by Salman Ahmed
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.
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.
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.
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.
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.
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.
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