Good afternoon,

 

I’m guessing that unless you’re down in the sunny south somewhere, you’ll be receiving this note while the snow continues to fly up here in Ontario. Winter, it seems, is not quite finished with us yet.

 

I recently started reading a book about different tendencies in sports that are generally accepted as the right thing to do, despite being statistically the less successful choice. An example is from football, where most teams will punt the ball away on 4th down, not wanting to potentially give the other team the ball in a dangerous position on the field. A few statisticians have done work on this, however, and discovered that it makes more sense to try to ‘go for it’ on 4th down far more often than is the current norm. Yes, it might result in turning the ball over in your own end of the field but even then, the other team isn’t guaranteed a score of their own. And when going for it does work, the team who converts the 4th down is able to remain on the field and keep their drive alive. This information was made available to coaches across the NFL and even though they realized ‘going for it’ made more statistical sense, they still punted far more often than not. It seemed to be the ‘safer’ choice… they were more concerned with not being seen as too risky – an NFL coach has little in the way of long-term job security. The book then draws an analogy with portfolio managers in the investment industry and the benchmarks that they are measured against. For us as PM’s, the ‘safe’ option would be to build portfolios for our clients with holdings that match those in the benchmarks, knowing that we are never going to have years where these portfolios under perform their benchmarks in any meaningful way. Like a coach in the NFL, a portfolio manager can be fired quite easily. A main reason for that would be if they hadn’t been delivering returns that are close to the ‘norm’… especially during years when benchmarks are down in value anyway.

 

For about 90% of our clients, we manage portfolios that are measured against the benchmark of either the main equity index in Canada (S&P TSX Composite), or a 50|50 blend of the S&P TSX and the FTSE Canada Universe Bond for our balanced portfolios. If we were to look like the benchmarks in this case, then your portfolio would consist mainly of banks, energy, and mining companies and would have both government and corporate bonds, maturing at all different times over the next 30 years. For those of you who dig into the portfolios you hold, you’ll quickly realize that they look nothing like this! We do not try to ‘hug’ our benchmarks. Instead, we have a disciplined strategy we follow for all our discretionary portfolio clients.

 

Our focus is (for equities, anyway) on companies that meet the following criteria:

• Growing profits over the last 4 or 5 years
• Consensus expectation for future growth
• A reasonable valuation for the stock price, relative to its earnings per share and growth rates
• A relatively healthy balance sheet

 

This strategy is not new for us, and has resulted in long-term net-of-fee returns that have been consistently ahead of our benchmarks (and most peers). Last year was an example of the opposite, however, where both our growth and income strategy underperformed because they had (and continued to have) almost no exposure to energy or mining stocks. We took the risk that our clients would understand that these sectors are more volatile than our typical holding and would ‘forgive’ us for this short-term underperformance. It will always be frustrating for us when the cyclical companies like energy and mining outperform, but those kinds of companies don’t seem to be able to deliver long-term shareholder returns… Suncor, for example, is one of Canada’s largest energy companies. Yet its share price today is nearly identical to what it was 15 years ago. The only return one would have received over that time is the dividend, and that’s only if you didn’t get frustrated and sell in years like 2015 or 2020 when Suncor’s share price was down dramatically and its prospects seemed grim. If you trust the ability of your companies to deliver consistent profit growth over time, it gives you comfort during down times and can lead to significant growth in your portfolio in the future.

 

This year, we seem to be back on track with all 3 of our managed portfolios outperforming their benchmarks as of the end of February (the third being the one we took over from a departing IA, and have since altered many of the holdings to match the above criteria). History gives me a sense of optimism that this out performance is evidence of things getting back to normal for us… only time will tell. Either way, portfolios are nicely in the positive for the year and our companies have delivered very solid quarterly results lately, on the balance. I choose to take this as evidence of high quality corporate management teams making necessary adjustments to inflation and the accompanying rising interest rates in order to continue a consistent path of profit (and accompanying share price) growth over time. So far, so good. I do hold cash positions in each portfolio (earning nice interest these days, of course) in the event that we continue to see short-term downturns in prices and will look to be opportunistic in this regard.

 

I apologize if this note was a bit technical in nature but we do have a number of newer clients that aren’t as familiar with our strategy as others. As the ‘veteran’ clients of ours know, I’m a believer that knowledge in our process leads to confidence in the approach and an increased level of patience when times are tougher. I thank you for that patience in 2022 and look forward to hopefully more of the growth in portfolios that we’ve seen so far this year. As always, I’m happy to discuss any questions or concerns you might have… it’s always nice to catch up. The rest of our team is doing a fantastic job at keeping in touch with our client base on a regular basis but if there’s something on your mind, please do not hesitate to reach out. On behalf of Shalu, Marta and Lauren, I thank you again for your continued support of our team.

 

Best regards,

George