resonance imaging machines (MRI) and computerized axial tomography scanners (CAT). It also provides informatics and consulting services to health care professionals.

One third of Philips’s sales come from the U.S. and more than 20% come from western Europe. Emerging economies account for another third of sales with the balance coming from other mature economies.

Investment Case

Philips has made a successful transition from a wide-ranging conglomerate to a company focused in the growing healthcare segment. An aging baby boomer population and growing middle class in emerging economies is seen as supportive to the long-term grown prospects of the industry.

Diagnostic and treatment devices have the added benefit of allowing Philips to build long-term relationships with clients. For example, MRI machines are complicated devices that require significant outlays by healthcare providers. The machines can last more than 10 years and require ongoing training and maintenance, which Philips provides. Once trained on a Philips product, customers are less likely to switch to a competitor.

The growth profile is supported by Philips’s research and development initiatives. 60% of its offering in 2018 came from products introduced within the last two years, reflecting the innovation drive at the company.

Management has sold most non-healthcare assets. It spun off the lighting business into a separate company in 2016 and continues to own a 16.8% stake. It has also made strides in running the company more efficiently. Customer service centres have become centralized, and manufacturing is less spread out allowing for savings on procuring materials.

Risks

Procter & Gamble, Siemens, GE, Toshiba and Hitachi are all involved in health technology. These peers have not made healthcare their focus but could disrupt Philips's leading position if they decide to.

Government budgets also present a risk. In mature markets, healthcare spending is often driven by politicians. Slowing economies and political shifts can impact spending patterns.

Interesting Fact: PSV Eindhoven, one of the Dutch “big three” soccer clubs was founded in 1913 as a team for Philips employees. PSV stands for Philips Sport Vereniging (translated Philips Sports Union). Brazilian legends Romario and Ronaldo are among the many famous players to have played for PSV. Today PSV is a separate company but retains strong ties to Philips.

While in Toronto this month, Tom sat down with the lead manager of our new Global Small-Cap Equity Fund, Magnus Larsson. Magnus is the Head of International Equities at TimesSquare Capital Management, which is the manager of our fund. With the camera rolling, the two discussed Magnus’ European background as well as TimesSquare’s investment process and approach to managing volatility. We also learned, to Tom’s dismay, that ABBA takes precedence over Springsteen on Magnus’ playlist. This 7-minute video captures the highlights.

In a separate 6-minute video, Magnus sheds some light on the new fund by chatting about a few of the current areas of investment, including financial services and technology companies. To be sure, these aren’t your father’s investments. Magnus and the team at TimesSquare steer clear of blue-chip banks and the FAANGs (Facebook, Amazon, Apple, Netflix, Google) and look for opportunities instead in little-known stocks such as Fineco Bank (Italy), Altran Technologies (France) and Horiba (Japan). There’s a slim chance you’ve heard of these companies, yet they’re leaders in their field with a unique edge on their competition. Magnus also discusses TimesSquare’s approach to investing in the emerging markets.

If you have any questions about the fund or how it might fit into your portfolio, we encourage you to contact us at 1-888-888-3147 or info@steadyhand.com.

by Scott Ronalds

While in London, Tom recently had a chance to sit down with Velanne Asset Management’s Anne Gudefin. Velanne is the new manager of our Global Fund, and Anne is the firm’s founder and CEO. With the cameras rolling, the two discussed Anne’s background and investment approach. This 12-minute video captures the highlights.

In a separate 9-minute video, Tom and Anne shed some light on the new-look Global Fund by chatting about a few of the current areas of investment, including salmon farming, asset managers, oil service businesses and media companies. They also discuss some of the more recent adjustments made in light of the October volatility in the markets.

If you have any questions about Velanne or the Global Fund in general, we encourage you to contact us at 1-888-888-3147 or info@steadyhand.com.

The manager of our Equity Fund, CGOV, was acquired by Fiera Capital this spring. Since the announcement, Tom and I have been thinking critically about what this means for our clients. As part of our due diligence we’ve met with some of Fiera’s top brass and also spent time with former employees and competitors. Though the ownership change is not our preference, we believe that the traits that have made the CGOV team a leading investment manager remain intact.

For background, Fiera oversees $140 billion managed by a number of distinct investment teams (i.e. bonds, Canadian and Global equities). These teams operate independently of one another but benefit from having centralized legal, compliance, and trading functions. Fiera largely leaves the investment teams alone. It doesn’t force them to alter their philosophies or investment process. It also allows them to decide which funds to launch and when to close strategies to new investments. Closing funds ensures that size doesn’t limit the manager’s ability to generate returns.

The CGOV investment team’s day-to-day responsibilities are not expected to change. Gord O’Reilly, the manager of our Equity Fund, doesn’t have additional responsibilities thrust upon him now that he’s part of Fiera. If anything, he can focus more on managing money without also having to help run a business.

Two areas we are watching closely are conflicts of interest and incentives. National Bank (NB) owns a 22.5% interest in Fiera Capital, has two seats on the 12-person board of directors and gives Fiera plenty of its assets to manage. Clearly, NB has some pull. Some of the most egregious conflicts happen when banks push staff to cross sell mortgages, insurance and other banking services, but we think this conflict is somewhat muted as Fiera only offers investment services.

The issue of incentives is trickier. The payouts that CGOV senior partners stand to receive from the transaction are staggered over a number of years and don’t start until a few years from now. The pay structure at Fiera will also put an emphasis on medium- and long-term performance, which aligns well with CGOV’s investing horizon. But we’re not kidding ourselves here. Many partners have become wealthier having sold their stake to Fiera and it’s hard to say if they’re all as motivated as they once were.

It’s fair to say we were disappointed to find out about the change in CGOV’s ownership. We prefer to partner with private, employee-controlled firms. On balance, however, we continue to see the characteristics we like in a manager: a focused investment team with experienced decision makers and a proven and disciplined investment process. As always, we won’t hesitate to make a change if we believe it’s in the best interest of our clients. Indeed, last month we updated you about a change we’ve made on our Global Equity Fund, the manager of which also went through a recent ownership change. In that case, our assessment yielded a different answer.

Last week we emailed our clients to inform them that we’re changing the manager of our Global Equity Fund. Effective immediately, London-based Silchester-Velanne Asset Management Ltd.* (Velanne) will be managing the Fund.

The previous manager, Edinburgh Partners Ltd. (EP), has been with us since inception in 2007. We still consider EP to be a leading firm with a deep team and disciplined approach. What prompted the change, however, was the firm’s sale to Franklin Templeton. As part of the sale, Sandy Nairn, EP’s founder and CEO, has taken on an advisory role with Templeton’s global equity team (he had worked previously with Sir John Templeton). Salman and I were disappointed to hear of these additional duties as Sandy was a big reason for our patience with EP’s performance.

Velanne Asset Management

The founder of Velanne, Anne Gudefin, has established herself as a leading manager. She built her reputation working at Franklin Mutual Series (yes, we see the irony of another manager with Franklin ties) and subsequently at PIMCO, where she was recruited as the firm’s first active equity portfolio manager. Anne has been managing global equity funds since 2003 and has over 25 years of experience in the business.

In 2016, Anne found herself in a position to start her own firm when PIMCO, which has a focus on bonds, decided to abandon its effort to build an equity division. We’re excited to be on the other end of that trade. Indeed, Anne’s situation is one that we’re constantly searching for — an established, successful fund manager from a large firm, who goes out on his/her own. In this case, Anne has attained a stature that allows her to be uncompromising in how she invests and runs her business.

Clients may remember that the hiring of Galibier Capital Management (Small-Cap Equity Fund) two years ago was a similar situation. In that case, it was Joe Sirdevan who’d gone out on his own.

Velanne is majority owned by its working partners, with Silchester Partners Ltd. owning a minority stake. Silchester is a private UK-based firm which, in addition to its investment management business, has backed nine associate firms since 1999 (Velanne is the ninth). This structure has proven to be highly successful, with Silchester providing financial, operational and strategic support, and the affiliates focusing on what they do best — investing.

Contrarians at work

Anne has put together an experienced team in London which manages only one mandate – global equities – and brings to our clients an established, disciplined approach to stock picking and portfolio construction. They do intensive research on companies to assess the underlying strength and sustainability of a business. As opposed to some value managers, their focus is not on broken down or shrinking companies, but rather high-quality ones that are going through a rough patch for a specific reason.

Going forward, the Fund will consist of approximately 50 stocks and will continue to look nothing like the index. Its focus will be on companies that are trading at reduced valuations but have a path to more normal levels. This path, or unlocking of value, may come from a new CEO and management team, a restructuring program, or a merger or change of ownership. Needless to say, Velanne is seeking to take advantage of opportunities arising from the market’s emotion and short-term thinking.

The Global Fund will go through a transition over the next few weeks. We expect the substantive changes will happen quickly and the transition will be completed by quarter-end. The changes will be fully reviewed in our Q3 Report. There will be capital gains realized on some of the stock sales, which will be reflected in the December fund distribution (remember, capital gains are exempt from tax if you hold the Global Fund in a registered account such as an RRSP, RRIF or TFSA).

For those who want more information on Velanne, I encourage you to read the Fact Sheet Scott has put together and the transcript of an interview Salman did with Anne. And as always, we can be reached at 1-888-888-3147 if you’d like to speak with us about the change.

The Fine Print

A final note: Technically, until early October, the manager of the Global Equity Fund will be Silchester. When Velanne receives its independent registration in the UK, the team will move from Silchester to Velanne and Velanne Asset Management will be the fund manager.

Below is the full explanation, complete with legalese.

*Effective August 20, 2018, Silchester International Investors LLP (“Silchester”) replaced Edinburgh Partners Limited as the portfolio adviser for the Fund on an interim basis. On or about October 1, 2018, upon completion of its independent registration in the United Kingdom, Velanne Asset Management Limited (“Velanne”), an associated firm to Silchester, is expected to replace Silchester as the portfolio adviser for the Fund on an on-going basis. The personnel at each of Silchester and Velanne providing advisory services to the Fund will remain consistent despite the change in entity providing the direct service.

by Scott Ronalds

If you own units of the Steadyhand Small-Cap Fund, you own a unique collection of businesses, many of which you’ve probably never heard of. But don’t be thrown off by obscure sounding names such as Spin Master, New Flyer, Oshkosh, Middleby, Intertape Polymer Group and Brick Brewing — for these companies may play an important role in your day-to-day.

The above stocks, while small in market capitalization relative to companies such as Apple, Starbucks, and Toyota, are innovative businesses that produce industry-leading goods and services, which like your iPhone, vanilla latte and Highlander, help make your day better, smoother and safer. And the added beauty of small-cap stocks is that they’re often better positioned to grow their revenues faster than their larger peers.

To illustrate, consider a day in the life of Evan Parubets, our Toronto-based Investor Specialist.

At the crack of dawn, Evan’s woken up by his young son, Elan. Not in the mood yet to jabber with a one-year old, he quickly looks for something to keep the little man entertained. Pups to the rescue! He grabs the PAW Patrol toy on the floor and hands it to Elan. Problem solved.

• The PAW Patrol brand of lovable rescue dogs is owned by Spin Master, a large holding in the Small-Cap Fund. Spin Master also owns Hatchimals, Etch a Sketch and Meccano, among other brands. The stock has been a standout performer in the Fund; the toys and books have been lifesavers for parents everywhere.

Evan’s got an early meeting so he’s quick to get out the door and hop on the bus to get to the office. The time on the bus gives him an opportunity to log on to Amazon and reorder some diapers, and maybe another PAW Patrol toy. He’s had his eye on Chase’s tow truck for a while. It’s a sweet ride.

• One of the Toronto Transit Commission’s suppliers is New Flyer. The Winnipeg-based company is a leader in manufacturing transit buses and motor coaches, and related parts. New Flyer recently won an order from the TTC for a fleet of zero-emission battery-electric transit buses. They’re sure to make Evan’s ride to work smoother and cleaner. New Flyer is a top 10 holding in the Small-Cap Fund.

It’s a busy construction day in the downtown core and traffic is moving slowly, so Evan gets off the bus a stop early and power walks the rest of the way to the office. He notices some slick aerial work platforms and a few concrete mixers. “Cool machines,” he thinks to himself.

• Both the JLG aerial work platforms and London Machinery concrete mixers that Evan admires on his walk are manufactured by Oshkosh. The Wisconsin-based company builds specialty vehicles including fire trucks, broadcast & communications vehicles, tow trucks, and airport vehicles. Indeed, not far away at Billy Bishop and Pearson airports, a number of Oshkosh’s vehicles stand ready. The stock is a new addition to the Fund.

Evan’s morning meetings run late and he’s pressed for time before his 1:00pm prospect meeting. His stomach is growling though, so he zips down to the food court at Brookfield Place to grab a footlong at Subway. Toasted, of course.

• Subway uses convection ovens manufactured by Middleby. The company is a leader in commercial cooking equipment. In fact, its products can be found in one of every three restaurants around the world, including quick serve and fine dining establishments. Middleby also owns the Viking range of appliances. The stock is the second largest holding in the Fund (as of June 30th).

After a hectic day, Evan gets home to find a fresh shipment from Amazon (this whole same-day shipping thing really is amazing). The packages are quickly torn open to appease Elan, although dad gets first dibs on the tow truck. After putting the little guy to bed, Evan gets to spend some quality time with his wife. It’s a hot night, so they decide to retire on the patio with a cold margarita. They’re too exhausted to get the blender out though, so it’s a good thing these ones come in a can.

• The packages which were so quickly opened were held together with adhesives manufactured by Intertape Polymer Group. The company makes tapes, films and packaging systems for retail and industrial use, and has been a beneficiary of the growth in e-commerce. IPG is a core holding in the Fund. As for those margaritas in a can, they came courtesy of Brick Brewing. Brick makes beer and related beverages under the Waterloo, Landshark, Margaritaville and Seagram labels. The stock has been a top performer since its addition to the Fund in late 2016.

These are just a few examples of the businesses you own as an investor in the Small-Cap Fund (or the Founders Fund, which holds a position in the Small-Cap Fund). The portfolio includes 18 or so other companies carefully selected based of their sustainable competitive advantages and promising growth prospects. They’re firms that you may not have heard of, but you likely know in one way or another. It’s a small world after all.

Earlier today, CGOV, the manager of the Steadyhand Equity Fund, made an important announcement. The owners of the firm have agreed to sell the business to Fiera Capital.

We know Fiera well, having followed them for a number of years. After speaking with the senior partners at CGOV this morning, and given our familiarity with Fiera, we're confident that Gord O’Reilly (the “O” in CGOV and the lead manager of our fund) will continue to manage our fund the way he always has: by investing in companies with strong balance sheets and leadership, which trade at discounts to CGOV’s estimate of fair value. As part of the transaction, the Fiera stock Gord receives through this deal will be locked up for five years.

The longer-term implications of the deal are harder to measure at this point. For background, Fiera is an independent investment company. A number of investment teams operate under the Fiera umbrella. These teams have autonomy over their investment process but are plugged into the parent for operations, client servicing and sales. The investment teams, rather than the parent, also have final say on which funds they manage and how big they want to grow.

Salman and I will be monitoring the transition closely to get a better understanding of how it may impact clients.

Edinburgh Partners’ Chief Executive Sandy Nairn visited Vancouver and Toronto last week to provide an update to our clients on the Steadyhand Global Equity Fund. Below is a review of some of the topics he discussed.

Firm update

The partners at Edinburgh Partners (EP) have decided to sell the company to Franklin Templeton Investments. Though it will have a new parent, EP will operate independently. Its investing and non-investing functions will not be merged into the larger organization. Sandy will become chair of Templeton Global Equity Group within Franklin Templeton, but will continue with his investing responsibilities at EP and on our Global Equity Fund.

10 years after the crisis

Financial institutions, particularly banks, have come a long way since the financial crisis. Global regulations have made it more difficult for banks to take excessive risks and bank balance sheets are much stronger than they were in the mid-2000s. Investors are also more carefully scrutinizing the risks banks take. Overall, institutions in Europe and the U.S., not just in Canada, are in a better position. It has, however, taken some time for financial companies to get to this position, and even longer for investors to get over the scars left by the 2007-2008 credit crisis.

European recovery

EP started taking a closer look at Europe when investors were writing off the region three to four years ago – it’s the team’s contrarian nature. Despite there being some areas of concern, the team felt there were lots of positive signs. EP did expect the recovery to be faster than it was, but it now seems to have arrived as economic indicators across the region continue improving.

Investors are taking notice and many European holdings have risen as a result. For example, the sentiment around Commerzbank changed once the European economic numbers perked up. The stock was up 70% in 2017.

U.S. stocks

Our fund holds 10% in U.S.-listed companies, far less than most other global equity funds. As a reference, U.S. stocks make up 60% of the MSCI World Index, a proxy for global stocks. EP’s focus on valuations is currently keeping them away from most U.S. companies. Investors flocked to U.S. stocks when the country was showing stronger signs of recovery after the credit crisis. Some of this was warranted, but now U.S. companies are far more expensive than their global peers (in technical terms, U.S. stock valuations are two standard deviations higher than their long-term average).

EP also doesn’t pay much attention to a company’s domicile, which is often driven by tax considerations. Instead, it prefers to look at where companies generate their revenues. On this measure, 20% of the Global Fund's holdings' revenues come from North America, 32% from Europe, 30% from Asia, 13% from Japan, and 5% from South America.

Emerging markets

Our fund’s largest exposure, by revenue generation, is to emerging markets. In economic terms, many of these markets have now ‘emerged’ and investors would be remiss to ignore them. Some of our holdings include banks (Bank Mandiri, Bangkok Bank, Credicorp) and consumer-oriented companies (Shanghai Fosun).

Technology in Japan

The Global Fund doesn’t currently hold big technology companies like Facebook or Amazon on account of them being too expensive, but the team does a lot of research to understand how advances are changing industries.

EP has uncovered companies in Japan that are set to benefit from innovation. Investors outside of Japan likely don’t appreciate the leadership position some of these companies have. For example, long-time holding Panasonic is viewed as a consumer electronics company for its TVs, but many people don’t realize it’s a world leader in battery technology. It has partnered up with Tesla and supplies batteries for Tesla’s cars. Another holding, Alps Electric, builds components used for virtual reality devices, autonomous driving, and workplace automation.

Bitcoin

EP has done some research on cryptocurrencies. Sandy believes there are benefits, but that it is more likely to become mainstream if a central bank controls it. The real potential, however, is in the distributed ledger technology on which cryptocurrencies operate, more commonly known as blockchain. It is early to say how blockchain can be practically implemented, but it shows promise.

Current positioning

Sandy’s team has been able to find opportunities, even as global equity markets have risen and look fairly priced or expensive. EP’s long-term time horizon means it can look at companies that are experiencing short-term troubles. Recently, the allocation to pharmaceutical companies has increased. These companies produce lots of cash and trade at reasonable valuations with attractive dividend yields. Politicians may pressure them to lower U.S. drug prices, but the stocks already reflect this risk.

The fund’s ability to invest anywhere also gives EP a chance to look where others aren’t. Currently, the team is finding interesting ideas in mid-sized Japanese companies and emerging market stocks.

Earlier today, Edinburgh Partners, the manager of our Global Equity Fund, made an important announcement. The owners of the firm have agreed to sell the business to Franklin Resources, the parent of the Franklin Templeton family of funds.

Dr. Sandy Nairn, the manager of our fund and Edinburgh Partners’ co-founder, has a history with Franklin. He was previously Director of Global Equity Research for Templeton Investment Management, which is under the Franklin umbrella. In this role, he served under famed investor Sir John Templeton.

It is too early to assess the full impact of the deal. What we do know is that Franklin serves as a platform for multiple teams who manage funds independently and specific to their own style. Edinburgh Partners is expected operate similarly. Sandy has also committed to continue managing our fund himself in the same way it has always been managed: unconstrained, global, long-term oriented and concentrated in the team’s best ideas.

As part of our next steps, Salman and I will be having an in-person meeting with Sandy next week to get a better understanding of the deal and its implication for our clients.

Note: The luncheons we are hosting next week in Vancouver (January 23) and Toronto (January 25) with Sandy will take place as scheduled. We will provide further information on the deal at the sessions. We will also post a follow-up blog after the luncheons with further details.

CGOV’s Ted Ecclestone was in Vancouver this week and gave an update on the Steadyhand Equity Fund to a group of our clients (CGOV Asset Management is the manager of the fund). Below is a review of some of the topics Ted touched on.

What CGOV looks for in a company

When assessing a company, CGOV narrows in on three attributes: people, business and price. Put simply, they look for well run companies that have either built substantial brand equity or offer a valuable product or service that can’t be easily replicated. As for price, they assess a stock’s valuation in relation to its peers, growth outlook and its own historic levels to determine suitable buy and sell points.

A prototypical CGOV stock is CN Rail. The company is well run by a respected and proven team, it has valuable, irreplaceable assets (CN operates the largest rail network in Canada and the only transcontinental network in North America), and it trades at a reasonable valuation.

25 stocks only

CGOV will own a maximum of 25 stocks in the fund. This allows for ample diversification and enables the firm to know its holdings and their competitors well. This concentration of stocks also creates a unique “competition for capital” within the portfolio. If the team finds a stock it likes, it must like it more than something already in the portfolio before it’s added. This forces the firm to always look at their current holdings with a critical, objective eye.

With this as background, Ted addressed some of the current factors that are playing a role in how CGOV is thinking about the portfolio.

Trump

The U.S. stock market has performed well since Trump’s victory. Investors’ enthusiasm for stocks is attributable in part to the President’s proposed tax cuts, which would be good for businesses. The U.S. market, however, is also one of the most expensive in the world and CGOV is cognizant of this. The manager sold one holding earlier in the year, Lincoln Electric, which is an infrastructure-related company that benefited significantly from the “Trump bump”, and has trimmed the fund’s position in Visa and CBOE Holdings.

The U.S. President’s desired trade policies are protectionist in nature and detrimental to companies that rely on the free movement of goods and services. This could impact certain companies, although it’s still unclear how far his proposed policies will go. The holding in the fund that could be impacted the most is Magna International (a Canadian producer of auto parts), although CGOV isn’t inclined to act on the stock until the trade picture becomes clearer.

Trump’s victory also led to greater volatility in some currencies, including the Mexican Peso, and uncertainty around America’s relationship with many countries. This led to a sell-off in FEMSA, a Mexican beverage and retail company with operations throughout Latin America. CGOV saw this as an opportunity to buy more shares in a high-quality business. These shares have since had a still-bumpy recovery.

Energy

Some observers think the writing is on the wall for the oil & gas industry with the emergence of cleaner sources of energy and new technologies. This may be the case, but it’s a ways off. The world still has a big thirst for oil, and CGOV feels it’s wise to have some exposure to the sector. Diversification, however, is paramount.

Energy companies make up about 13% of the fund (this is considerably less than the sector’s representation in the Canadian index - 20%). The fund’s holdings are diverse and include Suncor Energy (a producer in the oil sands), PrairieSky Royalty (a pure royalty business with no exploration risk), Pason Systems (more of a technology company in the sense that it develops technologies to monitor rigs) and Enbridge (a pipeline company). These businesses are more stable and predictable than those focused strictly on exploration and development.

Downside protection

While CGOV wants to keep pace in good markets (which they’ve done well), they also put a lot of thinking into downside protection. This is done through security selection rather than hedging or derivative strategies, which can be expensive and complex.

Two portfolio holdings provide a good example of this thinking: CBOE Holdings and Franco-Nevada. CBOE is the world’s largest options exchange (Chicago Board Options Exchange) and home to the VIX, the leading barometer for equity market volatility. When market volatility picks up, CBOE generates more revenue, which should provide good downside protection. Franco-Nevada is a royalty company with a focus on the gold sector. Franco is essentially a finance company (with no debt) that provides investors with exposure to gold without much of the operating risks faced by miners/producers. When the fear level in the market rises, gold tends to perform well, hence the attraction of Franco.

Stocks you don’t see in other portfolios

Although the fund is concentrated in 25 stocks or less, it owns a number of businesses you won’t typically see in other funds. This is because CGOV isn’t constrained by the size of company it can invest in. The fund owns stocks across the market capitalization spectrum (small-cap, mid-cap and large-cap). This allows the manager to uncover some unique opportunities, particularly in the mid-cap space. Throughout its history managing the fund, CGOV has had a lot of success investing in lesser-known stocks, such as Asia Pacific Breweries, Idexx Laboratories and Lincoln Electric. Current holdings in this category include Ritchie Bros. Auctioneers and Evertz Technologies.

What about technology?

As always, there were some good questions from the crowd following Ted’s discussion on the portfolio. The one we’ve heard a few times has to do with technology stocks, so it’s worth expanding on. The fund’s newest holding is Keyence, a Japanese company that manufactures automation sensors and vision systems for manufacturers. The question, essentially, was “Why go to Japan to buy technology when there’s so many tech stocks in the U.S.”

Technology stocks have been absent from, or have made up only a modest part of the fund, for quite some time. Ted admitted it’s an area they’ve missed the boat on. The FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) have been growing fast and have performed exceptionally well, but they’ve also been too expensive in CGOV’s view. Based on their valuations and outlooks today, Ted and the team feel the downside risks of many American tech stocks outweigh their upside potential.

Circling back to Keyence, it’s in a more stable phase of its business cycle and trades at a lower valuation, which makes it more attractive than its U.S. counterparts in CGOV’s view.

In closing, we’ve been very happy with CGOV’s management of the fund. They’ve produced excellent long-term results for our clients (including us, of course!) and haven’t wavered from their process.

If you’ve got a question on the fund, give us a call at 1-888-888-3147 or enter it in the Comments section of this post.

by Salman Ahmed

If you follow our newsletter you’ve likely seen the shot of Tom celebrating a hole-in-one in Scotland. Pretty cool. This wasn’t the only good thing to happen in Scotland. Tom and I also came away more confident in the manager of our Global Equity Fund, Edinburgh Partners (EP).

We were in Scotland to conduct EP’s annual review, which compliments the quarterly updates and other ongoing communication we have with our managers. During this review, we spend time with the primary decision makers and the analysts that support them. We often meet with people from other departments as well, including operations, trading, and risk management.

The objective of this, and much of our other research, is the same. We’re trying to determine if your money (and ours) is managed by the best investors we can find. Here are some of the thoughts we came away with after spending time with EP.

Portfolio Construction

It’s no secret that our Global Equity Fund has lagged over its history. This has largely been a result of holding less in U.S. companies compared to most peers and market indexes. For example, the MSCI World Index, a proxy for global markets, has 60% in U.S. stocks; EP currently holds just over 10%. The U.S. has been one of the world’s best performing markets over the past decade.

We appreciate EP’s undexing approach in this regard. They aren’t beholden to what the index looks like. Instead, they buy companies that are attractively priced in their view. A company’s domicile is often a result of where it can get the best tax rate or which stock market it chose to be listed on. EP, on the other hand, looks at the regions a company’s revenues come from. In their opinion, and ours, this is a better way to assess a stock.

This approach has led the team to invest in companies from Japan, Europe and emerging markets. While this decision has caused them to trail the pack during the bull run in U.S. stocks, it has started to pay off over the last year.

Discipline

EP’s valuation focus (the price paid today for future earnings) can result in the Global Equity Fund sometimes holding stocks with negative headlines. These stocks have been beaten up because of poor sentiment. EP isn’t swayed by emotion and instead focuses on whether the market is overreacting. This can lead to mistakes (Gazprom), but with good research, can also lead to wins (Bridgestone, SK Hynix, Intesa Sanpaolo). It also means the portfolio may behave very differently than peers or indexes.

Team

The firm puts a lot of consideration into the team. Sandy Nairn, EP’s co-founder and chief executive, has built a strong bench with individuals who have taken on increasing responsibility. EP did, however, lose a senior member to early retirement this year. While personnel departure is always disappointing, there were legitimate personal reasons behind this one.

EP also added two experienced analysts to its team over the last two years. Other managers we meet often fire staff to reduce their costs when performance is struggling; EP has done the opposite, which we see as a testament to their long-term thinking.

Outlook

EP, like our other managers, doesn’t currently see an abundance of opportunities. That said, there are still attractive companies out there. For example, Sandy purchased Galaxy Entertainment Group in 2015 when all Asian gaming stocks were being painted with the same negative brush. Galaxy has gained 75% since they bought it.

Banks comprise the largest part of the fund overall. In Canada we’re used to thinking of banks as one homogenous group. Our Global Equity fund, on the other hand, holds banks in Thailand, Indonesia, Peru, Norway, France, Germany and the UK. Each of these have unique factors that make them attractive.

More recently, EP is also seeing value in some pharmaceuticals. These companies produce significant amounts of cash, some of which gets paid in dividends. Additionally, many have attractive new drugs in the works. While there is still some risk around drug price regulations in the U.S., the manager believes stock prices more than reflect the uncertainty.

Our Global Equity Fund has struggled at times over its history. We’re the first to acknowledge this. But in investing we look forward. Through our assessment of dozens of global equity managers, we believe the caliber and experience of EP’s people, and the discipline and thoughtfulness of their philosophy and process gives investors in the Global Fund access to a top-tier investment manager with all the ingredients for strong future long-term performance.

Last week in Vancouver, we hosted a ‘Fireside Chat’ with Larry Lunn, the founder of Connor, Clark & Lunn Investment Management (CC&L), the manager of our Income Fund. After a storied career, Larry is retiring at the end of March, so we wanted to grab him while we could.

We should note that Larry has never managed our fund directly, but has advised us on a number of occasions and been involved in CC&L’s asset mix decisions.

As a side note, the session took place on a red letter day. We had just heard that the Income Fund is #1 for 10-year returns in Morningstar’s performance rankings for Canadian Fixed Income Balanced Funds.

We covered a lot of ground in the hour. Here are the highlights.

Interest Rates

When it comes to rates, CC&L has been in the ‘lower longer’ camp for a while now. This has been the right call, although with the recent rise in rates, we asked Larry if this theme still holds.

They believe we’ve seen the lows in interest rates. He noted the 10-Year Government of Canada bond, which now yields 1.6%, was less than 1% for a short time last year. There are reasons to believe rates will continue to rise – a pickup in economic growth, central banks buying less bonds and inflationary government policies in the U.S. – but CC&L isn’t looking for them to climb higher in the short term. Some of the forces that have pushed rates down are still in place – debt levels, demographics and technological innovation.

Bonds

What does this mean for the Income Fund? Rising interest rates would be good for income investors in the long run, but would cause bond prices to go down in the short term. If the rate rise is gradual, the impact will be manageable. In periods when they rise quickly, however, the fund will likely experience negative returns, as it did in the fourth quarter (-1.8%).

CC&L have been upgrading the quality of the bond holdings over the last two years. Larry explained that this not only means focusing on issuers with steady earnings and strong balance sheets, but also ones that have a stake in keeping their credit rating high (i.e. insurance companies and utilities). In other words, companies that are likely to be friendly to bond holders. That’s opposed to strong companies that are more likely to do shareholder friendly things such as acquisitions and share buybacks, both of which weaken the bondholders’ position.

Part of the quality upgrade involved shifting capital from corporate to provincial bonds (now 29% of the fund). The bulk of the allocation is in Ontario and Quebec issues, which offer a yield advantage of close to 1% compared to comparable Government of Canada issues. CC&L is of the view that both provinces will make progress in getting their fiscal house in order. Indeed, Larry pointed out that the new projection for the Ontario deficit is much reduced.

High Yield Bonds

By nature, high yield bonds (sometimes called junk bonds) are anything but high quality. They were introduced to the Income Fund about five years ago because Larry and the team believed the extra risk was more than offset by higher yields. Larry pointed out that so far CC&L has yet to have a default in this category, although that record will undoubtedly be tested because defaults are a part of high yield investing.

Larry confirmed that the high yield component of the Income Fund is currently very conservatively positioned. Half of the fund is in investment grade bonds, which is consistent with the quality emphasis mentioned above.

Stocks

Stocks make up just over a quarter of the Income Fund. CC&L’s approach has been to hold a mix of high dividend stocks (utilities; REITs) and stocks of companies that are growing their dividends. This mix has served the fund well, as dividend-paying stocks have been a key driver of performance over the fund’s history.

As for recent moves, CC&L has been reducing the weighting in interest-rate sensitive stocks and adding to stocks that are more sensitive to economic growth. For instance, the REITs have been brought down to about 4% of the fund, while Finning and Open Text are new additions. Larry pointed out that cap rates (or earnings yield) have been following interest rates down. When rates rise, there will be pressure for cap rates to rise, which will reduce property values.

Larry and I didn’t have time to reminisce about the changes he’s seen over his 40+ years in the business, but for those who are interested, CC&L’s most recent Outlook delves into this.

CGOV’s Gord O’Reilly and Steve Cocchetto recently provided our clients in Toronto an in-person update on the Steadyhand Equity Fund. Aided by thoughtful questions from the attendees, Gord and Steve covered a lot of ground. Here are some of the main themes from the conversation.

Opportunities

The team at CGOV is cautious in today’s environment. Outside of their existing holdings, few stocks in North America meet the team’s requirements: a competitive advantage, clean balance sheet, good management and reasonable price. It’s the last qualifier, reasonable price, that most stocks fail to pass.

Instead, the team is looking at other regions. Europe has been under a cloud, but there are high-quality businesses, particularly healthcare and utilities companies, that have been cast aside simply because they happen to be headquartered there.

CGOV is also brushing up on Japanese stocks. Companies in the region have long claimed to be improving shareholder value, but only recently has there been tangible evidence of the change.

Diversification

Gord and Steve spend a lot of time thinking about how to construct the portfolio with diverse ideas. Simply looking at how much of the portfolio is invested in each industry doesn’t properly convey the diversity of stocks in the portfolio.

For example, roughly 20% of the fund is invested in financial companies. For Canadians, “financials” is synonymous with our big five banks, but the Equity Fund has only every held one – TD. Other holdings include CBOE and Experian. CBOE operates the largest U.S. options exchange and has exclusive rights to a unique index called the VIX. Investor interest in the VIX increases in times of uncertainty because its value increases as market volatility rises. CBOE thus benefits in times of uncertainty. Experian too is not a conventional financial services company. Rather than take deposits, lend, or insure, it monitors the credit worthiness of consumers and provides credit analytics.

What gets them excited

Gord is particularly excited about opportunities for active managers as index investing grows in popularity. Index funds hold stocks in the same proportion as the benchmark they passively track. The iShares S&P/TSX 60 Index ETF, for example, seeks to mimic the S&P/TSX 60 Index.

When a few large investors, or many small investors, sell the same index funds, stock prices of the constituent companies can fall. This happens despite many of these companies continuing to have great long-term prospects. Focused managers, like CGOV, can take advantage of these cheaper prices.

If you’re interested in digging deeper into the Equity Fund’s holdings or long-term performance, I encourage you to check out our latest Quarterly Report.

If you live in the Vancouver area, we invite you to join us over lunch on Thursday, November 3, at UBC Robson Square for a “fireside chat” with the new manager of our Small-Cap Fund, Joe Sirdevan, founder of Galibier Capital Management.

Steadyhand President Tom Bradley will moderate a discussion around Joe’s investment philosophy and process, what gets him excited about smaller companies, and some of the new stocks in the fund.

It will be a great opportunity to learn more about Joe and the new look of the fund, and there will be plenty of time for questions.

Date: Thursday, November 3
Time: 12:00 – 1:15 PM (lunch will be served at 12:00; the discussion will start at 12:15)
Place: UBC Robson Square, Room C180, 800 Robson St., Vancouver

Please RSVP by November 2, as space is limited.

We announced last week that Galibier Capital Management is taking over portfolio advisor responsibilities for our Small-Cap Fund.

Galibier has now taken the reins and has made a few adjustments. Over the coming weeks, more changes will be made as the new manager transitions the fund to reflect their top investment ideas. The new portfolio will continue to be very concentrated, but will look different in terms of the types of companies it holds and where the manager’s focus will be.

Steadyhand President Tom Bradley recently sat down with Galibier founder Joe Sirdevan (the lead manager of the fund) to bring some colour to the new portfolio. In this 8-minute video, Tom and Joe shed some light on Galibier’s investment approach, how the portfolio will look different, and some of the fund’s anticipated holdings.

If you have any questions about the manager change or the fund in general, we encourage you to contact us at 1-888-888-3147 or info@steadyhand.com.

We’ve made the decision to change the manager of our Small-Cap Equity Fund. Galibier Capital Management is taking over portfolio advisor responsibilities, replacing Wutherich & Company.

Steadyhand clients received an email earlier this week with details on why we’re making the change. For investors who haven’t heard the news, we provide some context below.

Although young in its existence, Galibier is an impressive firm, led by its founding partner, Joe Sirdevan. Joe has over 20 years of investment management experience and in my view is one of Canada’s leading portfolio managers. He has a proven track record and has surrounded himself with a team of experienced investors. We’re excited to be working with Galibier and believe this change is in the best interests of our clients.

Nonetheless, this was a very difficult decision to make. Wil Wutherich has been a good partner of ours for almost 10 years and many of our clients have got to know him. Wil is a first-rate money manager and for clients who have been with us for a number of years, he’s delivered solid returns.

As we regularly point out in our writing, however, investing is all about looking forward. The next five years. Ten years. Twenty years. Some of the most fertile ground for our undexing approach in the years to come will be small and mid-sized companies in North America. By appointing Galibier, we can more fully take advantage of the opportunities, specifically by researching and owning more mid-cap stocks in Canada (medium-sized companies) and small-cap stocks in the U.S.

Salman and my biggest job at Steadyhand is evaluating and monitoring our fund managers to ensure we have the best possible team of investment professionals working for our clients. This involves looking at past performance for sure, but it also takes into account a number of other factors that we believe are more reliable predictors of future performance. In total, there are 7 P’s that we evaluate: People; Parent (ownership and company structure); Philosophy; Process (decision-making and portfolio construction); Price (fees); Performance (long term); and Passion.

Galibier checks all the boxes and I’m confident that we’re a better firm today as a result of the change.

The fund will continue to be very concentrated and look nothing like the index. There will be changes, however, to the type of companies owned (less cyclical, more growth) and the criteria used for evaluating them. For more details, I encourage you to review the materials we’ve prepared.

The website has been updated to reflect this change, including a video interview with the fund manager, Joe Sirdevan. We’ve also prepared a one-page overview of Galibier and a Q&A which hopefully covers off most or all of your questions. In the meantime, don’t hesitate to call us at 1-888-888-3147. Chris, Lori, Scott, David, Salman and I are ready to take your call.

Some of you have recently voiced frustration with our Global Equity Fund’s returns. If you haven’t mentioned this to us directly, you may have thought it quietly. Well, your disappointment is completely appropriate.

We expect our funds to beat market returns over the long run. The Global Equity Fund simply hasn’t done that. Performance has been poor in five of the last six years. I should note that we too are feeling the pain – 89% of our team’s financial assets are invested in our funds, including the Global Equity Fund.

At this stage, its important for you to know why we are sticking with our manager, Edinburgh Partners (EPL).

Undexing

We believe undexing will produce market-beating returns over a complete market cycle. Embedded in the results will be times when one or more of the funds will be out-of-sync with the market, sometimes for an extended period. All our funds have experienced these inharmonious periods. The most memorable ones were the Equity and Small-Cap Funds lagging behind during the resource recovery in 2009 and 2010, the stellar performance of the Equity Fund in the subsequent years, the award-winning streak put together by the Income Fund starting in March, 2009, and of course, the topic of this post - the Global Equity Fund’s struggles since 2010.

The Manager - Edinburgh Partners

In addition to monitoring our fund managers, we constantly speak with others, including global equity managers, as part of our research process. We do this for context. Meeting other managers allows us to compare the practices of our current subadvisors to others. It also helps us maintain our bench, if we feel a change is warranted.

Our conversations with other managers have strengthened our opinion about EPL. The firm continues to stand out compared to others, even those that have performed better. The investment team is deep and has been together for a long time. Moreover, they are owners of the business and invested alongside our clients.

Led by founder and CEO Sandy Nairn, EPL’s experience has shown through in how they’ve approached this tough period. They have worked on refining their process, but have not abandoned their philosophy – investing based on long-term profitability, not what’s hot. The team’s discipline hasn’t wavered either. They continue to add to stocks that are down and re-size winners. In recent days, they added to two pharma companies that have been beaten up – Roche and AstraZeneca.

Performance

Salman and I also look at all the funds a manager manages, or has managed in the past, to gauge skill. Though EPL’s global equity mandate hasn’t kept up, it’s International equity (non-North American) and European equity clients have done well. EPL continues to gain clients for those mandates.

That’s not much solace to you, but it does reinforce our view that the team has not lost its stock picking skills.

Value vs Growth

Since 2010, the fund has been fighting severe headwinds. I say this because over the last few years, Sandy and the team have steadily moved the portfolio to be more ‘value’ oriented.

The market is often divided into two broad groups – companies that are growing faster (Growth) and those that are growing slowly or going through a turnaround (Value). Many investors are willing to pay a premium for higher growth prospects, while they want discounts for the slow growing and/or troubled companies. Over the long-run though, value investors have done better, as the discount has more than compensated for the warts on these companies.

Growth investors, however, do better in certain conditions. Paradoxically, a low growth period is one of those environments, as investors are willing to pay a bigger premium for anything that looks like it will grow more than the market. That’s the situation we’ve been in since the global credit crisis.

EPL’s shift towards value occurred on a stock-by-stock basis over a number of years. The investments in the Japanese market in 2010 started the shift. More recently, it was epitomized by purchases of European and Asian banks, which are now well capitalized and trading well below the value of their assets.

It’s a small consolation to our clients, but EPL has had lots of company. Many iconic value investors, including Mason Hawkins at Longleaf, Franklin Templeton, Brandes and Seth Klarman, have struggled.

Looking Forward

If they could go back and do it over, EPL obviously would have delayed some of their stock picks and strategies, but they, along with Salman and I, have to look forward. When EPL decides what stocks to buy, or when we decide on our managers, we look beyond recent results and focus on generating the best returns possible for our clients going forward.

We expect EPL to take advantage of the huge gap that has emerged between growth and value stocks. By some measures, the price premium for owning growth stocks is as wide as it’s been since the technology boom in the late 1990’s. Over time, this gap will narrow and value stocks will experience a significant catch up.

And finally, for clients holding the Founders Fund, the Global Equity Fund accounts for 23% of total assets. In recent days, Salman and I have brought down the Founders’ equity weight by trimming positions in the Equity Fund and Small-Cap Fund (see our latest Outlook for details). Given how beaten up the Global Fund is, we chose to maintain the position.

The stock market has been highly volatile in recent weeks with China taking the spotlight away from Greece. As we note in our updated Outlook, the markets’ gyrations, both up and down, should remind us that nobody ever knows where the markets are going in the short to medium term, and investors shouldn’t be surprised if they continue through a period of retrenchment or turn around and head back to new highs.

Reacting to the latest global hotspot by making wholesale shifts to your portfolio is not a winning strategy. Rather, an effective approach is to selectively add to quality investments when they go on sale. This is what we’ve been doing for our clients over the past week or so.

Our equity fund managers viewed the recent downturn as an opportunity. Below are some of the specifics. We also put some of the cash in the Founders Fund to work, increasing the overall stock weighting from 55% to 57%.

Global Equity Fund: Additional shares were purchased in a few European companies including Bayer, Commerzbank and BP, as well as Whirlpool and Apache in the U.S. A new stock was also added to the portfolio, Harman International (an American manufacturer of high fidelity audio products and electronic systems) after it dropped roughly 20% amid the broad sell off.

Equity Fund: Positions were increased in CCL Industries, PrairieSky Royalty, Novozymes and Home Capital Group.

Small-Cap Equity Fund: Additional shares were purchased in DirectCash Payments, ZCL Composites and Avigilon.

Our overall stance is still cautious: we continue to hold a lower-than-normal weighting in stocks and bonds in the Founders Fund, and the cash position is still high at 17% (primarily in lieu of a fuller weighting in bonds). To re-iterate, we don’t know if markets will go up, down or sideways in the near term. But everyone likes a sale, and we found a few deals.

On Wednesday and Thursday, Salman and I had the pleasure of visiting Montreal to do some research. We met a number of people, debriefed at charming street-side cafes and took in the old city at night, but our main purpose for the trip was to meet with Wil Wutherich, the manager of our Small-Cap Equity Fund.

Since we launched the Steadyhand funds in early 2007, the Small-Cap has been the best performing fund in our lineup. From inception to June 30th, it’s had a cumulative return of 84%, which translates into an annualized return of 7.6% per year.

Over the last year, however, the fund has given back some of the gains, primarily due to its exposure to the resource sectors. It’s down 15% for the year ending June 30th and has been hit hard again this month with the further decline in energy and gold stocks.

Here are some notes from our meeting with Wil:

• In hindsight, the fund had too much energy, but Wil intends to maintain his exposure to this sector. He currently owns three oil and gas producers (TransGlobe Energy, Gran Tierra Energy and Arsenal Energy) along with Total Energy Services (drilling, transportation and oilfield rental services), ZCL Composites (manufacturer of fibreglass storage tanks for the petroleum industry) and Badger Daylighting (excavation services). Given the volatility in the resource sector, it’s likely that Wil will make some changes to his allocations to these stocks in the coming weeks.
  
• The two mining stocks in the portfolio, Primero Mining and New Gold, have also negatively impacted returns. The price of gold has been declining and few investors like gold stocks today, but in Wil’s view, value has ‘come back into the sector’. He is looking to zig when other investors are zagging, so his bias here is to buy rather than sell.
  
• In general, Wil is more excited than we’ve seen him in a while. As noted, the companies in the fund represent better value today and other names on his watch list have moved into his buy range.

As we’ve said previously, not all components of a portfolio will perform at the same time. A diversified portfolio is like a relay team. Different stocks, funds and asset classes carry the baton at different times. The Small-Cap Equity Fund has gone through a tough period, while the Equity and Global Equity Funds have been surging ahead. We never know how the race is going to play out, only that it’s long and unpredictable.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

We’ve written a fair amount on how stocks aren’t cheap these days (see Let’s Not Toss Valuations Out the Window). Price-to-earnings multiples (P/E’s) are at the higher end of their normal range, and corporate profit margins are at record levels in the U.S. Historically, this has been a bad combination because profit margins are cyclical and are vulnerable to reverting back to lower levels at some point, which would negatively impact earnings.

Elevated valuations and a lengthy run-up in the market make it a more challenging environment for investors. This isn’t to say, however, that there aren’t pockets of opportunity. In the view of our global manager, Edinburgh Partners Ltd., one such pocket is Japan.

We last provided an update on our Global Fund’s positioning in Japan last summer. Currently, over 30% of the portfolio is held in Japanese stocks, making the country the biggest area of investment. In a recent interview with Independent Investor (a British publication), Sandy Nairn, the CEO of Edinburgh Partners, provided his thoughts on why he’s so positive on Japan. The excerpt is below.

Thanks to the decline in the yen companies in Japan are now ferociously competitive. It may even be that the exchange rate has now become too cheap. Although this kind of statement can make you look foolish very quickly, I doubt the yen will go down much further. Recent events mean the environment has changed dramatically since I first started analysing Japanese equities back in the mid-1980s. Back then return on equity, dividends and buybacks might have been on international investors’ minds, but were rarely on those of domestic Japanese investors or company management.

This has now changed. Return on equity is one of the core metrics for any company, and Japanese companies are embracing it as an objective in a way they haven’t done before. The Government and wider society have agreed that tax revenues must rise, that deflation has to end and the deficit must be brought under control. Achieving this requires both rising wages and rising profits. Both formal and informal policy is heavily directed towards these ends.

What is becoming more clear as time goes by is that this is a genuine and powerful trend. One example is the minimum return on equity threshold required for a company to be an eligible investment by the government pension fund. Given the overcapitalised nature of balance sheets in Japan, increasing the return on equity requires increasing buybacks and raising dividends as well as improving profit margins. Companies now explicitly recognise this.

In addition to these shareholder friendly moves by companies there are also important supply side reforms including both broadening those in the tax net and simultaneously reducing the tax rate. There are a lot of positive changes happening and they are still not fully reflected in market valuations.

The Global Fund holds 13 Japanese companies, which include export-oriented household names such as Panasonic, Toyota and Yamaha Motor, as well as companies focused on the local economy such as East Japan Railway, Nippon Telegraph & Telephone (NTT) and Nomura Holdings.

The fund’s investments in Japan provide Steadyhand investors with exposure to not only cheaper stocks, but also a region that has been low on the radar of many global investors.

Our Income Fund is a key part of our balanced clients’ portfolios. It’s also the largest holding in the Founders Fund.

Bonds are on many investors’ minds these days. They provided stellar returns last year, but interest rates are at rock bottom levels. Tom recently met with CC&L’s Brian Eby (the lead manager of the fund) to discuss the fund’s performance, composition, some of the strategies his team is pursuing, and return expectations going forward.

(If you can't see the video, click here.)

Brian was in his element on the day of shooting, so we kept the film rolling and updated our ‘Overview of CC&L’ video, which you can watch here.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

I recently had the chance to spend some quality time with Sandy Nairn, the CEO and founder of Edinburgh Partners (EPL is the manager of our Global Equity Fund). We had an extended lunch in downtown San Francisco.

We spent a lot of time discussing the firm’s personnel (stable; continuing to invest in the next generation), philosophy (unchanged; based on 5-year valuations) and decision-making process (unchanged; ten smart people in a room; still crisp).

We also talked frankly about the fund’s sub-par performance. Sandy and his team are well aware of the returns to-date and he was more than willing to drill into their strategies.

The biggest drag on returns has been the fund’s lack of exposure to U.S. stocks. Indeed, it has been a double whammy - the American market has solidly beat other developed markets and the U.S. dollar has been the world’s strongest currency. For Canadian investors, the U.S. has been the place to be.

U.S. stocks have come down from 25% of the Global Equity Fund a year ago to just over 10% today. This shift resulted from a consistent pattern of selling U.S. stocks that have moved up and are getting pricey (Illinois Tool Works, SanDisk, Cisco Systems) and replacing them with cheaper stocks from elsewhere in the world.

EPL is well aware of the dynamics that have seen the U.S. economy recovering nicely while Europe and Asia struggle to grow. The lack of U.S. exposure is the result of company by company ‘bottom up’ research and a cautious macro view.

During the lunch, Sandy added some color to the Global Equity Strategy:

• In his view, the U.S. market is expensive. The EPL team keeps coming across companies that are achieving record profit margins and trading at above-average price-to-earnings multiples. High margins and P/E ratios are a bad combination.
  
• There are more over-looked companies in Europe, the UK and Japan. Because of the economic cloud over these regions, they can buy global franchises at fair prices.
  
• For EPL’s strategy to work out, the U.S. market doesn’t have to go down. If their analysis is correct, U.S. stocks’ ascent will slow while other parts of the world will garner more investor attention.
  
• Corporate reforms in Japan are finally taking hold. Investment managers have been predicting change for a decade now, but today it’s actually happening. There’s plenty of examples of asset sales, restructuring and share buybacks. Profit margins are at cyclical lows and have plenty of room to improve while still not threatening the heady level of corporate America. Combining better corporate governance with a weaker Yen, the chance of positive earnings surprises in 2015 is increasing. (To understand EPL’s thesis on Japanese stocks, see our August 21st blog.)

Sandy emphasized that there are still attractive investment opportunities, but after a stretch of strong market returns, it’s key to avoid expensive stocks. The composition of the fund reflects this, and is much different than the broad global market.

Our Small-Cap Fund currently holds 15 stocks and is sitting on a fair amount of cash.

Wil Wutherich, the manager of the fund, gives a rundown of its positioning in a recent discussion with Tom Bradley. Wil also provides some colour on the fund’s energy holdings and its best performing stock over the past two years (Badger Daylighting). And it wouldn’t be a thorough update without addressing valuations and a weak performer.

(If you can’t see the video, click here.)

Wil was in fine form on the day of shooting, so we kept the film rolling and updated our ‘Overview of Wutherich & Company’ video, which you can watch here.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

U.S. stocks have been the sweethearts of the global equity markets over the past five years. Yet, they’ve gotten increasingly expensive in the eyes of our global equity manager, Edinburgh Partners Limited. EPL has reduced the portfolio’s exposure to the U.S. considerably, as they’re finding better value in Asia and Europe.

Craig Armour, an Investment Partner at EPL, expands on the Global Fund’s positioning in a recent conversation with Tom Bradley. Areas that they drill into include the fund’s holdings in Japan, European healthcare companies and Asian banks. Craig also explains why the manager has been reducing the fund’s exposure to cyclical companies (i.e. those that are highly correlated to economic growth), the nature of its investments in the emerging markets, and what he perceives to be the biggest risk in global markets today.

(If you can't see the video, click here.)

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

We sat down with Gord O’Reilly and a high definition camera earlier this month for an update on the Equity Fund. Gord is a founding partner at CGOV Asset Management, the firm that manages the fund, and is the key decision maker for the portfolio.

We discussed a number of topics, including:

• What’s been driving performance
  
• The fund’s focus on high-quality companies with growing dividends
  
• Energy stocks
  
• What CGOV likes about industrial and consumer businesses
  
• Laggards (spoiler alert: there haven’t been many)
  
• Valuations

(If you can't see the video, click here.)

We’ll report back later this week with video updates on our Small-Cap Equity Fund (Wil Wutherich) and Global Equity Fund (Craig Armour).

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

One of the more ‘non-consensus’ strategies we’ve pursued over the last few years has been the Global Equity Fund’s commitment to Japan. Although there have been periods when Japan has contributed to client returns, on balance it has been a drag so far.

In a recent interview, Sandy Nairn, the CEO of Edinburgh Partners (the manager of the Global Equity Fund) talks about Japan and how he sees the strategy playing out. The relevant excerpts are reprinted here.

And what about Japan? Where does she fit in to this picture?

We continue to have a sizeable exposure in Japan [29% of the Global Equity Fund at the end of June and 5% of the Founders Fund] and our confidence remains robust following recent research trips there. Some holdings have been sold after strong appreciation, but we have found alternative investments in Japan with which to replace them and the current turmoil in markets is providing us with more opportunities.

Japan is at the early stages of a QE programme and has already done a range of things. The rise in equity prices that we have seen reflects the fact that fear of the cataclysmic economic consequences of an overvalued exchange rate has been corrected. But so far that is all that has happened.

The second piece that we are still only beginning to see is the sight of Japanese companies restructuring and doing things that would have been unthinkable ten years ago. We have seen Applied Materials and Tokyo Electron, for example, announce a merger. I don’t think you would have seen that happen a few years ago.

You have also seen Panasonic shut down various legs of its business and act in a determined manner to make its business more efficient, so as to get its margins up to a more sustainable level. What I think is happening is that many more Japanese companies now both understand what they need to do and are more willing to do it. They have seen how their peers in Japan who have taken the same steps are now reaping the benefit of an uplift in profits, first from the currency, second from their past restructuring and third from the effect of shutting down businesses. That has had a powerful effect on earnings.

The third and final stage will come when the domestic economy is reformed. That is a longer term thing, but I think will inevitably happen. Japan still has a long way to go. Take a company that has made 1% to 2% profit margins in the past, and where the market now sees those margins going to 3%. If that then goes to 6%, you will have doubled your profits again, and that is before even thinking about the top line growing. So the leverage from doing what some companies in other parts of the world would have done years and years ago is pretty large.

But it could take quite a long time to see the results?

Yes. While a number of major companies have moved down this path, others have not got there yet. The tanker is already turning, if you like, and 12-18 months from now I am sure that will have become the consensus view, whereas now it is just hope and belief. If profits do come through, I think we will see a change in sentiment toward Japanese management. I have been surprised by how radical some of the changes have been in a Japanese context.

For me, the first two ‘arrows’ presented by Mr Abe of monetary reflation and Yen devaluation were simply corrections of previous policy errors and were only necessary conditions. The so called ‘third’ arrow is the truly transformational one, the sufficient condition if you like. An over-regulated, supply side constrained economy could be consigned to history and the latent ability/intellectual property of an economy which has been suppressed for decades could be liberated.

This is the transformational element and more often than not its impact is underestimated. Mainly because it gets to pull the levers, the economics profession in general focusses on fiscal policy and demand management. Supply side reform is about creating conditions and waiting for the commercial response. The evidence from Japan is that so long as the reforms continue the response is underway. Moreover, the length and depth of suppression mean that the impact will be dramatic.