by Salman Ahmed
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.
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