Andrew Lacas (Wealth Advisor, Portfolio Manager, Wood Gundy) speaking and introducing Roberto Katigbak of CI Marret Funds on screen and speaking:

 

Thank you for joining us this morning for our webinar here with Roberto Katigbak from Marret Asset Management.

 

As you all know, Andrew Lacas with Lacas Advisory Group and we thought it was a good time to get Roberto on. It's been probably about a year since the last time we did one of these with Roberto and as a lot of you know, we’ve had a long friendly relationship with the Marret team.

We've been big supporters of them because truthfully, they are consistent. They continue to come to the table with some great product and what we like about them is that their story, although it changes depending on the macroeconomic environments, they are consistent with their presentation, they're consistent with their approach and their process which, you know, leading back to my institutional days as I've always said, if you have a strong process, repeatable, scalable, the results should speak for themselves and in Marret’s case they do.

So we wanted to get Roberto on today to have, like I said, have a chat. Obviously, there's a lot of macro questions in the world. The equity markets are hanging in fairly well, bond markets last year were obviously a dismal spot to be just like the equity markets, so we wanted to talk about that macro environment, what Roberto and his team are seeing, and then that will dovetail into why we're using, why we're overweight the Marret team inside of even our equity portfolios.

So I've got some questions but first, maybe Roberto, we can start off, you can give a quick little intro of yourself if you want, but let's chat a bit about the overall market conditions and one of the questions I guess I want to start off with is just sort of that difference between what we're seeing in equity markets and what we're seeing in bond markets.

And you know, from that maybe a good place to start for folks would be if we look at, even just the volatility, what the two different markets are telling us because the equity market seem to be fairly robust still, they're hanging in, very skewed to a handful of stocks, obviously. The bond market is telling a different story and I think that's where we are both aligned in our views of what's to come over the next number of months, is really the bond tail wagging the dog. I don't know if that's how the saying goes, but.anyway, with that, so Roberto, let me throw it over to you. Thanks for joining us and like I said, I'll pop in with some questions but really I just want to hear from you what you and Marret are seeing right now.

[2:42] Roberto on screen and speaking

 

Yeah, definitely. Thanks, Andrew, and thanks everyone. It's good to be back here again, and the timing of this call and this webcast I think is very, very, I guess the word, timely. We’re actually seeing a lot of important shifts that are going on right now in the macro environment perspective.

For those of you that don't know me, I work with our institutional clients as well as our private wealth clients, high net worth families as well as and support advisors such as Andrew. In terms of understanding our positioning of our products as well as understanding how they're positioned for the current environment and again, as I said earlier, this phase of the cycle, I think that we're potentially moving into actually creates a lot of opportunity.

What we're seeing last year was obviously when we look at a cycle, we typically look at a cycle with four distinct phases. Typically these cycles in an economic or interest rate or credit cycle typically lasts on average around eight years some get more extended, some are a little shorter, but on average they're eight years, and in those cycles there's four distinct phases kind of like seasons to the year,

 

[3:51] Displayed on the screen: Monetary Policy trend and Outlook slide

 

            Winter to Discontent

 

• We believe the probability of a hard landing for the global economy in 2023 is much higher than the consensus call.

 

• The combination of aggressive global central bank monetary policy tightening stalling economic growth, persistent inflation and liquidity withdrawal have already set his the path into motion.

 

• Financial markets are misinterpreting the central bank reaction function. Cyclical recessions are different, central bank policy is not stimulative, it is the exact opposite.

 

• Markets should be prepared for turbulence, air pockets and a missed runway. We do not believe risk assets and markets are pricing the outcome.

 

I guess would be the best way to explain it. So, just like there's a summer, winter, fall and spring, we have the recession phase, the early cycle phase, mid cycle and late cycle phase.

Now, why I kind of explained that is because last year was definitely what we felt was the late cycle or monetary policy tightening phase and typically what ends up happening is, as you know, the central bank starts to raise rates and then at some point they raise rates too much, they finish their rate hiking cycle and then they've raised rates to the point where they actually caused an economic slowdown in order to get their number one enemy right now is inflation under control. So last year was very much that phase where they were and this was a global synchronized hiking of policy more or less here. So you saw central banks globally hiking rates at a size speed that we've never seen before, Andrew, and as uncomfortable as it was for bond markets, I think investors have to realize this was historic. You've never seen central banks ever hike rates this fast and this high in that period which caused the historical volatility in bonds which again, was why we always favor active alternative type mandates to protect you from that. Now, that being said, we feel that they're at the point where they are in, this is highlight obviously with the Bank of Canada, the Bank of Canada now for several meetings, has officially paused their hiking cycle. Not to say that they're never going to raise again, but given what we're seeing out there from a macroeconomic perspective, the Bank of Canada is still holding firm, letting their hikes permeate the economy in terms of slowing it down. We do anticipate that the Central Bank in the US, the Fed, is also very, very close. They have raised rates the last meeting. They are likely to raise rates the next meeting, which is next week by the way, maybe one more time but all of the signs that we're seeing in terms of the work that we do in terms of understanding Fed language, it's very typical of them signaling the last few meetings that they're close to pausing. Now, the reason why obviously what we've seen now is bond funds and the bond sector looking really, really interesting this year is because this idea that if central banks start to pause, there's this idea that they've actually hiked rates too much, and they might have actually caused too much damage without really fully understanding all of the long term ramifications of a lot of this hiking that they've done might be putting the economy and recession risks to the forefront, now which is causing bond market…

 

[6:30] Andrew:

 

Can I just jump in on that one for a second? Just ask you this because It's interesting. I would agree with you on that. I think that the Fed is definitely coming close to an end, Canadian Bank as well, but historically the central banks always do this, right? So, maybe touch on the data points that they're using because they don't really use forward looking data as much as backward-looking data and even some things like employment, which is sort of the last shoe to drop. So yeah, maybe touch on that a little bit if you don't mind.

[7:09] Roberto on screen and speaking

Yeah, sure. And looking back we think this is actually one of the biggest mistakes Central Bank, this committee is probably going to make when we study this 10 or 15 years later. For several committees prior, committees before them, Central Bank committees, they would typically actually be anticipatory in terms of their monetary policy. So they would do some sort of policy action and they would anticipate in the future that this would actually have an effect. It does have a lag effect, but eventually would trickle itself into the economy. Now when you realize what Powell has done, Powell actually differentiated himself in the sense that they moved from anticipatory to reaction based policy and that's why they were too late in actually raising rates and they took too long and how come they had to catch up is because they were waiting for inflation to actually start to peak out before they started to raise. And they were just behind now the trouble now is that now that they're not managing on a more of anticipatory based, kind of outcome basis. This is the problem Andrew, and to your point, they're focused on an unemployment rate that goes higher like the Fed's goal is to have the unemployment rate go higher by 1%. Now, the ability for the Fed to actually engineer that without causing a hard landing is going to be very difficult, because all of the past previous cycles that we've studied, whenever the unemployment rate has gone up by only a half a percent, we've always had a recession. We've never been able to escape that. It just starts to feed onto itself now, now, when the Fed actually starts moving and now trying to target 1% if they're looking at the unemployment rate, to your point, the unemployment rate is the last thing to move, it's the, it's the laggiest of indicators so before that actually starts to take down what we have to do a part of our job is to anticipate or start to monitor what are the trigger points before the unemployment rate starts to roll over and in our view that starts with the job openings. So before people actually get fired, there's kind of like this evolutionary chain of tightening of the employment cycle. So the first thing you do, you start pulling job openings from the job opening bulletin boards. The next thing you do is you start reducing shifts and that basically feeds into the data of average hours worked per week, and then you start to track the initial unemployment claims. So these are filed every week, there was one today that came in at 230,000. So these are people that have just been let go and they're filing for new unemployment claims. Now, as that starts to rise, so typically the job openings come down, average hours worked per week starts to shrink then the people start filing more for initial unemployment claims and then finally the last thing is actually the unemployment rate. So our job actually is to make sure we're tracking pretty closely to get ahead of that cycle to position ourselves into the right pocket of fixed income that can actually take advantage ahead of the ahead of what the actual economy is doing. So we want to we we're trying to get to the puck where it's going to be instead of where it's at. So and to be honest, what we're seeing is exactly that. The unemployment rate isn't moving, but the early signs, like the job openings are starting to come down. You're starting to see the initial unemployment claims start to on average now above 200. Last week it was 245. This year's this week, it’s 230, But now we're above that 200,000 dollar, 200,000 job threshold of people filing unemployment claims and on top of that we're actually, this is a there's a lot of noise around this employment cycle. So a lot of the work that we have to do is we actually have to study, kind of the earnings calls from recruitment companies like Robert Half, like Manpower and what we are noticing the common theme is they're seeing a surge in job seekers as well as they're seeing a significant drop in job and businesses posting jobs and also the one thing that we're watching very carefully is the matching time between job seeker and employer is actually lengthening, which means it's harder. It's taking longer to match a job seeker with an employer.

So as you start to see what you're starting to see on a daily basis now, right? You're seeing companies and it's not just the tech sector anymore, it's not just the financials. You're starting to see this permeate to 3M, to Disney, The Gap announces 1800 people layoff. If this keeps on its track, the unemployment rate is going to go higher, probably towards the back half of this year.

 

 

[11:52] Andrew on screen and speaking

 

OK, and I mean that makes sense intuitively if you think about it, I mean employers had a heck of a time finding employees through the COVID crisis. So you ramp up last thing you want to do is let go of all those people that took so long to find but so dovetailing with that, and it's one of the things that we've talked about in the past both here on the team and you and I as well is and you have it here in one of your first points, the probability of a hard landing for the global economy is much higher than the consensus call and let's talk about that because the Fed and basically all central banks are still, you know, they are still raising rates and they're going to raise rates again probably, this, so they haven’t pivoted. Contrary to one of the narratives that was out there, that they're slowing down. That's not a pivot. Pivot is actually when you go in the opposite direction, so they’re still raising rates into this sort.of turmoil that we're seeing. Jobs are starting to fall, so if they're still trying to fight inflation, which is starting to come down, but the Fed can only do it one way, they can't stimulate more supply. They can only crush demand, which in and of itself is basically creating a hard landing, so to us, and I think this is why we're long our position with you guys, even in our equity portfolios, is there's no real way, we don't really see any way out of it, other than to engineer a soft landing is going to be really, really tough here.

 

[13:23] Roberto on screen and speaking

 

Yeah, and I think this is to your earlier question in terms of what equity markets are pricing in and how strong they are. Equity markets are really pricing in this idea that the Fed is going to start to cut rates towards the end of this year and that is going to enact the soft landing because the consumer actually is holding up. In our view there's a couple of things that we have issues with is, number 1, understanding the type of recession that we're actually going through is very important, because in the last 30 years of investing, we've gone through a .com bubble, we've gone through a financial crisis, we've gone through 911, we've gone through COVID.

Those types of recessions we call structural or event driven recessions, so something came out of nowhere, kind of damaged the global economy and central banks were there to actually bring us out of the recession, right? And in those periods, there has been very, very low inflation. So for the Fed to be able to try to like throw a lot of liquidity or cut rates aggressively, they could do it without worrying about inflation creeping up.

There exists a 3rd type of recession which or slowdown which we think is actually what's happening which maybe most risk assets, the consensus view is not really recognizing.

It's called a cyclical recession and this is a recession that is not coming from out of nowhere.

 

[14:52] Monetary Policy trend and Outlook screen removed, Roberto is on screen

 

This is actually a recession that the Fed is not reacting to, it's a recession that the Fed is causing themselves and the reason why the Fed is causing themselves, if I could segway into the point that you just made, is that inflation is way too high, and it's a certain pocket of inflation that they're targeting, ok. So this has nothing to do anymore with broken supply chains from China. That's all fixed. If you look at freight rates, you can supply chains. There's the inventories are building, you have access to goods now. And this doesn't even have, it has less to do with home prices and rent inflation. They know that acts with a lag.

There's a certain particular pocket of inflation which is really linked to wages that the Fed sees as enemy number one. So this they call this core services non housing. This inflation is tracking at 6%. So this is inflation that’s linked to, you go to the dentist, you go get a haircut. Medicare costs. legal costs, funeral costs. This is where anyone who has kids understands these day-to-day costs that affect our psychology is running way too high because there's way too much demand for these types of services, and there's not enough workers.

So what the Fed has to do is the Fed can't control immigration. They can't get people more workers into the system, so what the Fed's goal is in raising these rates and tighten the economy is to reduce the demand for these services more into an equilibrium, because if they don't do that, there's a risk that this idea. That's because this inflation in that particular pocket is running at 6% and their long term goal for overall inflation is like two to three. This does not satisfy their, they can never achieve their two to 3% target if wage inflation is running at 6 percent, and if it lasts too long, there's this risk that it turns into this, they call this a wage price spiral where if wage inflation is staying too high, companies get into this vicious cycle of having to pay like increased prices and then basically this damage is long term growth for even decades. And the Fed has studied this, so that's why it's important to get ahead of this now. And it's OK for them to risk a hard landing if they can get inflation under control, that means they can save the rest of the decade for growth.

 

[16:57] Andrew on screen, Roberto still speaking

 

[17:03] Andrew speaking:

 

Yeah. And it's just to jump on that comment there that you mentioned. Really, it's one of those things when we look at it, it's very similar, to what happened in the 1970’s, right? So in the 1970’s, they thought they had taken care of inflation, they start to drop those rates again, but they didn't kill that and, credit it is a very different labor market today than 1970’s. 1970’s, a much higher percent in the unionized employees, and we see what's happening just with the federal union right now, right, hold a lot more sway. So yeah, I see exactly where you're going with that is they need to get that unemployment level up. But again goes with basically creating a hard landing. So, for everybody that's listening, they're probably sitting there saying, geez, this is not the most uplifting, uplifting call I've ever been on. Looking over the next few months, let’s focus on maybe some of the positives that you're seeing specifically in your space and for the again, let's be honest, in the equity markets, I think we're both in agreement that the next few months could be challenging. We’re positioned for that. Our equity portfolios have anywhere from 25 to 45% cash, gold and you guys essentially, so pretty defensive tilt to that. It doesn't help on days like today and when the stock market is flying, but let's maybe focus in on some of the positives because every challenge, as you well know, is also an opportunity. So let's touch on that a little bit, if you don't mind.

 

[18.49] Roberto On Screen and speaking

 

Yeah, and I think what's interesting is we, as you know, with the our portfolios, our ability to withstand the volatility last year has really put us into a really good position this year because that historic volatility to the downside and most other bond funds and bond indexes, you know, into that turbulence, we are now seeing if we're turning the corner here into a hard landing scenario,

[19:56] Chart showing Historic returns during past recessions (Dot. Com Bubble-Mar. 2000-Oct. 2002, Financial Crisis October 2007-March 2009, Pandemic Plunge Feb. 2020-March 2020) comparing Asset Class performance during each period

• Chart depicts 3 different recessions - Boring government bonds outperformed
• Describes 5 phases of economic cycles: Late expansion, Peak, Recession, Trough, Early Expansion
• Dot. Com Bubble-Mar. 2000-Oct. 2002         

Financial Crisis October 2007-March 2009

Pandemic Plunge Feb. 2020-March 2020

Compares Asset Class performance during each period

Highlighting during recession, US treasury bonds outperform any other asset class

 

we actually think that high single digit, even double digit returns in bonds are actually possible now. Not only is the underlying coupons now higher than we've ever seen probably last few decades here at 4 or four and a half, 5%, but if they create a hard landing and they have to cut rates we do see the opportunity to actually start to take advantage of falling rates, which means every time when they cut rates and bond yields fall our funds are actually able to capture capital gains. So when we look at our base case of a hard landing scenario and hopefully you can see the screen in front of you. I've kind of shown you here three different recessions or hard landing scenarios here. I would say these are more recessions. What you'll start to notice here is that bonds actually and boring government bonds actually outperform all asset classes in these times of hard landing because in the hard landing scenario, equities have to start to price in the earnings deceleration and the weakening consumer. With that, fear of recession comes the seeking of safety, and there is no other more secure bond out there than the US Treasury bond. So we're not just limited to holding Canadian government bonds like most Canadian investors, we can actually buy U.S. Treasury bonds and every recession, U.S. Treasury bonds outperform Canadian government bonds by a significant margin. And by the way, there's no currency in these returns. We just we hedge the currency 100%,

 

[20:52] split screen to show Roberto speaking along with Recession chart

 

so don't worry about the volatility that comes with currency, this is just Global investors seeking the safer bond through the US Treasury trade. Now in a hard landing scenario we think they could actually cut rates easily 200 basis points,

 

[21:07] Andrew on screen, Roberto still speaking

 

which again our funds are actually lined up. We think that we can actually try to target high single even double digit returns out of these bond funds by being

 

[21:18] Roberto on screen and speaking

 

in high quality government bonds. But at the same time, there are two more trades that set up for our product, which are quite interesting because,

 

[21:28] Andrew on screen and speaking

 

So Roberto, before you get into those next two trades because I do want to get into that and because that also is exactly why we hire you guys, I always say we use managers to add value where we can't do it ourselves. And I think you walking people through those trades helps. But you mentioned U.S. government bonds and I just wanted to bring this up before we get the get off the US government bond side is, something else that's popping up now obviously is debt ceiling conversation in the US and it's during a time that's much more, I would say there's a lot more political risk now than 2011, when they had the debt ceiling crisis. You've got the group of, I guess, the freedom Caucus that is sort of holding a lot more power over the Republicans because of the fact that they have such a slim majority. They need to keep them happy. So how does that play into sort of the US bond world over the next little while, if, God forbid, they do default on some debts, you know, what are you guys thinking about on when it comes to the US default or sorry not default but debt ceiling?

 

[22:43] Roberto on screen and speaking

 

Definitely, yeah, look. at the end of the day they've never defaulted before. They've always got it done, even if it came down to the wire and did, did they have to go through certain government shutdowns at certain points just to make sure? Well first of all, just to just to clarify, the date for this crisis is kind of a moving target because it really all depends on tax receipts that come in. But the work that we've done on

 

[23:08] Roberto still on screen, Andrew speaking

 

which are which are coming in a lot lower than the like coming here

 

[23:13] Roberto on screen and speaking

 

they're so basically if you wanted to be very conservative, I think the June, July would be the dates where this this could become an issue. Now we think it gets done before, just because of the ramifications. No government wants to be responsible for the default or a potential default because the long term ramifications of a default of the US, government bonds, is widespread. You would be talking about global recession because what ends up happening is if a default becomes a risk, that means rates start to spike, but also the US dollar devalues tremendously as people start to fear the quality of U.S. debt. This is going to wreak havoc on global trade on top of that is not going to be a scenario, and we've seen kind of this threat back in 2011. If you go back, in 2011, we had a couple of things. We had this debt ceiling crisis plus we had sovereign debt issue crisis in Europe at the same time, and that led to equity drawdowns of 20% at that point, right?

Because when you have that again, that devaluation of the US dollar plus this impacts the consumer with higher rates, this impacts global trade with the weakening currency, this impacts credit and capital expenditure through credit borrowing, because everything just basically becomes more expensive. This is not a risk that I don't think either party wants to actually see realization. Now, is it being used as a political negotiation? Yes, definitely, but at the end of the day, in our view, Biden is never going to take that risk in terms of letting the actual debt default, because that would be that would be catastrophic, I think the word would be, so we do think it gets done. However though, there could be before it gets done, will there be certain government shutdowns, right to try to kind of push. like the leader knows the risks of government shutdowns to try to kind of push higher, as they start to see, OK well what tax receipts are lower, do we have to cut costs before we get forced into a default position? That's possible.

 

[25:32] Andrew speaking, Roberto still on screen

 

Which actually helps take care of that inflation issue because demand disappears with hundreds of thousands of government workers not working.

 

[25:38] Roberto on screen and speaking

 

Think about it this way every week that the government shuts down in the US is probably a hit to the GDP of 13 basis points. So if you get like a full quarter that's like a 1% hit of GDP, right?

 

[25:51] Roberto on screen, Andrew says “yes”

 

[25:51] Roberto on screen and speaking

 

So you were already talking about an economy that was at very low growth or zero growth. Now you add on the potential of, and I don't want to just bypass this whole idea that's banking stresses that we saw, because that is something that has to be recognized. Not in the sense that we think there's a big systemic risk in the banking sector, but it's more about the tightening of lending standards. So credit availability for consumers is going to slow. It was already slowing, but now it's really going to slow. Now if you add in and that potential hit, the GDP from tightening lending standards of banks was already going to be maybe 25 to 50 basis points of GDP. If you add the potential for government shutdowns as they hit the GDP. That's why again, this just further emphasizes the idea that hard landing is the most probable scenario. It was already difficult without a banking stress it was already difficult without a debt ceiling issue.

Now if you add these two things to the mix. Again, that's why I think I think we're positioned more for hard landing

.

[26:53] Roberto on screen, Andrew speaking

 

[26:56] Andrew on screen and speaking

 

Yeah. So if that's sort of the base, it sounds like it's the base scenario that you guys have at Marret, which is unfortunately sort of the base scenario that we have as well, but again, that dovetail. So I think a couple things. Let’s get back to those next two trades that you were talking about that are great opportunities, but the other thing that would allow the Fed a lot of cover to dramatically decrease rates over the back half the year into the next year as, correct me if I'm wrong, I think it's like 1.4 - 1.3 trillion of U.S. Treasuries are coming due over that timeframe, so realistically, they can't afford to keep rates sort of at these levels with that much debt rolling over, I don't think, I mean otherwise the debt servicing requirements are through the roof.

 

[27:46] Andrew on screen Roberto speaking:

 

[27:50] Roberto on screen and speaking

 

That's an important thing to understand is for the last 30 years whenever banks have hiked rates, what we call the terminal rate that eventually place where they stop over the last 30 years, it's always been lower, lower and lower and lower. OK, and the reason for that is because the last 30 years, debt levels have just gone higher higher and higher and higher. So it's just mathematics, right, the higher the more indebted you become, the less rates you have room for rates to move higher so keeping rates elevated at this level given our debt levels, if they keep them too high and this is no if they keep it for a full 12 months even we're likely not talking about a hard landing anymore. We're talking about more of recession risks, right? So I think exactly to your point , the economies aren't built to survive given our debt levels rates sustaining this kind of height. It’s just the feds trying to get this last bulge of inflation coming from wages through the system because they really probably want to get rates down to 2 1/2 two and three quarters over the long run. That's where they really want to see that again given where debt levels are, where rates could be sustainable given where would they think growth is going to be. It's probably in that 2% growth. So you can have 2 1/2 to two and three quarter rates.

 

[29:08] Roberto still on screen, Andrew speaking

 

Which gives them a little bit of wiggle room in both directions.

 

[29:11] Roberto on screen Andrew speaking

 

[29:12] Roberto speaking along with Andrew

 

If they need to stimulate a little bit or you drop back or whatever it is, yeah, absolutely alright.

 

 

 

 

[29:11] Andrew speaking

 

So if that's the case, if that's your base scenario the first trade right now is those bonds but what are the next couple trades that you see here to make some money over the next 12 months?

 

[29:29] Roberto on screen and speaking

 

The sequencing that we see is over the next 9, probably 9, 9 to maybe even 12 months, you’ve got be focused on government bonds, because right now the market is trading this idea of a pause and in the pause trade, all assets rally and that's what you're seeing. So you seeing government bonds rally. You're seeing credit rally, you're seeing equities rally, because this idea that there's a pause and historically equity markets have studied past pauses and they've seen that typically after a pause four months later, the Fed always does their first cut. However, we think you need to push back on that view because a pause at these levels might be higher and longer than what we've seen in previous cycles because of the risk that the Fed doesn't want to repeat the 70’s again. If they cut rates too prematurely and inflation reaccelerate, if you recall the 80’s, Volcker had to come in and clean everything up and they lost a whole decade of growth. It is possible that the Fed might keep rates higher and longer than just that four month period, as the economy still decelerates further as earnings become more under pressure, even as you start to see that unemployment rates start to tick up. They might still hold rates high then a couple of quarters pass equity markets start to price in, my God, the Fed is not cutting that same reaction function that we expect, they're not doing it this time. We have to start pricing in that they are higher for longer and what does that mean for the consumer? What does that mean for manufacturing, for services consumption, and then eventually profit margins, ok it's bad, we need to start cutting further. In that instance now, the equities start to sell off their final flush, credit market sell off and that actually opens up the opportunity for us to move and then government bonds are rallying. Then we can move from government bonds to credit very tactically, whether it be high yield or investment grade. And there's a separate trade that sets up as these bonds are now cheap because this idea that, OK we're going into recession now default risks are rising, downgrade risks are rising, the capital markets are selling corporate bonds.

 

[31:48] Chart on Flexibility to trade each part of the Economic cycle, Roberto still speaking

 

• Highlights:

 

2002.  - Recession- 30yr US Treasury Bond return was 16.25% vs S&P500 -22.10%
2003.  - Early Cycle-High Yield Bond returns were 28.15% vs S&P500 28.68%
2004.  - Early Cycle: High Yield bonds were at 28.15% Return vs S&P 28.68%

   High Yield Bond - 10.87 vs S&P500 10.88%

2005. - Mid-Late Cycle - 30yr US Treasury Bond return was 8.78% vs S&P500 4.91%
2006. - Mid-Late Cycle - 30yr US Treasury Bond return was -1.13% vs S&P500 15.79%
2007. - Mid-Late Cycle – 30yr US Treasury Bond return was 10.37% vs S&P500 5.49%
2008. - Recession - 30yr US Treasury Bond return was 41.20% vs S&P500 -37.00%

2009- Early Cycle - High Yield bond returns were 57.51%, 30yr US Treasury Bond return was -25.98% vs S&P500 26.46%

2010- Early Cycle – High Yield bond returns 15.19% vs S&P500 15.06%

              

That's our opportunity now as prices fall and then rotate our gains from government bonds and now focusing on credit and for the first two cuts and then after the first two cuts, basically you have this big rally in credit and actually we you can see credit performance actually can even do almost as good as equity markets sometimes in that instance and then what ends up happening is the Fed usually doesn't cut enough and then they have to start aggressively cutting rates. So then you move from the long end of that, we call it from the curve, which is instead of buying 10's and 20 year bonds, we start moving down towards one to two year bonds, when they really start aggressively cutting rates to re stimulate the economy and then guess what the cycle starts all over again and now we can start, we can really reset the cycle.

 

[32:38] Split Screen Chart on Flexibility to trade each part of the cycle, Roberto on screen and still speaking

 

Equities start to really start to now pick up and perform, we do OK as well because we're out of government bonds. We're back into the credit markets and we're going to ride that recovery. And just to let ,also even though we're calling it a hard landing, we don't see a full blown recession, OK,

 

[32:56] Roberto solely on screen

 

so I just want to be clear. I don't want people to be too panicky and understand this isn’t ’08 or ‘20. That's not what we're seeing out there. We think this is going to be what we call this a hard landing. So if we want to differentiate them, OK, a recession typically you see earnings drop by 30%.

So from a corporate perspective, you have earnings deceleration from a consumer perspective, the unemployment rate goes up by 4%. So it goes from 3 ½, we are now to 7 1/2, that's a normal recession. And then from a credit market perspective there's such high volatility and recession and we call this the spread, which is the yield you get above a government bond goes up to 7 or 8%. That's in a very high vol. scenario, we don't think that's going to be the case. This is kind of like a hard landing if you want to call it light recession where maybe the unemployment rate doesn't go up by 4%, but it likely goes up by 2% and maybe we don't get an earnings collapse of 30%, you might though, you probably will need a drop of 10 to 15% in earnings to actually get the unemployment rate up, so this is going to be a lighter on the lighter side of recession, so this is not a sky is falling type of scenario.

So we need to be prepared to act quickly to deploy our cash and trades. I mean the setups might last only three or four days for us to deploy into certain pivots among asset classes. So I just want to make sure people understand this is not a full blown recession we're talking about but this is there's going to be enough volatility for us to start taking advantage of the yields that are going to be falling as the Fed pivots and the repricing of credit into that rotation. And the last thing I just want to say, Andrew, is that even though we're calling for a hard landing where the Fed is likely going to have to aggressively cut rates into the beginning of next year, even if we're wrong and we get a soft landing, we have to recognize also that in a soft landing scenario, which is a low probability but not impossible, our fund is going to do well anyways because the Fed can cut rates, not aggressively 200 basis points, but they can just start taking rates down from 5 1/4, which is what they'll probably get to and take it down to the neutral long term neutral rate which is probably 3, sorry 2 1/2 to two and three quarters, that instance we could still do very well in this fund, high single digits and you might collect that instead of getting double digits in one year, you might get high single digits this year, and the next year. You kind of spread it out. So I actually, that's why we have a lot of conviction because whether we're right and we get a hard landing, which means we can do very well or whether we're wrong, we get a soft lighting, we could still do well.

 

[35:35] Roberto on screen, Andrew speaking

 

No, you're well, I mean, because the reality is we're going to get a landing of some sort,

 

[35:38]  Roberto speaking

 

one or the other,

 

 

 

 

[35:40] Andrew on screen and speaking

 

it's we have to land this thing that. Definitely hasn't landed yet, so that's true. And thank you for giving that sort of clarity and the difference between, say, the recession and the hard landing or soft landing whatever may be, because even in the equity side of the market some stuff’s been down since February 2021, right? So we're far along, you're starting to see rate of change for certain industries starting to change. Let's call a spade a spade, we're well into this. It's not like this is in the early stages. So that's I guess that’s the silver lining. Roberto I want to say thank you. That's about 30 or sorry about 40 minutes here that we've chatted. So yeah, I do really appreciate your time, the stewardship of our clients, money that Marret does and I hope people on this call and watching the recording afterwards get a good sense of why we do partner with Marret. As Roberto said, there's going to be a window potentially of like 4-5 days there to make these trades. We can’t do that. We don't have the resources at our disposal or the knowledge base to make that move. So as I've always said, we like to use third party managers where we know they're going to add value for us and where two ways to look at adding value. One is are they reducing our overall volatility or overall risk or are they giving us potentially better returns. In this case it's probably checking both of those boxes off, where because of where we are in the cycle, they're able to actually give us protection on the downside, plus if we do get that downside, give us actually some great positive returns. So Roberto, as always my friend, great to see you. Thanks so much and everybody who joined, thank you as well.

 

[37:36] Andrew still on screen, Roberto speaking

 

My pleasure. Anytime. Thank you everyone. Thank you for your support. Bye Bye.

 

[37:39] Andrew on screen and speaking

 

Thanks. See you.

 

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We want to take a little bit of time today to talk about losses. Unfortunately, losses are a part of investing. It's not fun. It's not comfortable. But it's important to recognize the different types of losses that you can have.

The first, a very common form is what we would call a “temporary loss of capital”, and it's just that - it's temporary. It's a high-quality investment that, due to market conditions, has fallen in price. Typically with the temporary loss of capital, if you give it time, you give that business time to generate the growth and the value that a business can generate over time. It is just that it's a temporary loss. That value will come back if you give it time. It's not fun, as I said, going through that, but it's not going to massively impact your long-term plans.

 

A “permanent loss of capital”, however, is a different beast altogether. A permanent loss of capital is just that - it's permanent. Your money is gone. And there's essentially two ways that I know of that you can create a permanent loss account. First is when the business you own goes bankrupt. That typically happens with more speculative newer companies and pre-revenue type of businesses. However, as we know, it can happen in big, strong businesses that have been around for 100 plus years. That's one reason why we've hired a team of forensic accountants to help us make those decisions on our blue chips given portfolios to make sure that the balance sheets of the businesses we own are as strong as they could possibly be.

The second way to create a permanent loss of capital is through selling -selling when the markets are down, selling when you're holding us down. And this can be done for numerous reasons. One very common way is human emotion. You know we want to protect ourselves when times are tough. So we sell. Sell out of that good high-quality business and move to cash, or move to something thinking that different asset class is going to hopefully protect us, and then we miss out on that subsequent recovery. We just created a permanent loss of capital.

 

The  third way to create that burn loss of capital through selling is from poor cash-flow management. For cash-flow planning, not understanding when you're going to need that cash in the future and planning accordingly. Look forward so that you're not forced to sell your high quality investments when they're down. Take a look at your portfolio. Take a look at your holdings. Take a look at your cash-flow management. Are you owning businesses that will become a permanent loss of capital, through what the business is doing? Or, could it become a permanent loss of capital through what you as an investor would do? Again, take a look and if you have any questions, I'll be happy to help answer them.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2022.

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

 

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A :

And thank you for joining us today for what should be a fantastic conversation. I’m excited to have Munro Partners joining us from Australia and the timing is fantastic. We have a special guest speaker, Kieran Moore, who's a portfolio manager in Australia, so it's an early morning start for him. So we thank her for joining us here today. For those of you who know, Monroe is one of our partners that we use in our output portfolio and we really chose them for a fantastic protection that they add in our portfolios. They have a very interesting, absolutely turn-focus type of portfolio where they are looking for I guess, you could say disruptive type of industries. Companies that are, that love  using this term, “S curve” growth, but where not much else matters other than that growth. And they're really doing their due diligence to find fantastic businesses that can weather the storms for us. And then they overlay some extra great sort of technology or not technology, sorry, some great downside protection on top of everything that that they have. So this is a new format for us, so I apologize in advance with this live event format, but we should be alright and what we're going to do here. First I'm just going to introduce you to Kieran here who is going to be joining us and walking us through a bit of what Monroe has to offer. So let me just load this up, Kieran. I think you're live now.

K:

Great, thanks. Thanks Andrew. Thanks everyone for joining. I've got some slides on the screen. Hopefully everyone can see them and so what I'll do is I'll just walk through  what we do at Monroe and how we find, we think, some of the best growth investments in the world and how we do that in sort of a risk-adjusted manner. So please happy to take questions at the end or as you see fit. But what I'll do now is I'll just introduce you just to the business and the team and sort of give you a sense of who we are and what we do so. Really quickly, Monroe now is just over five years old, so we started in July 2016 here in Australia. And what we've done since July 2016 in Australia is we've run our liquid alternative retail fund for our Australian domestic clients. Now the team here at Monroe, the team actually compounds or the team has a longer and broader track record. And the team is led by Nick as the CIO on the top left there. And so Nick used to run the retail or liquid alternative strategy at our previous place of employment. And So what I'm referring to here is the track record of running retail absolute return money actually dates back to 2005, and that's a fully endorsed track record from our previous employer. And so, as Monroe sits here today, we've got almost a 15 year old, just over 15-year track record of running the absolute return or liquid alternative type strategies for retail clients. And we think that holds us in good stead to present what we have today. And so what's really important about our business and what you should know about us is that we're a partnership firstly and foremost and what we mean and what we think our partnership is really important for is effectively, it allows us to move the equity around in the business and attract and retain talent over time so we can attract different people to the investment team or to the business operations team and incentivize them to stay with Monroe and be with us for the long term. And so the team has grown over five years and that's the partnership as it stands today. In terms of what we do and who we are in, the strategies that we run: So we run principally 3 strategies here today. So we run our liquid alternative strategy and that's the main one we're going to be focused on and talking about today. And what that means is that we aim to give you meaningful positive returns over a three to five year view. And we think about meaningful positive returns as being roughly double-digit. And we do that with a capital preservation mindset. So we have the ability to hold more cash during periods of volatility in the market. And we have risk management tools that we can use during periods of volatility in the market, which I'll touch on in a brief moment in the slides to come. We also run our traditional mutual fund in the middle, which is our traditional long only fund, and that's our relative return fund, so that aims to outperform a benchmark or outperform an index over a 5 to 7 year period. And then more recently, the way we look at the world is through areas of interest and more recently, what we've done is we've launched our Climate Change leader’s fund. So this is a traditional mutual fund that aims to invest in what we believe are climate change beneficiaries or climate change champions. And that's a slightly higher beta smaller satellite product that sits along our main products and you do have those climate change ideas in our two main products. And so that's who we are and what we've done. And now what I'll do is touch on sort of how we invest, what we do, and how we find these great growth investments. And so firstly, our philosophy. To how we how we look at the world. Well, our philosophy is really, really simple. So firstly, we think earnings growth, drive stock prices and to many of you what that effectively means and to many people what that means is effectively, if a company makes more money every year, its share price generally goes up. Secondly, we think sustained earnings growth is worth more than cyclical earnings growth. So if a company can sustainably grow its earnings through the economic cycle, we think you should pay a higher multiple for those earnings. And then lastly, we think the market often miss prices growth and its sustainability. So the market will often believe in what we think. What we know now is mean reversion. So if earnings for a company are going up then the market will assume they'll eventually roll off or if earnings are going down, the market will assume they'll eventually bounce and come back up. So as growth investors as structural growth investors, we essentially don't believe in mean version, so we believe in structural earnings growth independent of an economic cycle driven by some structural change in an industry. And So what I'm showing you down the bottom is two companies, two financial or two payment related companies. One MasterCard on the left and one Bank of America on the right. And what I'm showing you in the light blue line is the earnings per share expectations. So effectively, how much money the company is going to make? And then in the dark blue line, I'm showing you the share price. And what's quite obviously, first of all, coming back to that first step of the philosophy is that that earnings growth is what's driving the share price in both situations. Now on the right Bank of America's earnings, its earnings are driven by macroeconomic factors. Factors where we might have a view but not necessarily have an edge. So it's driven by net, interest margins, unemployment, GDP levels, terms of trade for the US, etc. On the left MasterCard, its earnings are driven by a structural change. Now that structural changes this shift from physical to digital cash. Now that's a change in the world that we all know and understand really well in our everyday lives. But it's a change that the market has been incapable of pricing in the structural nature of that growth for a long period of time now. And you've seen those earnings go from roughly a dollar a share in 2008 to over $9 a share in 2020. And so that's what we're about at Monroe consistently and over and over and over. We're trying to find these MasterCard type situations. These situations have structural growth over the cycle where earnings growth is driving the share price higher overtime. And so I suppose the obvious question as investors in our fund is, well, how do we know that actually works? How do we know that philosophy works in practice? And So what we did was we looked at some work done by a guy called Henrik Besson Binder. And what he did, he ultimately looked at the buying hold return of every stock in the US market over a period of 80 years between 1926 and 2016. It roughly equated to 25,000 companies, and he analyzed their buy and hold return versus treasury bills. And what he found was that actually out of those 25,000 companies in these two big dark blue bars in the middle here. Roughly 24,000 of those 25,000 companies actually created no wealth versus treasury bills over that period of 80 years, so some went to zero, went bankrupt, and then some only amount enough to offset what those first few had lost. And so ultimately, what his conclusion was that he found that there was roughly 1000 stocks that are effectively responsible. For the entire return of the US market between 1926 and two 2016. And So what we did is we plotted those companies on the right. Here we plotted their annualized return on the Y axis and their life in months on the X axis. And what you can see by some of those logos is that each one of those companies, each one of those really big wealth generators. Who's benefiting from some structural change in their industry coming back to that MasterCard example? To Boeing, for example, in long distance aviation or think about McDonald's back in the day and quick service restaurants or Disney in home entertainment or even companies like Home Depot and Big Box retailing. Or more recently, obviously your tech giants up at the top up on the top left here. And so as your as your growth investor, our job is to try and work out well who's coming along next. Who's going to be the next biggest value driver or wealth creator for the market or any market over the next period of 80 years? Who's got that structural change in their industry that are going to benefit and grow their earnings in a structural manner overtime? And so that's what we're trying to do. At Monroe. We're trying to find these MasterCard type situations, and we realized that the equity market is a game of lots and lots, and losers roughly 2524 thousand losers. Out of those 25,000 companies and very few winners. And So what we do really quickly is we divide the world up into areas of interest. So we look at areas of interest. We don't look at sectors and we don't look at regions. So we're focused on areas of structural change, and some of those areas are things like climate change. We think it's a great time to be investing in climate change over the next ten, 20-30 years. The digital enterprise that's our focus on software as a service taking share of IT budgets globally. Digital payments, that's our focus on those MasterCard type situations. The shift from physical to digital cash. Innovative Healthcare is things like rising health care costs and improving patient outcomes globally and then things like E commerce. So the shift from physical retail to digital retail areas that we all know and understand in our everyday lives but are not necessarily being priced in the market as structural nature of those earnings. Growth is not necessarily being priced in. And So what we do for all our companies, we look at them on a qualitative and quantitative basis. And on the qualitative basis, what we do is we try and find these five characteristics. So we try and find companies that are clearly growing. We find we try and find companies that are did it able to leverage that growth. To grow their earnings faster than their sales. We try and find companies whose growth is sustainable overtime. We like companies with large controlling shareholders who can think much more long term about their business. And we like great growth companies with the best products. So you have to have great customer perception and then on the right we do our quantitative work. So this is where we model our earnings. We model our multiple and we look for those catalysts along the way. And then the last piece of the puzzle which I'll touch on more broadly in a moment, is our rigorous risk management. And this is where that absolute return or capital preservation mindset kicks in. We focus on the risk management and we make sure we manage the volatility for investors and try and manage the downside. So that's what we do. That's what we do in trying to find our stocks. That's what we do in trying to find these great growth investments. And so why don't I just skip forward a few slides and think about? Well, how does that equate to where we are for positioning at the moment? How does that equate to opportunities that we see today? And So what we do over and over again is we look for these opportunities called S curves. And what we mean by an S curve is that an S curve of structural growth always beats the macro. So focus on the left hand side here on this chart on the left. What I'm showing you here is the total mobile phone market in the big dark blue shaded area. So the total mobile phone market is represented in units on the left here over a period of roughly 10 years between 2008 and 2018. And what you can say is the total mobile phone market started at roughly 1600 million units and it went to roughly 2000 million units in 2018. So not a great place for great growth investments compounded at roughly low single digits per annum. What did grow, however, is this Gray line. In this Gray line, is represented represents the penetration of smartphones within the total mobile phone market. And the penetration of smartphones went from roughly 10% in 2008. To over 70 / 70%. In 2018, ten years later. And we know that one of the best growth companies of all time is Apple and Apple was able to position itself at the start of this S curve at the start of this structural growth opportunity over a long period of time. Now, why am I telling you all this and the key message from this slide? The key thing I want you to take away from this S curve is that. That S curve of penetration happened no matter whether there was a GFC back here in 2008 in 2009. No matter whether there was a European crisis or Greece might be leaving the euro back in here in 2011, 2012. And it happened no matter who was in the White House at any one time through these years, that S curve happened because of some structural change in an industry. And what we found and what we've come to learn overtime. Investing in these great growth investments is that the S curve opportunity will always beat the macro. And on the run as I said. Sure, Andrew, go ahead, sorry,

A:

let's just want to jump in with a question on this show. You'll probably get it as well, but yeah, you know this S curve example is fantastic with Apple. How do you guys end up choosing an apple though as opposed to a Nokia or a BlackBerry who were also in that space and obviously did not have an apple a decade?

 

K:

That that's a great question. So why don't I come back here to the risk management? And this is where in that example, so that's a great question, and this works for Google in search engines as well, so you could have invested back in the day you could have bought HTC. You could have bought Nokia. You could have bought Motorola. Even Amazon developed a phone, the fire phone, and they all failed versus Apple and Samsung. Similar in search engines. So back in 2004 when you could first or 2005 when you can first invest in Google, you could have invested in ask Jeeves. He could have invested in a number of other search engines that have effectively all failed, but we all remember them. And so how do we hone that winner? How do we focus our attention on that winner over and over again? Well, it comes back to our risk management tools. So we employ stop losses on each individual position in the portfolio. So what we mean by stop losses is that if we have a stock, so we invest in a long stock. And that stock falls 20% from its cost or falls 20% from its peak price. Since we bought the stock, we review that position. So what that means is we don't automatically sell the position, but we review it. So we, we go and we say well, has something changed in our in our fundamental investment case. Are we missing something that the market is realizing here? And so this is where the partnership kicks in. It's in all the partners interest to effectively understand that investment case and effectively tell the portfolio manager or the stock champion that actually we might have missed something here. There's something wrong. And so coming back to your question, Andrew coming back to that phone example. Into in 2008 or in 2004 with the search engines, if we had invested in any of those other products, any of those other phones or any of those other search engines we would have consistently had this issue coming up where that stock would have triggered under our stock loss rules and we would have had to keep defending and defending and defending that stock. And ultimately, once you've defended that stock is a stock champion or a portfolio manager, it gets harder and harder and harder to keep defending that stock to the rest of the partners in the business. It's in their interest and it's in your interest to make sure that we're not missing anything. And so this stop loss process. What it eventually does, it creates this situation over here. Which are at top ten winners since we started Monroe Partners the liquid alternative strategy for our Australian clients in 2016 and our top 10 losers and what it forces you to do is to run those winners to focus on those winners and cut your losers quickly. And so you can see that that works in in the example of investing in, say, HTC over an apple or a Motorola over an apple or a Nokia over an apple back in 2008. That stop loss would have kicked in over and over again to refocus you back on those winners, and so that's effectively how we really focus on finding those winners. And so, as I mentioned, coming back to the Apple example, coming back to that S curve example, Apple was able to position itself at the start of that S curve and it was able to grow its revenue base over a long period of time. And what it did, it's revenue based was able to grow into other things. So for example, into things like wearables and home accessories into now into things like services and software which have created great layers of revenue on top of their original. On top of that core product, which is the iPhone. And so that's what we're looking for. We're looking for these S curve opportunities. And so some of those S curves that we've invested in over the last five years, which we still think have opportunities today. Some of these S curves, which I'm showing you now, so things like that digital payment example. That represented by this top line here, so the digital payments we still think has room to run, and so companies like MasterCard and Visa will be beneficiaries of that square. And PayPal are also in that universe. USE commerce represented by this blue line down the bottom. Now e-commerce clearly accelerated during COVID and we think it will only continue to grow from here and we think Amazon is clearly a big beneficiary of that. An emerging opportunity which I can touch on is HelloFresh. In that space we think HelloFresh is going after effectively a massive total addressable market, which is the grocery market which is very low in terms of its online penetration. You've got things like Internet disruption, which are big digital Internet platforms, and then you've got things like software. So we measure things like an S curve for the workloads in the public cloud. Something which is accelerated during COVID, but we think has room to run or more of that S curve to play out. Eskers that we're looking at the moment and we're really excited about for 2022 S curves in things like climate change in things like renewables, in things like electric vehicles as a portion of total vehicles, it's still very much in its infancy globally today. And we're also looking at things S curves in semiconductors. So as we move into an era of AI or artificial intelligence, we need faster and faster semiconductors, or more highly efficient semiconductors to process that, and so we're looking at curves into semiconductor market.

A :

Kieran, just to jump in started again but just you know, as you're talking here you know you mentioned it and I agree with you on the on your renewable sector. I think over the you know that that sale is. Clearly you know the winner is clearly behind that one, for quite some time, but in the meantime, how do you sort of interact with, you know, like over the last 12 months? As an example, that renewable space has been under pressure. Probably a little bit overvalued in the short term. Now you're getting to the fossils and things coming back to life. How do you deal with that in as a manager where you know you want to be in that long term trend? When you talk about the downside protection already, but is there more to it when you're looking at sort of valuations of something like that that you want to be a part of long term?

 

K :

Yeah, so that's it's a good question. So just to set the scene there. I mean this is to throw up a slide. This is. I mean this is the opportunity here. So we think the time is really now to invest in climate change and you've got three really big tailwinds, so you've got investor targets. You've got corporate targets and you've got country targets, which we saw COP 26 and we'll see a cop 27 later this year. And I suppose you know that that means that we've got a great opportunity to invest in a structural growth company for a long period of time. So we've got a great opportunity to invest in, say, a renewables opportunity over a long period of time. And we're right at the start or in many industries. Companies in this climate change space are very small. They're often in different sorts of sectors, and they're effectively right at the start of their earnings growth trajectory. And so yes, what we do is. As we look at those companies, we come back to our process so we evaluate them on a quantitative point of view. So we model that earnings upside overtime and we model that multiple upside overtime and we model that out those catalysts. So we need to see those catalysts along the way to effectively tick the box and make sure that fundamental thesis is playing out in practice. Now throughout 2020-2021, we obviously saw a difficult year for a lot of these renewable companies. Now, ultimately that doesn't necessarily change what happened in 2021 was effectively that. There were, there were disrupted by supply chains and raw material issues and logistics issues, transport issues,  etc. A lot of these businesses, as I said, are in their infancy and a lot of them are not digital businesses, so they don't grow via that viral adoption like a Netflix or a Google. Effectively at companies like Vestas and Alstead have to grow by building wind farms or shipping turbines and things like that, so they're much more leveraged to the economic conditions, or they're much more leveraged to cyclical factors. And so firstly, how we deal with that? We come back to our pack, our research pack. So we build our research pack with forecasts. These quantitative factors on each company that we run and we make sure are we paying too much for these earnings in the current market environment and have we got these earnings forecasts right? Do we have those catalysts to tick the box along the way? And then secondly, it comes back to well. It comes back to our really our stop loss processes. Comes back to those risk management processes. So it comes back to that stop loss. So if the company falls 20% from its peak since we've bought it, which a lot of these renewable companies have. We go well. Do we have too much exposure for the current market environment? Have we missed something in in the investment case? And so we manage it effectively through our quantitative measures is part of our process, and through our risk management tools as well in conjunction. And so now that obviously we've passed the COP 26 catalyst which we had at the at the back end of 2021. And we've dialed back some of those climate change investments down to that catalyst has passed. So it's really about. Managing to our process, ticking those boxes and then managing the risk through the stop loss process. Hopefully that answers your question, Andrew.

A :

Yep, that's right, that's great. Thank you.

 

K:

And so these coming back to those S curves. These are some of the opportunities we're seeing today. And so if I sum that up into a portfolio, then. To give you a sense of how we're positioned as in our growth investments, will this effectively, this is how we're positioned as at the end of November, and these weights are relatively were relatively the same as at the end of December, slightly reduced in many cases. And so these are our areas of interest. Remember, I touched on the fact that we don't look at those sectors and we don't look at those regions. We focus on these structural changes or these structural areas of interest. And so, as I've talked about two areas that we're excited about for 2022 and we see great growth in earnings opportunities, things like climate change and high performance computing. So high performance computing is that focused on semiconductors, which I can touch on if you're interested which is. Effectively faster and faster compute power to deliver higher applications, so to deliver those AI applications, etc. Digital enterprise I mentioned was our focus on software. So we think software as a service only makes up that small portion of IT budgets globally today, which is clearly going to grow overtime. Innovative healthcare so in the healthcare space we've focused on life sciences and diagnostics companies, so companies like Danaher companies like Abbott Labs, companies like Thermo Fisher. They come, their companies focused on improving patient outcomes and lowering healthcare costs globally. And we've seen that many of those companies through the COVID pandemic. We've seen them effectively gain tailwinds into their earnings growth. Digital payments was a difficult area for us in 2021, but we really do expect. We expect some reasonably strong bounce back in the years ahead for companies like Visa and MasterCard as the economy normalizes and then lastly down the bottom there. We've got our areas in ecommerce which are touched on. And then in Internet disruption, which are those big those big platforms? So that's effectively what I'm showing you in the Gray bars is effectively our positioning. Our position sizing in each of these areas driven by these percentages down the bottom so our long position size. And then we've got our number of holdings in each of those top seven areas on the right and then in indicative position and in climate change, it's something like a Trane technologies which plays into the heating, ventilation and air conditioning space or energy efficiency space. In in semiconductors, that's a company like ASML, ServiceNow, Danaher, etc. So this is how the fund was positioned as at the end of November, and as at the end of the year. And this is the way we look at the world through those areas of interest.

 

A:

With another question about going to talking about this, cause sure you know. Obviously the start of this year has been challenged for a lot of you know, growth, growth names and I love seeing a small up there. cause that's probably our top individual holding that we have. You know, so when we go through this rotation, which is really, I think a lot being driven by  interest rate, sort of scare. Or the fact that rates are going to be going up. And of course those historically pulled back some of the growth. What do you say when you're going through a cycle like this? You know when you look at these type of businesses, how will. Another couple percent potentially of interest rates, affect. You know, these businesses?

 

K:

Yeah, no. It's a great question and certainly this year the start of this year has been a difficult one for us and for many growth investors so. Look, why don't I jump back to? Why don't I jump back to the interest rate point first of all and then I can touch on you know what we what we're focused on? So firstly, on  interest rates. Well, actually, sorry. Why don't I jump back one slide? So what we do as a growth investor? We're really focused on this equation. So when we look at the economy and what's going on in the world and what's going on in markets, we're really focused on this equation. And what this is we call it the equity risk premium or the carry trade. And So what it shows you is effectively, are you incentivized to own equities over bonds or bonds over equities and what it is, it's the it's effectively 1 divided by the PE of the market. So the PE of the S&P 500 minus the US 10 year bond yield. So the P is 20 * 1 / 20 is 5% minus the 10 year bond yield 1 1/2%. So you get. Effectively, 3 1/2 percent equity risk premium. And So what we've done is we've tracked this equity risk premium overtime, and we've tracked it over a number of years now. And we still, we still think it's very much in your favor to own equities over bonds and so that equity risk premium. We think it sits at roughly around 300 today, and so we think the positive carry that you get from owning equities over bonds is still there today. So it's still in your favor as investors to own equities. If I jump to the next slide and to address your question a little bit more directly, Andrew is about interest rates well. What's become really evident in in the interest rate market in the fixed income market throughout 2021 was that we saw big inflationary concerns and we saw that all through the year, if you look at different asset classes in commodities in natural gas in things like lumber, we saw it in a whole range of different asset classes and so our view is that actually if we look at the 10 year bond yield, we saw all these inflationary factors happen in 2021. All these asset classes at some point throughout the year exhibit inflationary factors. And then at the end of 2021, if you looked at the US 10 year bond yield, it was only roughly 1 1/2%. And even as we've had now effectively 4 hikes being priced into the market for the Federal Reserve in 2022, the US 10 year bond yield is still only up at roughly 1.8%, and so we think it comes. But the interest rate conundrum we think comes back to this equation. And what I'm showing you here is your total debt outstanding in the dark blue line over time and you can see since the early 1970s it's gradually increased overtime and accelerated through that covid period. And what I'm showing you on the lighter blue line coming down overtime is that US 10 year bond yield. And so in the post COVID world, you know where do we get? Where do interest rates go? Well, we think effectively we think in the long end of the interest rate curve. So the 10 year and above are effectively they're effectively pegged down to a certain level due to this amount of debt in the world today. So we think the level of debt in the world in the US in particular is particularly high and interest rates simply can't go too high because of the amount of depth in the world today, and so the total debt outstanding is. As at record levels, then we think effectively the US 10 year, which is the key risk indicator for us as growth investors won't get too far above that 2 to 3%, we think. So we think longer term interest rates are going to be lower for longer. And so then, how do we? How do we come back to? How do we relate that back to the stock? Let's come back to really a philosophy. Our core process. So we've got earnings growth. We're focused on earnings growth. As I said at the start, with that MasterCard type situation, we think earnings growth drive stock prices. And ultimately, what you're saying in interest rate markets is that the interest rates don't really change. Who wins or loses in the long run. It doesn't really change who those Besim Binder key, big value creators for the market are over the long run, it simply changes the price you pay for those earnings or how much you pay for those earnings today. And I can show you, I guess the best example here is we're showing you a chart of Amazon, and So what? I'm showing you here is Amazon EBITDA in the dark blue and the share price in the light blue similar to that. Master card type situation that this is what we're looking for. Situations of structural earnings growth, overtime. And then on the right. This is the EV to EBIT down multiple for Amazon. And what you can see as the share price has gone from. You know, roughly $500 back here to over $3000 today. The multiple is effectively rerated and Derated over that time and it's rerated Derated for a number of reasons over that time. Whether it's you know what's going on in geopolitical and political front, what's going on at the Fed, and obviously more recently with interest rate and inflation concerns. And so our view is that we need to focus on this earnings growth situation. We're trying to focus on these big winners over the long term. And all we have to do is growth investors is to manage the volatility along the way or in in the liquid alternative. Try and manage the volatility. And we do that through a number of the tools we have available to us, whether it's reducing the net equity exposure, whether it's employing more of those short selling ideas. Whether it's on hedging or hedging or the currency, depending on the conditions, whether it's using those stop losses a bit more. Becoming more active with those stop losses, or whether it's buying a put option on the market. Buying an SMP put option or a or a NASDAQ put option that effectively will try and ensure us or protect us should the market suffer a really sharp big drawdown like how it worked in that COVID quarter at the start of 2020. So that's really. That's really how we're how we're thinking about it today. Andrew. To answer your question, I mean clearly we don't know what's going to happen with the Federal Reserve, but I think what we do know is that. While growth may be out of favor over the last couple of weeks or over the last, you know shorter to medium term. You know, we know that moving forward growth will probably slow and inflation concerns will probably come off at some point. And we know that as growth investors. If there is a slowing growth environment and if inflationary concerns are coming off then people will come back to these great growth investments. People will come back to companies like Microsoft and to Google and to Amazon that they know are going to give them those structural earnings growth overtime. Hopefully that answers your question.

A:

No, no, no thank you.

K:

No problem so, so why don't I just? Why don't I just quickly touch on performance for the fund over the five years and just touch on? Sort of the track record overtime so. Yeah, So what I'm showing you here is the performance of the Monroe Global Growth Fund. So this is the equivalent of the liquid alternative which we've run for the Australian clients overtime. For the five years since we've started Monroe, and as I mentioned right at the start, our aim is to deliver you at least that try and achieve that double digit return over a three to five year view. And we've done that over the five years since we started. With a beta of roughly half the market, so with slightly lower with roughly lower volatility than the market, but still strong absolute returns. And then for the Canadian product or the liquid alternative product. This is how it's performed since in its chest over three year, just on three year track record so far. More broadly, and I touched on this this at the start and really you know this is important to come back to in in periods of really volatile markets and in periods where growth is moving in and out of favor, you know the team Nick and the team does have a longer term track record which I mentioned right at the start, so it's that track record or double digit compounding returns dating back to 2005 at a previous place of employment. So we're I recognize that. You know the market can be difficult at times and growth is is certainly having a difficult start to the year. But you know, it's important to come back to this process, and it's important to come back to this track. Record that you know these periods we have dealt with these periods in the past. And you know, as long as we're true to our process and true to what we do and transparent about that, then you know. Ultimately, we think that you know Microsoft's earnings will continue to grow. Google's earnings will continue to grow. Amazon's earnings will continue to grow and the investor community will come back to those earnings overtime and realize that those earnings are still great places to invest. And come back to those climate change champions and realize that you know we do have to solve this problem of decarbonizing the planet. Otherwise we're in big trouble. So they will realize that these investments are great opportunities moving forward.

A :

That's great hearing thank you. Thank you so much for that. I obviously ask a few questions on the way though. People do want to ask question. There's a live Q&A feature up in the top right of the screen. You can just click on the question mark, ask a question, so leave that open for a few more minutes. But you know, I guess for one question you know one of the other questions I haven't looked in with you as you're going forward, but you know, if you can look back over 2021. You know, and take it further into 2022. You know it was there something that sort of was abnormal or one big take away that you and the team. You know that you learned through 2021 that that you know you're adapting into you. Know your processor, your velocity on a go forward basis.

K:

Yeah, it's a good question so. Look, I think UM, look, I think what? What surprised us most about 2021 was that. You know, we clearly know that we're in sort of a mid-cycle phase, UM, throughout 2021. I mean, it was fairly obvious to most market participants that interest rates were going to move higher at some point. And you know, we still think that long end of the interest rate curve will be held down by the total debt outstanding. But we knew that interest rates would eventually have to move higher. We were in a mid-cycle phase. We're in an economic recovery phase, and so we knew that as investors that interest rates ultimately or the Fed will ultimately go towards a path of hiking. I suppose Andrew to answer your question, I suppose. What was? What was surprising to us about 2021 was that how you know how significantly the market dealt with that, and So what we did, and this comes back to part of those stop losses or that risk management tool that we do have is that a lot of our higher multiple names really came off or we started to price in that interest rate move really aggressively. And in the first half of 2021 we had a lot of a lot of these names in in the higher multiple category that that effectively triggered under that 20% fall from peak. And so we did move away from some of those higher multiple names and we were really surprised. I guess. How severely the market dealt with that. Uhm? Throughout the year. As we move throughout the year, we really refocused and really focused on the quality of the portfolio and the broad, I suppose diversification of ideas in larger and higher quality names within the portfolio. So something like a Twilio which we exited in the first half of 2021. Higher valuation idea, an idea that sits in our universe and we think it ticks all the boxes and it looks like a great growth investment. But it's something we stepped away from in the short term as part of that risk management framework to try and refocus on a higher more valuation mindset in terms of the ideas that we're looking at. And so I suppose, how harshly and how much the market focused on these sorts of names surprised the somewhat in 2021. I suppose in 2022. You know there is obviously room for a potential policy mistake, or. Or potential slip up by the Fed at some point which, which clearly we don't know as yet. Whether that's going to happen and we can draw parallels to Q4 2018 if people do that. But ultimately, what we're trying to do, and ultimately I think 2 areas that we're excited about in 2022 is the two areas at the top here, which are climate change and high performance computing the semiconductor area. And I think what's obvious about those two areas is that actually those two areas can benefit from a cyclical recovery or benefit from a market environment where cyclical factors are really the focus and driving the market higher. And so that's what we're looking forward to in 2022, and we think the earnings growth will come through, notwithstanding, you know, a broader a broader issue. A broader issue. If the Fed does make a policy mistake.

A:

Yeah, but you know you can say that cause you know I was wondering. With this for, for moving a little too far. Second reason, so that is probably something like. Potential steak is out there with them is that it is a big point line. Go through here. And you never know. Which I guess you know dovetails into a bit of a question that came up here on the on the Q&A, and you just need to mention it back, you know, feels a little bit like 2018, so is this a familiar feeling to you guys? Is this something that you know market cycle going through something like this is comfortable? It's never comfortable when it's down, but still comfortable with it.

K:

Yeah, look, absolutely. I mean, it's . It's something that the team has dealt with through the track record. It's something that the team is dealing with at the moment. And you know, we're a little bit disappointed about the start of the year. For growth investing, there was a lot seemingly priced into the market through 2021 as we digested some of these interest rate hikes. But I suppose look to the fundamental premise is that in the absolute return fund. What we do have is  these tools as I mentioned, so you know every fund manager in the world has these things in the Gray in the Gray boxes they have these attributes. So for us we're focused on growth. We do active research, we're stock picking. We're highly convicted about that. In the liquid alternative, what we have at our disposal and we stand ready to use is all these tools around the edge so that effectively govern the stock picking process so that ability to use put options. If the market is. If we're worried about some exogenous factor in the market, the ability to hold more cash, the ability to use those stop losses, the ability to hedge your unhedged currency, and the ability to short sell. So it all feeds into that capital preservation mindset and so. OK, it's coming back to your question and coming back to your point. And you know if we do see some kind of policy error or. Some kind of reversal in course by the Fed that we saw, you know in early in 2019, then you know we have these tools available to us to use. They are really a core part of their liquid alternative portfolio and it's not about us being able to see what's coming up or being able to accurately predict what's going to happen. It's about having the tools available at our disposal to put to work and to try and manage the volatility to the best of our ability through those periods. If the market conditions require that and that's a big part of what we did in 2021.

A:

So I guess one last question then that I don't you know it's. You're just starting off your day over there, so we'll let you let you get to it. You know. So now that we've had a bit of a correction here, not a bit. I mean that the broader market has had a bigger production year this year, but you mentioned truglio, and some of those other companies, so I think that peaked in about a year ago and appointed $50 or some drop about 50%. So I'm glad you got it. Got it out of that portfolio, but you said that's probably short term. Look to come back in so with this correction that we'll be seeing you and the team starting to get, you know, a little bit more bullish. Or are you still just? Try to take it slow and just wait and let this you know. Let the dust settle a little bit more.

K:

Yeah, look I think come look. I think if I come back to our if I come back to our process you know a lot of these companies that we do step away from the sidelines. You know we do still like the fundamental thesis so we think a lot of these companies that we might step to the sidelines too from time to time still have these qualitative and quantitative characteristics that we're looking for. And you know, we're still like the long term opportunity, I suppose in the short term, where we've what we've done and you know this, this came evident in 2021. What we did was we? We focused on those higher quality, larger cap ideas, and we haven't as yet looked at some re-entering some of those smaller cap higher valuation ideas. Yet we're. You know what's going on with the Fed and what's going on with interest rates is still a little bit uncertain for us in the in the near term, and we really want to see, you know the fundamentals come through. Obviously in Q4 earning season, which is starting at the moment and we want to see the market react positively to good earnings. So focus on the fundamentals and really what's been going on over the last few weeks and potentially the back end of 2021 is the markets really focused on? Is broader macro issues whether its interest rates or inflation or growth slowing or supply chains and logistics or raw material costs etc. and what we want to see is growth investors and coming back to that MasterCard example. We want to see the market focus on those fundamentals, focus on those earnings growth opportunities and until we see that we do want to stay slightly higher quality, we want to stay slightly higher bid cap and we want to be ready to use those capital protection tools more and more. If we need to.

A:

Well, Kieran, thank you for that and I really appreciate you taking the time. Starting off today to join us to all of you who were able to get on. Thank you. A lot of emails of folks who were having trouble getting on so. Those of you who did join us thank you very much. And Kieran and team - thank you. You know we really do love your approach. I think we're very aligned and thinking of  at the end of the day I know my manager is fully resolved by, you know, the other day we need to find good businesses and all those great businesses. I think you guys do that fantastic drop for that on board the growth side. Obviously there's a spot for dividend portfolios, but there's also a need for growth for everybody, so thank you to you and your team for doing a great job and I really appreciate you taking the time to join us today. And for all of you here, thank you and enjoy. Enjoy your afternoon.

K:

Thanks a lot Andrew. Thanks everyone for joining. Thank you.

 

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Good afternoon everybody and thank you for joining us here in Halifax on a very rainy day. But we're thrilled to have all the way from Scotland Murdo MacLean with the Walter Scott team, Myrtle and his team have been our go-to global equity manager now for about four, five or six years - I guess, really since I started with Wood Gundy. We made that decision to use them on your behalf for a couple of reasons. But the biggest thing is the long-term process that they have in place, going back roughly 40 years that has allowed them to consistently over time produce great risk adjusted returns, which is what we're always looking for our clients. They get us that exposure that we need outside of Canada and outside of the US through their global mandate that goes into both the US and international. It really allows the team at Walter Scott to pick their highest conviction holdings that are anywhere in the world. And for that reason we've had a fantastic track record with them. Obviously, with the markets being how they are starting off this year and so it's a great time to get a catch-up with Murdo. I think it's been about 14-15 months since last time we had him on a webinar, so we do thank him for joining us here. So with that I'm going to bring him up and send him live here on the screen just to really start by giving us a bit of an overview of who Walter Scott Partners are, how they manage money. We'll get into a bit of a Q&A, and just on that note, a little bit of housekeeping: You'll see in the top right corner there is a section for a chat. Please feel free to throw in some of your   comments in there.  So that's great. And Murdo over to you.

Murdo:

Thank you very much and good afternoon. I think it's afternoon isn't it. Yeah, good afternoon to you all from Edinburgh here. So yes. First of all thank you very much indeed for the support of Walter Scott. Canada is a part of the world where we spend quite a lot of time speaking to clients, visiting clients. So obviously it is a very important part of the world for us when it comes to clients. We're incredibly appreciative of all your support and it's great to have the opportunity, frankly, to speak to, not just the advisors, but also the end clients on events like this. I think whilst I'm going to talk, I'm going to certainly talk to you about Walter Scott and to give you a bit of a sense of who we are and how we go about investing our clients assets. Also touching upon maybe just looking back at the last year, but also the here and the now because that's clearly top-of-mind for a lot of investors and  clients at the moment. And as Andrew said, I'm delighted to take questions at any stage towards the end of the call. Obviously after I've made my Like I sort of comments. So Walter Scott is based here in Edinburgh. It was founded back in 1983 by Doctor Walter Scott to focus on global equities and to really, you know, construct client portfolios focused on long-term, bottom-up buying, hold investing, in many ways that sort of style of investing started here in Edinburgh many years ago and we feel very strongly not just looking back on our 40 years, but looking back on the history of this approach to investment, that it is an approach that works exceptionally well, provided you're willing to give it time. And in our world investment is a long-term endeavor. The shorter you go, the more you enter into the sort of day trading speculative end of the market, which is fine, but it's very different to what I think and we do in what our clients entrust us to do as well. So hopefully by going through our approach they'll give you a bit of a sense about what it means to us to be long term and the job that we feel we have to sort of carry out for our clients. So today we manage a business which runs for clients around 135 billion Canadian dollars in assets under management. The construction of portfolios is done here in Edinburgh by our global research team. That's set here in Edinburgh. I think that's very important because although it is a team that looks around the world, scouring it for the very best businesses for your portfolio, we all sit together here in the UK and Edinburgh and we feel that is important. It helps us stay away from a lot of the local market noise that you tend to get. It helps us avoid a sense of bias towards a local market, which often is the case. We look East and we look West and we try to find just the very best businesses for portfolios and we believe that when you hire Walter Scott for a global portfolio or an international portfolio, that is what you get. You get a truly global view and not one which is overly influenced by where we're based. And there is, I think, a long a sort of thread that runs through our business. And it's that notion of longevity. Longevity in terms of our client relationships, so our average client relationships are around about 10 years in age. That means, obviously that there are some client relationships that are a great deal longer than that. That is how we would like to run our business. If we can do a great job for our clients today by growing their assets, arguably we do not need to find any more clients, and if we can do that job, longevity with our staff retention. So again on the team that constructs portfolios at Walter Scott, on average, they've been working here for around about 10 years. The people that run the business, Jane, Roy and Charlie are come on to show. I think on one of the slides here have been at the firm between 25 to 30 years - started straight from university. And so you have investment people running this business and then the philosophy. Which I'll come onto articulate shortly is grounded in the belief, as I said a little while ago, that investment is best done over the long term. Even the very best businesses, which hopefully this portfolio is heavily exposed to, do require time to show just how good they are. Hence you will always find us talking about investments in years, perhaps even sometimes in decades rather than in quarters, and certainly more than in months. That's how we truly believe you add value over the long term. Our clients come from all over the world as you can see, but Canada as reflected upon, is a very important market together with the US, hence the amount of time that we spent there. We have a little office in Boston which is largely focused just on US clients. But it is a client-focused office only which we opened about three years ago -or, as I say, our research job. The construction of portfolios and investment side of things is done here. Global portfolios, which is the entire obviously global universe, International or IFA, depending on how you want to term that, is global except the United States and we do not cheat on that if you will. and by some U.S. companies it is pure global XUS.  Those are the two sort of flagship strategies that have both been up and running since the mid 8 mid 1980’s. So we have, I think, a good long track record here to talk to, and certainly the comments I make today, the investment approach that we take this very day is exactly the same as it always has been because it's worked. We've seen no reason to deviate from that over the years. You can always of course look to improve things. But the core tenants tenets are consistently there. The research team, is as it appears in front of you now -  the business is run by Roy Jane and Charlie Jane, being our Managing Director. And then we have these three regional groupings: Now these are our relatively loose groupings. They're meant to simply focus the mind on which part of the world you are focusing on finding ideas in. But over your career you have the chance to spend time in each of these three regional teams. Now I joined the firm 15 years ago, having spent some time in Japan before that as a translator. So coming from a different background, but I spent some time in two of the teams before rotating into the client-facing role that I have today. The point is the companies we invest in operate globally. We need to think globally. We do not want to erect artificial barriers around the world and so that we can organize our portfolio in a neat and tidy way. It doesn't work like that in reality, so we give people a global view. But then when it comes to which sectors? We want to pick stocks in its bottom-up. As I said at the beginning, that means we start with the companies, we work out which sector they're in. Later on, it doesn't really matter. We want to build really high quality, relatively concentrated, but yet diversified portfolios which give our clients exposure to lots of really interesting industries and lots of really interesting companies and themes, but at the same time, spreading that risk across those 50 or so companies in the portfolio. 

Andrew:

Yes, let me just jump in with a question on that: So I think that's obviously one of the reasons that we sort of came in and signed up with you guys was because of that bottom-up sort of fundamental research really. And as you, I think you alluded to, you think in decades, not months or quarters. So I know some of your holdings have been, you know, 20 plus years in the portfolio. But maybe you could talk about a bit on that fundamental side. How do those portfolios you know? How do you choose what you know? I mean, your universe is the whole world. So how do you choose as a team? The 30-40 businesses that you actually buy for a long period of time?

Murdo:

It's a very good question, and it's something that certainly I think when you first joined the firm. I think that's the question everyone is asking is well, how on Earth do I sort of figure out what works? It's certainly something that I think. You get a sense of as you spend more and more time at Walter Scott, you are equipped at the start with this philosophy which is hammered into you from day one. Which is that what drives share prices, which is what everyone talks about constantly when you look turn on the TV. What drive share prices isn't necessarily what the Fed does. It isn't what COVID does. Not over the long term, what drives share prices? Hence why one share price looks different or another is the companies themselves. It is the internal workings of that company. How good is this company at growing its revenues and growing its profits and its earnings? How consistently do they do that versus another business and that is really what I think we're trying to do is. We're trying to find businesses that are amongst the very best at growing that wealth as we would say, because that is what ultimately is reflected in the share price. Overtime. That's why you have to think longer term because. It takes time for the market to award that consistency in when you're talking, days, hours, months. It does have lots of factors that influence share prices, so you need to look longer term. We are equipped with a couple of tools which are very important in taking this universe of some 1500 companies down to a manageable size. You start with this spreadsheet in the middle here. You're obviously not supposed to see this in any great detail, but it's just to represent the fact that the first stage is the number stage. We take a business and you know lots of ways you can screen prescreen companies. We want businesses that grow their earnings at 15%. Plus, we want businesses that have an operating margin of above 20% things like this. We want businesses that don't have much debt. That gives you a little bit of an easier or universe. We put the business taking all of its annual reports into this spreadsheet. So we crunch the numbers. Then you look at all the ratios of the business at profitability’s the growth rates. If you come up with a business that's very attractive in that sense, then we can move forward and look at constructing a sort of case for the business looking at the industry that it's operating and looking at its history. What are the barriers to entry for these businesses? So this stage takes the longest, because this is really when you're getting to know this business intimately. You'll be speaking to the company. Many times you'll be having interviews with management many times. To understand how they think, because that's crucially important, because it's all very well understanding how a business has performed over the years, how it analyzes. But if you don't know what the management is thinking and what they're really focused on when we go through periods of uncertainty, the tendency is you just sell the business and move on because you don't know. So we spend a lot of time trying to get under the skin of management as well, using these different tools. So we're looking for and passed the slide. I'll come back to. We're looking for businesses that have these sort of. Qualities from a numbers perspective. Sustainable growth. Financial metrics that are superior. So really high return profile. Great margins which tell you that this is a business that's doing something special. This is a business that tells you and I how much to pay for their goods rather than the other way around. And that's so important. Businesses that also the smart businesses do this, the less smart businesses tend not to that manage their business in a responsible way. So, just like Andrew manages many of your assets, probably in a balanced, pragmatic manner, we want these businesses do the same thing with the shareholder equity that they have. So run a great business, invest for growth, but maintain a solid balance sheet, because at some point you will need that and that is something that we will not compromise on. And I think it's very important when we look at the longer term performance we've delivered is that these businesses grow very nicely, but when you go through choppy waters, they tend to protect you. Rather better than the average business will. And then we're looking for businesses that are exposed to growth. Tailwinds really strong tailwinds to their business, so it's unsurprising really that when we when we look at the portfolio and where it's positioning is that the portfolio is skewed towards businesses that are in the ascendancy within sectors such as technology and healthcare, but also in areas such as industrials, but within industrials, again, not your cyclical. One year profitable next year lost making sort of business. But businesses that are exposed to things like automation things like robotics. And just better ways of doing things, ways of doing things that people are increasingly going to shift towards as we go forward. So that's what we want to align the portfolio towards, because that's frankly easier to make money in those businesses than trying to battle against the tide of relatively average or poor business. Is hoping that you get the timing right, because that is basically what you're doing when you're investing in businesses like that, so hopefully that gives you a sense. Andrew of. How we get to that point? What we're looking for in essence?

Andrew:

Thank you for that and just I guess on that last focusing on types of businesses. You know the sectors that. You know the way some people might look at that and say, oh, geez, they're really in that aggressive, high growth area. But you know, because of your screens? And when I look at your holdings, you know you're not playing in the. You know the zooms of the world that are down 80-90% over the last 12 months, so. It's clearly making a focus to that growth, but still have some sort of brains. I guess that are holding you back from getting you know, really, really impressive, and in that high growth space is that, is that accurate?

 

Murdo:

Very much so you know we are just to sort of back up for a second there with that with that sort of philosophy that we have about it being the internal wealth that drives the share prices, you first of all need to have internal wealth. You need to be investing in businesses that actually earn a profit and you know there's so many companies over the last few years. That have done exceptionally well and be rewarded by the market that don't actually make any money and we want to invest in businesses. Beats the Pon, their earnings that they're generating now tangible earnings, not the promise of earnings and I think what we're seeing now in January all be it that it's rather volatile and all that sort of thing is a bit of a change. I think in the market focus, and as things settle down, which they will, the market will probably seek to reward those businesses that do have earnings right now. If you look at this, this sort of portfolio here a lot of numbers on here, but basically this suggests that somewhere in the region of 50% of the portfolio is exposed to two sectors, healthcare and technology. You may also note that it's not really exposed to areas that are quite large in the Canadian equity landscape. Energy, materials and financials. We don't really have a huge exposure to them now. First of all, just touching upon the healthcare and it just looking at the healthcare slide here. Uhm? I think when you tell people you have 30% tech, they assume that you own the sort of businesses you've just said. The high flying growth business is extremely high valuations, probably not a lot of earnings yet, but that's the way you invest in tech and it's fast moving and it's disruptive. We don't invest in those businesses we invest in these businesses here in front of you that some of which will be household names and some of them grow very quickly. They are all profitable and we have these characteristics on the bottom, which I think is very interesting and tells you a great deal. These businesses on average have been around almost 50 years, so the notion that in tech it's constant disruption. Fast moving, you know you can't stay on top forever. Well, Microsoft is a business that was the largest company in the World 3 decades ago and is still there or thereabouts today because it has a good management team that's constantly reinvented itself. It can be done, and these businesses I think, are great evidence of that. On average, they have almost 30% operating profit margin and they have virtually no debt as well. These things are all connected. They're not individually coincidental. We think that each and each and every business here is bringing something different to the portfolio, but at the end of the day, one thing as well that doesn't come out here, which is important to stress, is that typically they will sell to other companies rather than to consumers, and that's crucial as well. That is why they are so stable and consistent, because consumers tend to be rather fickle and sensitive to things businesses make. Long term considered decisions. That's very important, I think. In healthcare, you'll also see the similar slide, which says a very similar story here. Healthcare we think is underpinned by very long term demographic related tailwinds? So on the one hand you have pharmaceutical businesses you know, like Rausch or Novartis or other businesses that are developing drugs to treat things like cancer and diabetes which are increasingly prevalent unfortunately, as the world gets older. But you also have companies in here that make devices that treat things like heart conditions. Indeed, companies that actually make systems for surgery, surgical procedures that are operated by a human. But there are. They're basically part human, part robot. These are better ways of doing things we've been doing for decades, if not more, that result in better outcomes for you and I shorter recovery periods. So just to your point, Andrew, yes, you're right. It's. It's not this sort of high growth, high risk sort of area of the market we're investing in. We're investing in businesses that are tried and tested, but ultimately we also believe are going to be the winners over the next ten, 20-30 years as well because of the innovation that they have in their businesses.

Andrew :

Perfect, perfect, you know. You brought up Microsoft, so you're completely right. 30 years ago was one of the biggest in the world and again one of the biggest in the world today. We did spend about a decade though of essentially sideways movement after the tech wreck in 2000. And I did see recently you guys have liquidated a couple of positions so you're buying is great, but that's half the equation. So how do you look at that and say, “alright, time to move off of a company or trim it back”? Word is that decision happens because you know, going back to Microsoft - great Company, but if it was held for that 10 years of sideways movement, it really didn't do anything for the 4th bullet was climbing is, you know key even their long term investment.

Murdo:

Yeah, great question and I think you're right. I mean, there's a great many companies that experience what Microsoft experienced in the fallout of the TMT bubble. I think the reason why Microsoft did nothing in that period was because people paid far too much not for that business, and then had to ratchet back expectations. As was the case for a lot of companies, including Amazon and the likes that basically had to swallow that for quite a number of years before they could get back to sort of a reasonable point of time. So you're right, I think for a long term investor, yes, it's very important that we find great ideas and so on and so forth. But the biggest risk for us is also the fact that as long-term holders, you can fall in love with businesses. If you're not careful, you can see a business achieve great things and begin to believe that it will always do so well. In fact, although it's nice to have been sitting on a great performance, it's all about tomorrow's returns. It's all about going forward, and so we spent a lot of time at the firm here discussing and debating these businesses on up a regular basis. That doesn't show up in the turnover of our portfolio. You won't see us chopping and changing it a lot, but that masks a lot of debate about these companies. We re-pitch something once a year from fresh so that has to be good enough every year to get into the portfolio. We also look at the way that businesses are trending on a quarterly basis and we also ad hoc discuss things when something happens. We just saw Microsoft, for example, spend, I think it was, $75 billion on activation Blizzard a few weeks ago - a big gaming company. We think that that is a very interesting space. Uhm, and Microsoft? It already tallies with their strategy, but we talked about that at length, considered its balance sheet can afford it, etc. etc. Way that it works at Walter Scott is to buy any new company for your portfolio. The entire research team needs to be in unanimous agreement that it's good enough. That will take some time to get to that point because we don't have want to have to change it once we’ve bought the business. At the same time though, to protect against that “falling in love” and that that sense of complacency, it only requires one person from the research team to hold up their hand and put forward a cell case for a business. Now it has to be a well put together. So a case clearly based upon analysis. But the point being that it certainly shouldn't fall to the individual that brought the company into your portfolio to also decide when it's appropriate to sell that business. We've got 20 people looking around the world - looking at businesses who might, for example, be the next Microsoft, it should be building on every one of the team to bring that forward as a risk to highlight that, give us a chance to debate that, and if they're convincing enough, we will sell that position. So I think there's that asymmetry that is designed to build high conviction in the portfolio, but to avoid complacency as well. And I think that's something that's always been part of the process here at Walter Scott. Right?

Andrew:

Switching gears a little bit, you know the firm's been around for 40 years, so it's really been able to survive and thrive through lots of different types of market cycles. And obviously the start of 2022 has been a challenging time. Has been immune to do this, especially to transition. I guess that we're currently seeing a way for more growth into more value type of names. You know risks of inflation, lots of talk about interest rates going up as bottom-up fundamental managers. How does that bigger picture play into your decision making? Or does it? Because you are buying great businesses for long term, Just how does that plan for you guys?

Murdo:

Yeah, absolutely. I mean, I think just sort of focusing on these two slides. Maybe for a moment you know we are a bottom-up stock people and you know, we believe that it's companies, not markets that create value for clients. We believe that the long term is the right approach. It is another thing that we say often here is it's time in the market, not timing the market. That again creates value, so we're not going to jump in and out of this type of business into that kind of to try and catch every possible way to go up, because we understand that in doing so, you're likely to miss a great deal of opportunities to be in great businesses. So I think when we look at the volatility just now it always feels like the market narrows its focus. When we see volatility and this is the worst possible thing that's ever happened. There's no way back from this, you know. The world is going to hell, etc. etc. Well, the world isn't going to hell. In fact, the world coming out of hell, you might say quite encouragingly so, but it's always about well what? What is the outlook for businesses? The outlook for the global economy is looking more encouraging, so we're aware I think of why certain businesses are doing rather better at the moment, and we're where others are not doing badly, but others are being sold to fund purchases of some of these businesses that are now expected to do rather better. So for the last ten 20-30 years companies, some of which we own have done phenomenally well because they've been consistently growing and. They're at the forefront of innovation and so on. And at the same time, and I'm going to talk globally rather than in Canada here, but the same time some sectors haven't done so well. Financials haven't done that well. Energies have done very poorly. That's why it only accounts for 3% now of global benchmarks from a much higher rate. So they have come down because they haven't done that well. There is an argument now that the next little while it may be slightly better for them and so people there are people out there selling these obviously high quality businesses to buy some of those businesses - the more value,  as you might say. So we look at that and we need to understand what's going on so we can explain to clients when they ask us. But that is about the extent of it, because at the end of the day, we strongly believe is that it's companies. As I said at the beginning that I've got that consistency, that persistency of growth, and they're generating all the cash they're generating. The earnings that don't disappoint you all that often, that are the ones that will drive share price up, and therefore the value of your portfolio app over the long term. But you have to also recognize that markets do go down and for the last 10 years they haven't really gone down all that much. I mean, if you if you listen to the narrative in January, as I said, you'd think the world was ending. The NASDAQ is still over 50% above where it was before the pandemic started, right? So the markets have been on a phenomenal run, and if markets go sideways or even down 10% this year, after 40% in the last two years, that isn't such a bad outcome. And I think we would all have taken that two and a half years ago, if we were offered it. But if you look at this slide here, for example, this is 20 years of our returns for our global portfolios in the months where the market has gone up. We've typically captured 96% of that, or close to, you know, if market goes up, 10% we’re almost 10% up. But when markets have fallen in the months that they've gone down and there's been a lot less months, that has gone down in the last 20 years, we've only captured about 75% of that fall. And when markets go up and they go down and they go up and go down over the years, this is what drives the difference between our returns and that of the overall market. And it's by being invested in these good companies with this good balance sheets that protects you when markets fall, but they also enable you to keep up with the market when it rises. And the other chart that we often use to get across this notion that with a patient approach, with the right philosophy and with the confidence to back yourself through these choppy months for the long term, it pays off. And so when you look at, for example, this slide here over the last almost 40 years. If you look at these ruling periods you can see that if a client has come to us and stayed with us for just one year over the last 40, we've beaten the benchmark by about 60% of the time, which is OK, but it's not superb. But if a client stayed with us for five years, we're beating the benchmark over 80% of the time. And if we can retain a client for 10 years, which is our average sort of relationship, then virtually all of the clients have beaten the benchmark by over 3% gross of fees there. And that's really the message that we want to get across. Yes, the “here and the now” is noisy. It's always noisy. It appears like it's fraught with risk for equities as an asset class have been one of the most reliable in generating long-term returns. But particularly so if you take the long term view, and I think what our approaches is designed to do is to deliver at or above average levels of returns over the long term, but with reduced volatility. And I think that's really the message that I would want to get across today. I would almost say do not turn on CNBC. Do not open the financial press because whatever you read today is just speculation. It's just someone's opinion. What really counts is the is the earnings that businesses are generating and hopefully will continue based upon this philosophy to guide you towards more businesses that have that persistency of growth and away from those that only pretend that they do, and ultimately will probably not be able to keep that up over the long term.

Andrew:

That's great, Murdo and it's  exactly what I like to hear is, you know, the consistency in, your team’s approach and for me I'd be more concerned if in times like this. And I do appreciate it's that the markets charge. Right now you're out here, talking to us and your end unit holders in a challenging market which we always do appreciate as well. But it scares me when I talk to money managers and portfolio managers who change depending on which way the wind is blowing. But having that consistent approach, finding and understanding that at the end of the day we're owning businesses. The market is the market, but good businesses will, sort of Caria soon. Well then go back. You know I've got a chart here: 2008 through to end of 2021. In the global category there's three negative years in there, and each one you had significant outperformance. And it’s not like you’re going to cash. It’s, as you said,  great  position. Maybe one last question. Where you look at the global mandate you've got your teams got the pick to go to the US or abroad and most folks are looking at the valuation differential between say Europe and the US. And for those of us on the call that that aren't aware of that, typically the US does trade at a fairly significantly higher multiple than in European or Asian markets. How do you take that into account? Yeah, I guess you're just buying businesses but there's at play a role at all?

Murdo:

Yes, absolutely. I mean, I think we, you know, given that we manage both of these strategies over, you know 40 years, I think we've got a good optic, I suppose, on the relative attractiveness of them. All of the both options. I mean, I think we always ask clients to decide what they want rather than ask to tell them so we don't, I think. The global is a slightly larger part of our business, but overall both of them. Global 1500 Companies International is 800 ish. That's a huge universe that we have to pick within. You know, ultimately, as you say, it doesn't really concern us too much where these businesses shares are trading, whether they're Toronto, Tokyo or Taiwan. These businesses, typically, if they're good businesses, will be selling their wares to the global customer base. So where are their shares are listed? Might mean something when they first start, but not when they are established. Businesses selling globally it is the case that the US market has done rather better over the years than other parts of the world, but it points in time that that isn't the case. That hasn't been the case, so you know to us. I think we stay. We stay away from obsessing about countries and regions. And, as I say, much more focus on companies themselves, you know, I think one or two things that I would add is, you know we have the ability to invest in emerging markets too, but you don't often find that we do so. So in this portfolio you'll see that we own one emerging markets company which is Taiwan Semiconductor, which is effectively selling to the large Western electronics businesses and Samsung. They are  a Developed World Company. Basically they're not in emerging market company, they're not an emerging company, but otherwise in the Emerging World we do tend to see that there's a slightly different risk. Profile they tend to be more volatile, they're less transparent. Shall we say they're working in in countries where governments are a little less predictable, let's shall we say. And then there are other sort of factors that play too, so we like emerging markets in the sense that we think there's a lot of growth there. People out in the emerging markets are becoming more wealthy. They are the marginal consumer of lots of things. So we like to capture that. But we like to do that through companies that maybe exist in the West. Or in Japan, for example, you know Louis Vuitton is a great example of a business like that, whose main customer is most certainly Chinese these days. Once Upon a time there were Japanese. Perhaps in the future there will be Indian. The key thing is though, is that they sell aspirational goods that not everyone can afford, and that's crucial. Also then most wealthy people still want to buy their goods because not everyone can on them, and so they generate significant amounts of revenues from emerging. Markets, but we can pop across to Paris and go and see them, and they'll speak to us and we can analyze their accounts and we can be confident that their businesses have been audited by globally recognized companies. So these are all important things when we think regionally. That's the one caveat, I think that we definitely do see emerging markets as a slightly different asset class, but otherwise it's bottom up. Going forward, we hear the arguments that come that the international markets are cheaper than global because the United States is more expensive, but the US is home to some very, very good businesses that have not become worse all of a sudden. And therefore I think it requires a balanced approach. As I say, the best businesses are those that that we should be investing in. You must, and being Scottish I suppose we never we try not to lose sight of the fact that you must not. Overpay for even good businesses, but over overall it's worth paying a bit of a premium to for quality and for the for the consistency and the reassurances that you get from those sort of businesses. So yeah, I mean I don't think this portfolio will ever be 100% any country because we have a global team obviously looking, but we just simply want to invest in the best businesses at the end of the day.

Andrew:

Thank you, thank you for that. Just you know, one last question just cause we are Canadians looking at this. You've got a tiny little bit of Canada what? Can you share what that is?

Murdo :

Yes, so we have two businesses that we've come across in Canada on our travels that we that we found to be attractive. One of them is alimentation Couche-Tard, as you probably know, runs Circle K. And the other one is at Canadian National Railroad, so you know, I think in both of those what we like there is. And I think when you listen to what we say, maybe you think we'd own Shopify or something like that. But actually growth comes in all kinds of shapes and sizes, but I think what we love about those two businesses is that they're incredibly consistent. They have such strong market positions and they're run with the long term in mind. Act is consolidating a very fragmented North American convenience store market and CN Rail has incredibly high barriers to entry. Yes, the recent approach didn't pan out for Kansas City Railroad, but I think we were investing in that business before the opportunity came along for KSU. It didn't pan out, we're perfectly happy with CN rail as it is. We think both them pay great dividends as well. There's another sign of a strong business. But you know, I think I'm yeah within Canada. You know those businesses we think are truly world class and hence we really like them?

Andrew:

Well, thank you for that. I suppose again, a point of interest for a group of Canadians. Thank you once again. It's been about 45 minutes now so and I did forget to initiate that the chat feature so people can actually said there's no. So I do apologize for that new format that I'm getting used to here, but. You know, for us on our team you know when we look at managing our clients’ money, at the end of the day, it's really important for us to recognize that our job is to find value and add as much value as we possibly can for your clients. The beauty of this platform is that, I hope it got across that. You know, Walter Scott running his team there. They're adding a ton of value that we just can't do. You know we're not going to hop across and go visit a headquarters in in Paris. So and the beauty of the platform that we have access to is that we are able to add them into your portfolios with no additional cost than your typical equity portfolio. So we are able to bring this team on. Pay them, you know, out of art. Sort of. Cut and it's the right thing to do, so it gives us that. That global exposure that we all need our portfolios and I think Murdo and his team at Walter Scott is showing for 40 years that they've got a process that works and you know, we are convinced that you know we obviously keep an eye on them, but as long as they keep doing what they say they're going to do and they have for as long as we've been following them, you know we're going to continue to be happy having them as a cornerstone of your global equity portfolio. So, with that Murdo, I don't know if there's any last comments that you had to say, but if not, we do appreciate everybody joining us today and we'll talk soon. Thank you very much. Thank you, thanks everybody. Have a great day.

 

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Andrew:
Good afternoon everybody. Thank you for joining us today. It's for those of us joining in Halifax. It's looks like it's the first day of our spring out there. So wonderful day. Very excited today to have Eric Nuttall, senior portfolio manager of Nine Point Partners, energy funds and as Eric and I were chatting before this presentation, one of only a couple energy managers left in Canada survived the sort of cold winter that energy had for the last decade and is really the last two years or so as we all know, energy is got a bid again, a much late one, and one that is very well deserved. So we're throwing that of Eric here today to share some of his thoughts on the current energy market and some outlooks on where it is going forward. Obviously oil and gas sector in Canada is a big part of the Canadian economy. And is very important to all of our daily lives and with all the volatility out there, all the inflation and all the uncertainty in the world, it's been a place that we've needed to pay attention. We're lucky enough that in our alpha portfolio we added to Eric and his ETF's about a year and a bit ago now, which has been a fantastic return and has helped buffer the downside of the markets in just about everything else. One piece of housekeeping and I see somebody actually just put something through. There is a Q&A format here. If you look up on the top of the screen, there's a little question mark. Feel free to put in any questions you may have and we'll try to get to those. So with that, I'd like to send it over and introduce Eric Nettle, who will, as I said, give us some views. Thank you. Thanks for joining us there. It's great to have you. 
Eric: 
Happy to be with you. So maybe what I'll do is I'm going to do a share of the presentation. I'll spend maybe 10 minutes. I'll give you a brief overview of my thoughts on the royal macro. I'm sure there's no shortage of things that we're going to be able to talk about. We can talk about the weakness in recent days even today, as I left to come into the boardroom. We've got oil at the dollar and energy stocks down, so trying to make sense of that. But the real message is to communicate why we are in a multi-year structural bull market and kind of where that's taking us. Because I don't think people understand what has gotten us into the crisis in energy supply crisis that we are in today and what's going to get us out. You know, it was years in the making. It's going to be years in the solvent. And inevitably, what I think it's going to result in is a materially higher oil price. And the reason for that is when we look at where we are today, inventories, which is kind of my measurement of how undersupplied and oil market is have been collapsing by the fastest pace in history. We just got March data out literally this morning. The trend continues and so inventories falling tell us that the market is really, really undersupplied. And so you got figure, OK? Well why is it happening? We know part of his demand. Demand is normalized back to pre-COVID levels. Irrespective what's happening in China with a couple cities being pretty harsh on their lockdowns. It's a short term hit. The real story is on supply. There are structural challenges to supply growth all around the world. Whether it's US shale companies which I'm going to touch on. Whether it's OPEC which we think are running out of spare capacity, whether it's the global super majors that are preferring to invest in renewables alternatives as opposed to increasing investment in oil and gas, and the end result is this mismatch between supply growth and demand growth, and it's making inventories fall really, really quickly, and conversely, that's putting a lot of upward pressure on the oil price, because that's the signal to the market of just how bad or good things are today. We see this trend. All around the world, the United States are the same, uh, trying to continue. So we get the state out every week and you know, we look at not just oil, but now diesel jet fuel. Everything is in shortage. You hear about it like how many you truck in jet fuel to airports. They're running out, truck stops running out of diesel. So there there's a profound shortage of everything, energy, even gas, and that's a whole other conversation. And so why is that occurring? The biggest reason is there is a lack of ability to grow at rates similar to in the past. There was a time, like Andrew mentioned, I've been managing the fund for about 12 years or so and it's been the worst bear market in the history of this sector, so it's been a unique time to be a fund manager and at times be the face of the industry, at least from a capital markets perspective. And the biggest thing I've had to deal with has been the rise of US shale because US shale it was something new IT was a new source of supply. It was difficult to wrap your head around just how big it was going to be and US shale is always this source of quick supply. I call it short cycle, meaning it takes only four to six months to bring on a wall, and so every time in the past decade anytime oil rallied, these guys would go drill, blow their brains out. You'd have a production surge and it would kill the rally and we did that over and over and over again and it was like riding a roller coaster was really, really volatile. Give a lot of investors nauseous at certain times during the price collapses and so that trend of these guys going and growing production so quickly is no more, it's over and it's over because investors have said look at, we endured that we lost a lot of money you made no money. We perverted the market since OK, what's the real price of oil? Which should it be? And so investors have changed the business model going forward and what they've said is you will now as investors we are the owners like I run the biggest energy fund in Canada. And so I'm indirectly the biggest owner of energy stocks on behalf of my clients. And So what am I saying to candy companies? What are American energy investors saying to U.S. sales and that is don't grow, don't even bother. If you're going to grow by like a meager little amount, what we want is we want to get paid and it's our time to finally get rewarded for having endured the misery of the past decade. And so these companies are no longer really pursuing growth. They're keeping production flattish, modest growth, and they're maximizing free cash flow, which means they're paying out massive dividends and buying back a lot of stock. And so it's we're getting returns. And so this means that these companies cannot grow. At the same pace as they did, because they don't have access to the same amount of capital, and so this very, very disruptive force that I've had to deal with the past ten years is no more. We think shale growth at best is going to be about 800,000 barrels per day. What does that mean? Well, demand we think is going to be up about 2,000,000 barrels per day, so there's a mismatch. And so there's a call on OPEC. There's a call on the global super majors, but it's a call that they can no longer answer when we look to OPEC. Which is another reason why we're really bullish and they all price. We think there's exhausting.  
Andrew: 
Can I just ask a question on the comment there that you made in regards to pay back, you know, rewarding shareholders essentially at what point or do you see a point where you know oil gets to a certain level or something Where these companies say, alright, yes, we've increased our dividends. We've bought back shares, now let's start looking for new reserves? Do you see that happening again at some point in the near future or do you just think no, we're going to keep doing this dividend growth in Or are they going to be able to do both at some point? 
Eric: 
Yeah, I think we're years away from them having to do that for a couple of reasons. One is so their model and you can see Canadian companies adopting it. It's called a variable dividend and so you've got a base of two to 3%, but there's a cache suite every quarter, so it's effectively we generated this and it's formulaic. So it's like 75% of whatever we did is going back to you and so we can model that out. And you know, we're modeling about 9 to 11% dividend yields, and So what would be the willingness of shareholders of owners to give up that extremely attractive yield? It's like 0 because I know what happened the last time these guys went out and pursued aggressive growth and drilling it led to the incineration of about a trillion dollars of shareholders money. And so owners are not going to be willing to allow that to occur. CEO's are no longer willing to do it, so the average CEO in the in the shale code is making about 15 million bucks a year, like not a bad gig. Most of that is a bonus, and so in the days of massive growth they were literally being rewarded to it to do. The growth rates today are not even a variable, and so you have the codification of variable dividends you've got. The change in compensation plans. If you know as a company always have to have enough inventory and so the faster you grow, the more you chew through the number of wells or inventory you have, so it's a more difficult business to manage, and so I don't think that we're heading there anytime soon. 
Andrew: 
So if I was to extrapolate your view there, then. You know you would say you know basically, we don't really need and I like the title of your presentation everyday above 80 WTI is a great day so we don't really need any growth in the underlying commodity price for you to see, because these companies aren't paying out 10% at the moment. So you see this dividend increase happening really no matter what, it's almost an inevitability at this point. 
Eric: 
Yeah, the amount of free cash flow of the companies are generating at $100 oil, so on average in North America, the average free cash flow yield so I think about free cash flow as a huge you generate revenue you've got to spend money to stay flat, what's leftover? So that's free, cash flow and then you relate that to the market cap of the company. So this tells you, OK, what could the theoretical dividend yield be? And that number is in both 31% in North America, so it's the amount of free cash and profits you know we have to model cash taxes because of the amount of profits that these businesses are generating now. And when I look at my fund, especially over the past week where I'm maybe down 70% because of, you know, Kathy Woods and Art can mean stocks, imploding and such and energy stocks getting sucked up in that selling vortex. My average holding would be discounting an oil price of about $57, so I think we're going meaningfully higher than current. But if stocks are only discounting 57, you're getting a free optionality. Clearly, on anything above here and if stocks just start discounting a reasonable oil price, we will. Still we still see very meaningful upside ahead. So the second one that we've seen this looming, and we've been kind of the lone voice, for I would say for a year and you can see more people catching on to this theme, and that is OPEC we think is set to exhaust their spare capacity in the coming months and this is going to be wildly bullish for the energy market because OPEC has always historically at barrels that they could bring on if there's a geopolitical event if there's a bombing somewhere, if there's a war if something happens, they could bring on barrels. The price of oil's always set off that that last marginal barrel, and because of many years of insufficient investment, you know you think about a Saudi Arabia 80% of the revenue comes from oil, so you've got to account for 80% of expenses you buy off your population, effectively by subsidizing power, jobs, education, etcetera, and the flip side is to that social contract is don't go out into the streets and demand regime change because like in Canada and democracy, the worst case that happens where our Prime Minister is, we fire him and he goes off to get a job that pays him you know, a lot more than what he was making in office. In these countries if you get voted out of office, the ending to that story can be heck of a lot worse. So during the past six, 7-8 years of low oil prices, the last thing these countries cut were social spending. The first thing they cut, we're spending on new productive capacity, the ability to increase production because it was at a time of oil prices as well, and so we're seeing that hit where in March, which is the last month or April I should say, the last month of data we have eight out of the 10 biggest members of OPEC were producing less than what their quota system allows, and so you're giving up hundreds of millions of dollars every month in lost revenue. Well, why would you do that? It's because this is a hugely capital intensive industry. You always have to invest just to stay flat to stay where you are and these companies. These countries bring on large projects that take four to six years, so even if they're now allowed because you know oil revenues enough, you can satisfy social spending, you can start investing again. You're looking at four to six years to have some semblance of stabilization. You look at the two biggest countries in OPEC, like Saudi and the UAE. They're increasing production by 2,000,000 barrels per day between now and 2030. Well, that's eight years, and demand historically was growing out over a million. So you've got demand growth of at least 8 and you have basically OPEC growing by two, and so there's a 6 million barrel per day delta there. And I can't tell you worldwide, where that's going to come from, because this common theme of underinvestment is also happening in the global super majors, which this is the last slide on the supply, and what we see is investment peaked in 2014, it fell as with oil price collapsed. Oil price today, back to where it was back in 2014, but spending has only recovered modestly. It's at half of what these to spend. So why is that? It's we know, you know, PESG divestments need to reach net zero emissions by 2050, etcetera. The inability to reach those goals if you're growing oil production, you know subsidizing dirty oil and all of these different things, and so the global super majors, which are about 45% of global oil supply at best, is going to be flat between now and 2030. So I just told you we'll Opec's going to grow by two between now and then. These guys are going to be flat demand's going to grow by at least eight. US shale is not growing. Canada can isn't growing as investors are saying you can't hear stocks are too cheap, you know do buybacks instead. And so it's this mismatch between supply and demand and demands the last topic to talk about. Because why can't I go and buy stocks right now if I was this morning before I came to do this talk with you like, how can I go and buy stocks today where I can only pay 1 1/2 times Cash flow and get decades worth of inventory for free and it's for something for a reason which I call energy ignorance, which is defined at the bottom of the chart or the slide and it is I defined as the lack of knowledge of how oil is used. But more importantly the timeline for alternatives to displays its use because we all hear about electric cars as an example and be like well, geez, you know we're driving electric cars soon. What's it going to do for oil demand and so people like, well, I'm not going to be using oil in a couple of years, so why would I bother paying for a barrel of oil to be produced 10 years from now? So there's this mismatch. And So what I do is we give we have to have a conversation about, well, how was oil used? Because I firmly believe that everyone hearing my voice, we will be consuming oil for the rest of our lifetimes. And so to me, that's the opportunity you can buy decades worth of inventory of production of free cash flow for nothing. And so when I look at such things as OK, Eva's electric cars, well, there's 1.35 billion cars globally to displays an EV sales last year globally were 5,000,000. So that 5,000,000 is scaling. But so too is the 1.35 billion, because that grows every year. So the world's population. Correct, so the problem is getting bigger and bigger and bigger. So my best guess is we're at least two decades, 20 years before EV sales can displace enough of the install base to really make a serious dent. Well, that's 20 years, so again, I'm paying for two years of cash flow and we've got demand growth. At least I think for at least 15-20 years. The punchline, is it's going to take decades to reach critical mass. This is not an overnight transition yet share price valuations would suggest otherwise. When I look at 40% of oil that is non transportation. So like plastics, Petro chemicals, lubricants, rubber, all of these things that grows by world population growth and living standards where we in Canada consume 20 barrels of oil a year, each of us and the areas of the world where the population is actually growing the Middle East and Africa, they consume 5. And so we know between now and 2050 we think the world's population is going to grow by 2 billion people in areas of the world where they have rising living standards, which means the amount of oil each person is using is rising at the same time. So how do we shrink, let alone keep this 40% of total demand flat? Because we're told we need to. Well, the only way is for us to tell them you cannot have what we have. You cannot have the lifestyle that I know. My three young kids certainly take for granted and so I don't know if that be a terribly effective conversation for us to have, and so when I see forecasts about, you know, peak demand my gosh, what's going to be happening? I cringe and I get frustrated and I laugh all the same time because it's that ignorance that is affording the ability to buy again decades worth of free cash flow and dividends and pay literally nothing for it. And so when we look at well, what does that mean? For energy stocks. There's a lot of different ways to value a company. Our preference is to look at OK with free cash flow related back to how many years of production do they have? And so we just kind of triangulate to see what we think is reasonable value. We're buying stocks at two times their cash flow. They used to trade it 8. And so, why? Why is the same business like a Crescent point? I'll use as an example. It used to be like a $40 stock. Now it's like 8 bucks or something. The company's going to be debt free next year, and when we look at all the oil price in Canadian dollars, it's higher now than when the stock was at 40. And so why is the what people are willing to pay for their cash flow? Why is it followed by 75%, 1 1/2 times a day actually it used to trade. Going back to energy ignorance if we're not using the stuff we're not using oil, why would I dare place value on it? To me, that's the opportunity. That's what excites me so tremendously. That's why I think this remains a generational opportunity because ignorance will not last forever. You know I can, I can feel slowly as a slow, slow process. But things transitioning back and the best chart that I've ever used is here, and that this is, well, how many years of free cash flow? At the current oil price, in fact, a little less would it take for the average company to privatize and become debt free because you know, my own belief is demands going to grow at least a decade. Which point it's going to peak, but it's only a slow, slow moderation, so we've got a long runway. But if the average company I'm only paying for three years and on average they have 15 years of reserves, that's the average in Canada. So I'm getting 12 years of their free capital for free again. So that's a common theme, It's repetition is important because it impresses upon you just how profoundly mispriced these stocks are. And so despite you know strong gains, it's the reason why I still see very meaningful upside ahead. 
Andrew: 
Well, that's a great overview Eric. And it does paint a great picture for going overhead. You know you probably have it somewhere in your deck, so I'm sure you're getting the question of law so you know you. You basically laid out your base, let's call your base case scenario for the energy sector going forward. But one question I guess I have is around this Russia war Ukraine war. There you know, obviously they are a huge driver of oil in the world. My understanding and you can correct me if I'm wrong, but my understanding is that Russia doesn't have any real capacity for storage. So what happens to your scenario and to world supply if, let's say European countries start to say no to Russian oil and gas. My understanding is that those pipelines have nowhere to go so that they actually have to get shut down. Is that accurate? Because I was talking about that with someone the other day and they had no idea that this was a potential situation, but is that something that is accurate? And if that is the case, how does that impact the scenario? That sort of you just laid out for us. 
Eric: 
Yeah, so my last column in the financial post revolver on the theme that the civilized world has realized that we need to get off Russian hydrocarbons because it's oil revenue is being weaponized literally you know, it's affording their ability to buy weapons, they're killing kids. So you have the EU debating that as we speak. I kind of expect that that's where they're headed because you can't justify any other sense. The International Energy Agency so kind of a spokes spokesperson, but like an organization that studies these things this morning, said they think that Russian production will fall by about 3,000,000 barrels per day in the second half of this year, which in an already undersupplied market is meaning like extremely meaningful. I frankly, I don't know how that can occur like there's this mismatch between we have to do it, but my God like the implication for the price is significant. Like we're not talking about a $2.00 move here from that because we're already so massively undersupplied, and there's nowhere else in the world where you can make up for that, because Opec's going to be out of capacity. And when we look at the Canadas, the Brazil's it takes four to six years to grow production meaningfully. And that's if investors are willing to allow it. Which were not because I just told you I'm buying stocks at 1 1/2 times when these two trade at 8 and I'm saying don't grow, use your free cash flow and buy back stock aggressively, which will drive the rerating. So we are in such a unique setup, but you touch on a theme which I think is very important because there's this misbelief that if peace breaks out tomorrow which we all pray for, well, what happens to sanctions? They get lifted, we go back to normal. I don't buy that. I think this is a permanent. This is a big miscalculation. On the part of someone and it's going to have long term impacts because you've just had every major oil company in the world say we're out. Can't justify we can't justify the political risk. We're taking multi-billion dollar write downs, we're done. And so you're going to have the second largest oil exporter in the world starved of both capital and technological know-how services. And so there's a long term story of an erosion of the productive capacity. And I'm not I haven't seen anyone else go there yet. That, to me is the real story, and it's just it. It's further, it's further fuel here, from the pun to the argument that we've been making, that is, we are in this structural bull market. There's no easy fix because the gross supply meaningfully. It takes a long time, so the conclusion is oil has to go high enough to kill discretionary demand, and that means the price meaningfully higher than where we are today. 
Andrew: 
So one question came in and I'm going to get to it in a minute. But before I get to that. You know you talked about crushing the consumer is sort of the erosion has to happen and you know question that pops up and I don't know if you have the answer to this, but you know I've had a few folks mention this to me. Said you know, last time or the first time and it also goes very now we're about $1.90 something per liter of gas, obviously diesel way higher than that. If you go back to kind of the first time we hit $100 barrel of oil years ago, I think it was in in the financial crisis era. We hit a dollar at the pumps. It was sort of a dollar for dollar, but now we're $100 oil and $1.90. Do you have any insight on what's causing that? Is that you know being and you're seeing record profits for, you know, comes like grow at that shell. Is that part of it or is it just is there something else going on that people aren't necessarily aware of? 
Eric: 
Yeah, I'm not a refining expert, but what's going on is we have a carbon tax. Now when we didn't then, so that's a significant tax. There's also now a shortage of products so the spread between you know what they you bought refiner buys oil for and sells it for is higher. Because inventories are so profoundly low. And now we've got a demand surge post COVID where there's a, you've got a rebounding economy we've got weakness in China, which I would assume and be over in the next month or so is blocked downs. Can't persist forever, but so you've got a diesel shortage. You've got a rebounding economy. We're all going to be traveling like I've been. I've been doing business travel a lot. Airports are jammed, so like the demand on jet fuel is huge and at the same time a lot of refineries have been shut down because it been long in the tooth and industry has been investing enough in them, so there's this mismatch. And so yeah, I think gasoline prices are going meaningfully higher from here going forward, as mainly due to oil. If I'm right, that supply growth cannot match demand growth. Then you got to kill the demand growth and you've got to go high enough and stay there long enough to change people's behavior. And you know, I'll bore you with the math, but that that's an oil price way above $150 a barrel. 
Andrew: 
A question actually just came in as you were saying that you know where you think demand destruction starts and you're saying way above 150. 
Eric: 
It starts at 130 but it really happens at 180 so it's going to be somewhere in between there. I actually think we'll overshoot if you inflation adjust the prior high. It's about $184 a barrel and you know that's not a good place to go. It's not something I'm going to be cheering. But it's just I'm driven by logic and math and that's kind of where it takes me. 
Andrew: 
OK, perfect one other question that came in and I think I know the answer. You know as you said it's going to take you know 4-8 years for a new project to come on. So the question came in here Premier Higgs in New Brunswick is suggesting that governments start to kind of change or at least review that gas exploration regulations and things like that. But here what you say even if they make changes, it still doesn't bring anything online for a number of years. 
Eric: 
Yeah, so again yeah, natural gas is a whole other spirit to go through like just looking at oil. So just thematically, if governments you know actually supported the industry and didn't want to publicly say they should be thrown in jail for climate crimes if we repealed legislation, which is means we're never going to build another pipeline in Canada, a new one ever again after TMX. So government just recanted a lot of the profound errors that they've made in recent years. The ability of industry if investors said OK, go ahead, which I don't see happening until stocks at least double, if not more, to get back to closer historic collaborators. So there's a lot of ifs in that, so let's just say they go for it. Let's say Canada we can actually do Greenfield oil sand projects, which the CEO of the largest oil sand company says we'll never see another Greenfield project in Canada ever again, even if they did. Even if you could bring on more projects, it takes four to six years, and so that's why it's taken years of bad energy policy of ESG investing divestments dirty oil but don't want to own it? Share prices including. Well, there are consequences to that. The end consequence from investors for me this last man standing is saying OK. It's my time to get paid for my clients and we will do that through dividends and buybacks. Not growing production. That's the consequence to all of those bad policies, and all of those bad decisions, and so this is the end consequence. So for every action, there's an equal opposite reaction. This is it here, and the only solution is stocks more than double energy investors say, OK, go for it, and even then, there's still profound challenges to grow. The little nuances like exploration. Has also been falling for years like the rate of you'd feel discoveries have been falling. Pools are getting smaller, pools are getting gassier. Pools are deeper, more complicated, more expensive, and all of these things, and that's not even something we've had to talk about for many years. The time will come, but. Yeah, so it's what takes years to get into. We'll take years to get out of. 
Andrew: 
OK. Well, I don't see any other questions coming in and you know Eric, that was a that was a fantastic overview of where we currently are and you know your view on where we're going as an investor in energy it's a good view, as a consumer it's definitely gives me some pause. I would say again for us as investors you know and for our clients who are concerned with inflation and cost going up. You know this is obviously a fantastic hedge against that. Going forward over the years to come . Like I said, thank you for your time. We really do appreciate it. You know one question just popped in. That is actually I think I can answer this one. They just asked if you will be paying a dividend note on the fund, but I know you do have a cash, an energy dividend fund more as well, so I guess if you just want to touch on that maybe. 
Eric: 
Yeah so we have two solutions to problems that investors have when it comes to energy problem. One is I'm not worth what I want to be worth. I want to make more money and so we have the number one energy fund in the world for last year in 2019 to accomplish that. So if you're bullish on where oil already is, let alone where we think it's heading, and there you agree that there's a mismatch in valuations, then we have the nine point energy fund. It does not pay a meaningful distribution. There's no yield from it. Problem #2 has been, well, we're bullish energy, but my clients, you know, I want to get paid on a monthly basis. And so we launched a fund ETF version about a month and a half ago sitting about 140,000,000 bucks. It's one of the most successful ETF launches in Canadian history we're told, and what it does is it seeks to maximize yield from the energy sector in two ways. One is, we leverage our in-house analysis where we have almost every company in North America modeled out of varying oil prices I can tell you in free cash and dividends all those things which people don't do, and so we're picking names where we can get maximum yield potential. But the real juice is not in the dividend. The real juice is in writing calls. On the underlying securities, and so far what we're doing is we're selling people the right to buy our holdings from us one month out at an average 12% higher than current. So our worst case is we have to sell the stock a month from now, 12% higher. But in exchange for that, because the volatility of the sector is so massive, the premium that we can get by writing those calls to other people is huge, and so we're making 18% annualized for writing those calls, and so I don't know how often if we can do 12 times a year, six times a year, we're going to figure that out if I can only do it half as much, well, that's 9% from writing calls six and a half from the dividends. That's current. What we estimate that's a 15% dividend yield for the fund. That's not a promise, but that's just the month, so we're paying out five now by the end of the year, there will be a tree up between what we've done, what we've paid, and what we've done. I want to smooth it out on a quarterly basis. It's going to take a bit of time, like maybe in the next quarter we'll have a true up because we just launched a month and a half ago, but that's the goal. So there's two problems. Problem one is want to make be worth more? Problem two is I want to get paid a monthly basis and still get per upside participation. And now we have. I think in my opinion. The two best solutions in the world to satisfy both of those problems. 
Andrew: 
That was great. That was I think, very timely. We really appreciate it. You're, you're knowledge and depth as we always say we do own some individual energy companies. But it's a space where you need a little bit more depth of knowledge to invest very successfully. So that's why we've been happy to have nine point partners and your we have to use the ETF in our platform. But the ETF's along for the ride and it's been fantastic for all of our clients and I believe your scenario for the next few years will continue to play out. You you've paid your time in the in the penalty box there for the first decade and it's your time to shine. So we do really appreciate it and I hope you have a great rest of your afternoon. Thank you for joining me buddy.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2022.
If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor. 

Commissions, trailing commissions, management fees, and expenses may all be associated with hedge fund investments. Hedge funds may be sold by Prospectus to the general public, but more often are sold by Offering Memorandum to those investors who meet certain eligibility or minimum purchase requirements. An Offering Memorandum is not required in some jurisdictions. The Prospectus or Offering Memorandum contains important information about hedge funds - you should obtain a copy and read it before making an investment decision. Hedge funds are not guaranteed. Their value changes frequently, and past performance may not be repeated. Hedge funds are for sophisticated investors only. 

On a more challenging note has been the alpha portfolio. That one is a little bit more of a growth type of portfolio and has a little bit more exposure to technology as we know and if we look coming out of March of 2020, that portfolio did extremely well, whereas the North American core portfolio lagged a little bit over the last 12 months. It's kind of been flip flop so that is why we try to have a bit of balance  to both of them in our portfolios. So we are down a little bit this year it was heard as most other said, is that technology exposure and I'll touch on some of those names though in a little bit. We have benefited though from the gold we do have about a 6 or 7% weighting in gold there we also have that same defensive go anywhere portfolio. We're also in double digits cash and that is a buffer that we've put into to try to protect as well and waiting on the opportunity to deploy that and the final piece that has worked extremely well for us has been our protection. Basically what we've had is we've had a short position on and we've also had a volatility position. So as the volatility in the markets increases, that goes up for us. So it's a nice hedge against everything else. So when you see the markets going down, that volatility in that short position are going to give us something to the upside that we can then trim take a little bit of cash and build that up for another day. So from a position standpoint, we're constantly changing and adapting, but at the end of the day, what we have to recognize is that we're buying businesses and the biggest thing is are those quality businesses are the businesses that we want to own for the long term. So I'm just going to pull up some stats here so I can look at. Ran through a few of our more growth oriented technology names that we have and give you a couple of examples of ones that you may or may not know. A company called C3 AI as an example. It is a leading artificial intelligence company. It's pureplay in AI we believe that AI is going to continue to drive a lot of growth in the future. So that is something that we continue to be bullish on over the over the next number of years. So if we look at that company, it's down the IPO last year ran up to about $140.00 or so has plummeted back down. We didn't own it through that whole upside or the whole downside. We started buying it after it had collapsed once fallen more since that point. But when we look at the business it's about $1.8 billion company. Well, they have cash and cash equivalents of about a billion dollars, so you're getting that billion dollars of cash and you're paying $1.8 billion for that which means you're getting sort of all that future potential and growth for not a lot of money. And when we look at what's called the current ratio and the current ratio is looking at you short term liabilities, so within one year and your short term assets, so again within one year and how many assets do you have to pay those liabilities. That's a real big number that we look at to make sure that a company in a challenging market for financing is going to be able to keep itself going, if they're sort of at an early revenue stage type of a company. C3 AI has a current ratio of 8.2% as of May the 5th. So to give you some context, they could sort of easy, and this does simplify it a bit, but essentially they have eight years of liabilities, current liabilities, if they stayed at these levels covered. So we are comfortable with C3 AI   the largest shareholder company called Baker Hughes. So those are things that for us give us comfort that it'll get through this downturn and come back on the other side. Another example is coming called 26. It is a 6.7 billion dollar company. They are huge player in the 5G space. They're also in sort of the EV autonomous driving space as well, with some of their products. They are now trading at about a 20 times earnings, so not a crazy multiple to be growing in the type of space that they're growing and that's what we want to see there, is what we're not paying a huge premium for that company to be in a space that we really like. So although it's down, we're still from our purchase price or initial purchase price, we're still basically slightly positive, so it's been painful to watch it fall but again we're quite comfortable with the last one. I guess I could mention as well just kind of going through the list here to see some names is a company called Keysight Technologies. It's in the 5G space. 26 is trading at about 18 times earnings, I don't know what I mentioned there. Key side is trading at around 20 times. Keysight technologies is the leading testing company in the 5G space, roughly 75% of hardware that's out there in the 5G world is tested on their on their products. Again they have roughly $2 billion in cash, a current ratio of 1.6. So nice and high. It's a company that we just love. We truly believe that 55G's not going away. It's going to continue to get rolled out over the coming years and they dominate the market. So for us, when we look at something like that it's been challenged here in the short term. So I hope that gives you a little bit of a of an update on our three, I guess big macro views and also a quick little view on current positioning in the portfolios. if you have any questions, any concerns please? feel free to reach out to us. We're always here for you. And thank you all.

 

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2022.

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

 

Commissions, trailing commissions, management fees, and expenses may all be associated with hedge fund investments. Hedge funds may be sold by Prospectus to the general public, but more often are sold by Offering Memorandum to those investors who meet certain eligibility or minimum purchase requirements. An Offering Memorandum is not required in some jurisdictions. The Prospectus or Offering Memorandum contains important information about hedge funds - you should obtain a copy and read it before making an investment decision. Hedge funds are not guaranteed. Their value changes frequently, and past performance may not be repeated. Hedge funds are for sophisticated investors only.

ANDREW LACAS: The North American Core Portfolio is essentially a dividend portfolio as you all know, even with all the stats of this year, that is actually still in a positive return for the year to date. We're very happy to say that we still have a year to date positive.

The one year return is still fantastic. The big reason for that has been the overweight allocation into gold and into energy. Those are two areas that have done very well. Then because of the focus on dividends, it was very underweight technology, which has really been the spot that has had the biggest pain.

We don't have a lot of technology, we don't have a lot of smaller mid-cap names. Again, because of that focus on dividends, there is roughly a 10% weighting in gold. We're looking at about a 6% weighting in kind of a defensive go-anywhere fixed income product, 5% cash, and then 18% in energy, which includes pipelines.

That is one area. The Canadian oil Patch is one area that we believe is going to continue to benefit and continue to do quite well. The other specific name that has helped us quite a bit is a position we've had on there for quite some time in Nutrient, the world's basically largest fertilizer manufacturer.

Obviously with the war in the Ukraine bringing offline a number of, or a huge amount of fertilizer, ammonium, potash production, that has benefited the remaining companies like Nutrient quite well. We like the trend already.

The war has unfortunately, as we know just been a humanitarian disaster, and from an investment standpoint, it has caused, as we've discussed in the past, some serious issues when it comes to things like fertilizers and potash and other sort of pieces of that, that come into that pot.

Andrew L

Good afternoon, everybody and thank you for joining us today for another fantastic webinar. I'm really excited to have Andrew Brenton, the CEO and founder of Turtle Creek Asset Management joining us today. Andrew and his team at Turtle Creek have put together arguably one of the best, if not the best money management teams I've come across in my investing career. One of the reasons why we like to partner with Turtle is if I go back to when I started in this business, in institutional sales in Toronto, what it came down to really was - what is the process? You've all heard me speak this way, does the money manager have a repeatable and scalable process? if they do, results should take care of themselves. But there's really no point in having any more of a conversation if that process isn't really truly repeatable and scalable. Andrew and his team, we believe have one of the best ones we've ever come across and it really comes back to the beginning of their careers in private equity, Andrew will speak more to this. So like I said, I'm thrilled to have them on to share with everybody today, who Turtle Creek is, how they manage money. Will get down into a little bit more nitty gritty but to start, Andrew, welcome. Thank you for joining us. We are recording this. So for all of you that have friends and family that couldn't make it, we will be posting it on the website as well, but yeah, Thank you for joining. And maybe just to kick it off just maybe give us a little bit of background high level about Turtle Creek and how you got started.

Andrew B

Sure, thanks Andrew. Happy to be doing this and frankly, looking forward to making my first trip to the East Coast this summer having missed it for the last couple of summers because of the pandemic. So our background as you mentioned, and when I say our, I'm referring to my two partners who started Turtle Creek with me. Previous to Turtle Creek we ran the private equity subsidiary of the Bank of Nova Scotia and did that in the 1990s and actually did quite well in that. But we really thought we wanted to spend our time focusing on the public market and investing all of our money in the public market. So you can think of us as one of our corporate catch phrases is, “a better kind of private equity”. If you remember one thing about Turtle Creek, I often say, look we own companies. It's not our fault that they're private. In other words, you get information every month that really isn't very good information. In other words, the unit price and the short term or in fact if you're looking at your portfolio on a daily basis, how you're doing on a daily basis, it's not very good in information. So Evita came to me, who's on the call with us today, recently and said we should have a couple of calls with groups because our unit prices haven't performed as well as the market in the last, like for example, in the 1st quarter. I said really, I mean I kind of knew that but I wasn't really focused on it. We're focused on how our companies are doing and at least in the prior quarter because of course that's Q4, calendar Q4. The results were across the board really strong, which caused us to take our long term view up on a number of our companies. So in other words, the number that we calculate that intrinsic value of the portfolio is higher today than it was at the first of the year. The fact that the unit price is down year to date for us is just noise, and also is an opportunity. We viewed declining share prices as an opportunity. So if you think of us having been control investors in private companies and having sat on boards working alongside management, we have a lot of experience and maybe I think take a different perspective on public companies than a traditional public money manager because of that background and we're now 11 professionals on the investment team. The other eight, some of who have been with us for over a decade so we've had essentially zero turnover on the investment team. None of them did private equity generally we’ve hired people fresh out of school. But they can be taught to think the way we think, to think about a stock as not a stock, but as a piece of a company. So the other thing to understand about us that would essentially we do the work as if we were going to invest to buy the entire company. And I think that as well is unusual or rare in the public market. And I think partly it's because people feel if I'm wrong I can always sell, and we just don't want to be wrong. So again we'll do the level of due diligence and time and work spread out over time that we did back in our prior careers as control private company in investors. So that's a, call it a high level view of or overview of Turtle Creek and you can see on this slide. To date, it is only been North American companies so the way to think about our approach and the evolution of the firm in the 1st decade or so, we were overwhelmingly Canadian equities and now we're roughly 2/3 US and 1/3 Canadian. At some point, we'll look outside of North America, but we're still busy working our way through the US, meeting all of the terrific public companies or meeting all of the public companies and trying to identify the few that are terrific and so the reason that we were overwhelmingly Canadian equities in the first decade was intentional. We thought, before we look elsewhere let's sort our way through Canada and to try to identify those few fantastic companies that are going to make great returns for their shareholders for the long term. And if you, if you understand the companies that we own, the Canadian examples would be a couple of Montreal companies, TFI used to be called TransForce and Gildan Activewear, a Vancouver based company called premium brands, Ontario company called ATS Automation. These are all continue to be significant holdings of Turtle Creek and I think will be for many years to come. They won't be if they lose their way If management changes so we're careful to keep an eye on all of our companies to make sure that they're maintaining the greatness that we think they have today. Companies don't stay great forever so you have to recognize that at best, maybe you can find a generationally great company for one generation. And so I think we identified a bunch of Canadian companies that fit that criteria and over the last 12-13 years, we've identified an even greater number of US companies that meet that criteria. So if you think of our approach where a buy and hold in the long term will be really good for the shareholders. One of the reasons we love the public market is the prices change, and if you think of any of our long time holdings like the companies I mentioned a buy and hold has been really good for the shareholders. We've done better because we take advantage of that emotion and fluctuating share prices of our companies. We have a bunch of these like ATS automation. A global remarkable automation company founded and headquartered in Cambridge ON and the Buy and hold return since we first invested in the 2009 has been 21%. So I think we can all agree that's a great buy and hold return. We've earned a 27% return because of the fact that we aren't to just buy and hold. We have an active overlay on top of it to try to improve upon buy and hold now 27% sounds is a little bit better than 21%, a person might think it's actually a lot better. I mean the power of compounding over  a 13 year period, if you and, I won't do the math, but it's probably twice as good even though it's 21% versus 27% so again it's the power of compounding when you're dealing with big percentages. So that foundation of owned companies where a buy and hold will be we think quite strong and then this active overlay that adds value to a buy and hold with every basically every single one of our companies over the years.

 

Andrew L

Andrew, you are right, I just did the math for you and over a 13 year and is actually exactly twice as good as a return.

Andrew B

Well, there you go, I mean I set it thinking I'm not sure it's that given the it's pretty close, it's funny it wasn't that long ago that the buy and hold wasn't really very good. Meaning, if you look on that chart. Just a year or so ago, the stock was in the teens and now it's actually around I think around 50. And so the buy and hold was positive but it wasn't anything to write home about, but we really are confident in this company there's a really good group at a New York that owns 19% and sits on the board and sometimes I feel a little guilty given all the work they've done, they actually went in 07 and had a proxy fight, changed management, changed the board. It was a period where we weren't keen on the company. We'd met them, we just didn't do a lot of work because we weren't convinced if the management was strong, and they made some significant changes and that's when we became really interested and a year and a half after that became a shareholder. And when I say a little guilty, our returns are a lot better than theirs, but it's gotten better for them in the last couple of years. So New York hedge funds, are not known for long term views but they've taken a very long view on this company and so I'm actually delighted for them that the stock has the market quote unquote is finally recognizing all of the things the company is doing and then if you think of our approach, we own fewer shares than we did a few years ago, but not much fewer because while the share price has gone up, anyone who can see the chart, the green line, which is our business value or intrinsic value for the company, it has gone up a lot too. They've done some very impressive things. There's a relatively new CEO. He's been there for four years now who's really taken the company to another level. It was good before and he's making it even better. And back to my comment of generally being very focused on your companies and being aware of changes in both directions. When this CEO was hired, we put a question mark on it, a caution because it was a new CEO and over the next year or two we really have become comfortable. It became comfortable that he was the real thing and was the right person to come in to really take the company, as I say to, to the next level. So we take our views up on our companies and frankly, we also take our views down on companies and it's a never ending process.

Andrew L

Andrew,  that's great. While we were able to jump into  ATS automation, it's one of our favorite companies just also because of the fact that we believe that automation and robotics is going to be a huge growth engine going forward. But I want to jump back to something you said sort of almost at the beginning and I think it's important where you had pointed out that the net asset value and the unit price of the fund is down a little bit more than the market just to start off the year. What we always tell all of our investors is that it's volatile fun.  In the short term, it's very volatile and I think that has to do with your optimization. But, Can I also make the assumption that you found the Dispur in a very different way than most,  you and the other founders you really seeded it with your own money and yourself in and friends and family and it wasn't for probably about 6-7 years before you started getting outside money invested in the fund. So is it safe to say that in a way, this is your personal account and you’re managing your own money in a way and the rest of us are kind of along for that ride. So the market volatility doesn't necessarily keep you awake at night because you just understand these businesses so well  and you're willing to buy more of them, is that right or again too much of a generalization?

Andrew B

You're exactly right. As I've said to people, if I Had been born into or inherited wealth which I had none of I'm not sure that we would be taking outside money, because if I started with a lot of money and then you compound, I mean there is a limit to any investment strategy and we're very aware of that we have capacity now, but there will be a point that we don't and we don't want to let the amount of money we're managing impact our returns because as you point out, this is where this is where all of my family's wealth is It's where all of  my two partners have all of their families wealth we're the biggest in investors in Turtle Creek by a meaningful margin. And so and with the people who have been with us for a very long time I never want to look at them and say, yeah, I know the returns aren't as good as they could be, but we're making a lot of money on management fees so that is not the mentality and the ethos here and your comment about risk and portfolio construction, I guess in a sense you're absolutely right. I mean, we had to think about for our family what's a diversified, optimal portfolio which includes risk mitigation and if you think of the main fund, Turtle Creek Equity fund, we have 30 holdings. None of those companies have any issues. None of them had an issue going through the pandemic for example,  or the companies we owned and the credit crisis. So, they don't have too much debt although they try to optimize their own business from a capital structure, they're all in different industries. So, our view is once you own 25 to 30 companies and they're great companies. You don't need to be more diversified. So that's our philosophy and I know my in-laws when we started one of the triggers to really create Turtle Creek was people like my in-laws who were saying, hey, I don't know what to do, can you manage my money? They didn't have a lot of money now they have a lot of money. if you put your money into Turtle Creek at the very beginning, it can be life altering. Has been for them, but I had to think about older people then is it right to have 100% of their net worth essentially in equities?  I actually am OK with it as long as it's well managed with the approach that we are taking because once you look at the companies we follow, so we have a Turtle Creek 100 that names all of the companies. That includes all the companies we own and then other companies that we used to own that were following that we think are more fully priced.  From that list, and it's actually a bigger list than the 100, we're simply trying to build and constantly rebuild the lowest risk portfolio that we can, it's a as I mentioned before, it's a never-ending process. We had a full day essentially beat up session yesterday on a company that we own called CarMax. They're the biggest used car retailer in the US they're not in Canada. Yet they have, I think they've cracked the code on developing that trust with people who buy used cars, 3-year-old cars, 5-year-old cars, and there's no haggle. They provide a warranty, and they still have more geographic growth in the US they just open their first New York City stores ever. So, it's an Omni channel approach. It's very well run, we have these beat up sessions, one of the reasons that the team wanted to have a beat-up session on this company is that the public stock market is very focused on comps and it's been a very unusual period of time. You've all read about how used car prices are up a lot in the pandemic. It's hard to get a new car, they're all the supply chain issues that the OEM's are having. So, it's a very strange period of time for used car sales in the US both on pricing and volume. But what we see is this company doing all the right things for the future. They're taking share, they're going to continue to take a larger share of the market. It has only gone up in the last year or so as we've interacted with the company and spoken to them. The purpose. of having that beat up session now was there's a real scenario where that stock weakens? It already is down a decent amount. If you look at a stock chart in the last couple of months. and we've been buying as a result. But like the team wanted to make sure everybody was on the same page that hopefully and so this is maybe an unusual statement that hopefully the stock really falls. It's a small holding in our fund, it's a less than a 2% weighting because while it's up for us it is Cheap enough to be one of the 30 that are the cheapest of all the companies we follow, it's a lot more, call it fully priced than our largest holdings that we're very valuation focused that gap  between what we think it's worth and where it's trading or one way to think of it as what's the buy and hold return from here for each of the companies that we follow and that's how we're constructing the portfolio. So, I'm hoping that stock will weaken because as the quarterly results come in this year there could be some bad comps. Because last year was so unusually strong, and as I say, we're taking our long term view up on the company. So, it's that nice combination. I'm not going to try to predict where the share price will go, but hopefully it will weaken through this year, that'll give us an opportunity to make it a lot a much larger holding in our fund and it's what you said, Andrew having that mentality. When I get the question, what keeps me up at night, it's funny it's never our portfolio it's not our companies. I might worry about my kids, but not the companies in our portfolio. It's not to say that bad things don't happen periodically to our companies. They do It happens to every company at a point, but it's fairly rare and even. Then it can provide an opportunity because even when a bad event happens to a company often, maybe, almost always, the public market is more punitive to what the share price than let's say the hit to our view of the value of the company.

Andrew L

That's great and it's interesting over the last number of years, I mean, I can think of a few times that you've had issues you whether getting a short sell attack or hold capital getting off suit deciding to go after bank for the first time ever. But what always has been impressive is that the conviction that you as a team have to actually go in and add more. So, it’s simple to say buy low, sell high but it's extremely hard to do without that level of conviction and that knowledge on that company and the business that you're actually buying. So, when you do have these big sessions and when you're choosing, do you have the final say? Is it a team? Do all the analysts and everybody sort of pitch the pros and cons? Can you go in a little bit of detail on how that works? and one last thing I will say I see a question came in so I do want to remind folks on the top right corner there's a little question mark feel free to write in any questions you have, and we'll try to get them to Andrew.

 

 

 

Andrew B

Sure. So, in terms of the companies and identifying the companies it's the partners that are involved in everything. That's still a critical element that I'm focused on and it's not just finding well run companies. It's finding run companies who are honest it's a big deal, right? And when I say honest, I don't mean that there's no fraud. You want to make sure that there's no fraud. One of the problems at home (Canada) we had a few years ago when they (US) had their liquidity crisis was the word fraud was in the newspaper. I actually for the first time Spoke on deep background. You are not even identified, or they can't even use your quotes, but to help the Globe and Mail reporters understand the issues because the fraud that existed wasn't at home, it was the mortgage brokers who were making up income letters for their clients so they could qualify for a mortgage. In fact, that portfolio was in Brampton that area, they did better on those loans than there average so there was no true credit issue and there was no fraud inside the company and that was an important issue. It was funny because when Warren Buffett invested in the middle of the crisis and unusually for us, we did go inside the company at that point we were the biggest shareholder. We signed an NDA which put us on ice and at that point we were able to. See what was going on and give advice to the board. It was a new board at that point we helped with the board renewal. Berkshire and Buffett acted very quickly. They're really smart people and they saw no evidence of fraud looking at 20 years of audited financials and we told them this was after the fact after they invested, we said you made the right call. That's it's an important point to understand on our approach. We're not activists, we don't go looking for companies that are like, use ATS automation as an example we're not the kind of group that would say we don't understand management strategy. The founders passed away let's go have a proxy fight and let's change the board and let's go on the board and find new management, that's not our approach. But we're very engaged So if you mentioned Badger day lighting, now called Badger infrastructure when they were subject to the short attacks, the short noise, we helped them in a bunch of ways, just in counseling we told them they needed to do a better job of getting their story out. They needed a better CFO partly through communication, which is something they did at a point. They have a very strong CFO now. They started having their first ever Investor Day. They've been doing it once a year now in Toronto. So, they communicated their story better and for the first time they bought back stock, because they had the balance sheet to do it and we worked different directors. I had some long conversations with some directors who thought there was something wrong about buying back shares like as if you a company is allowed to issue shares whenever they want but they shouldn't buy them back. We got the board on side with that, and they were quite active, and you put all those pieces together the noise went away, and the stock went a lot higher. But the stock for, and there's never a good reason why things run at a steam or ran at steam a couple of years ago, and it went from being one of our largest holdings to a small holding and now it's back to being an above average waiting in the fund. So again, it's an example of a company that I'm very comfortable that a buy and hold is going to be terrific over the long term. But I know we're going to beat the pants off that because of this, the market gets excited and then it gets depressed and then it gets excited again and again. It's what I mentioned at the outset it's one of the things that drew me into the public market. I thought this is terrific, it's like this added feature that you don't have if you were a private equity investor.

 

Andrew L

I mean, that's one of the beauties of investing in private equities you get that stability, and you don't get the mark to market on a daily basis and your emotion taking over which you're able to exploit and take advantage of that situation.

Andrew B

Just to finish on that point. it's what you said Andrew, as a team we've done the work and we're comfortable we're dealing with honest companies that have a level playing field. A part of their job is to talk to their owners that we never worry that the market knows something we don't know if your companies are telling you, boy, you guys are doing as much work or frankly more work than our other shareholders and that they're not whispering to some people and not others because there are companies that will do that. It never is a concern that with the share price down, maybe there's something that we don't know. Years ago, one of my partners, Jeff Cold and one of our early annual letters took my first draft and wrote in it's really hard to buy more of something when everyone else is selling and you're the only buyer and I went into his office, I said, Jeff, do you find it hard to buy more of? I think it was open text. We were talking and he paused, and he said no, I don't. I said so, let's not. write something that people want to hear when we don't believe it's true. It's like the  trader at National Bank years ago when they had a lambed or, the CEO of TFI, formerly TransForce through Toronto and he said, boy, there's a lot of interest now. Everybody wants a meeting and he said, I remember in 09 when there was blood in the streets and you guys were the only buyer and he made it sound like we were courageous, epic striding at the Stock Exchange, we were talking to the company. We were talking and we were comfortable that they were going to manage through the credit crisis and the Great Recession. He did an amazing job managing through that. We understood there were no liquidity issues in the company and the market was taking a fearful approach and not putting the share price down to really low levels. So it wasn't courageous for us. It was just an incredible opportunity. So that's exactly right, it's knowledge and it's comfort that you own good honest companies. I mean, it's really the secret sauce.

Andrew L

So talking about  good solid companies and understanding companies. A question came in about specifically, on spatial computerized glasses companies, but I think we take that broader. You've never owned Canadian banks, you don't own oil and gas. In technology, you an ATS automation to be viewed as a technology company and open text is obviously, a technology company. So you do have growth type of returns when we look at your long term track record. But you view yourself in more of a value type place. So when it comes to investing in technology and the some of these future disruptive type of technologies. I guess that doesn't really fit your bucket. So maybe just could you touch a little bit on that?

 

 

Andrew B

I would strongly disagree with that assumption. If you look at my resume before I set up the private equity subsidiary for Scotiabank, I had been in mergers and acquisitions back in the 80s, but I actually set up the high technology practice for McLeod Young Weir or Scotia Capital. So I covered tech and I've got a science undergrad. There was a biotech bubble in the early 90s. That was insane. It was more of a bubble, just smaller in the sense of market, the size and number of companies. It was a bigger valuation bubble than the.com craze that peaked in 2000. So we are very comfortable with technology and very focused on technology change and what disruption will happen to our companies or companies that we’re following. I'm not interested in companies that are about to boil the ocean because 99 times out of 100, there's a fatal flaw. Years ago we did very well owning a manufacturer of DVD's, knowing that DVD's are going away. You just didn't know when and how quickly and that was actually at the beginning of DVD. So VHS tapes and in 2000 everyone assumed that everything was going over the Internet. I thought yes, but not for a long time and that's exactly how it played out. The point of the story is I we weren't big enough and we weren't looking at U.S. companies. I was really interested in Netflix recall back then they started as a mail order DVD company and are one of those rare companies that have transitioned the way they have transitioned. But if you come back to the companies that we look at and own and follow, I want to own the company that is not going to get flattened or blindsided by something coming out of Silicon Valley. If you think of the portfolio, we own SS and C technologies, that that's a Connecticut based company. It's one of our top holdings. There's CEO, founder, was a force of nature. They started as a hedge fund administrator 30 years ago. They're now a basically a vertical software company and financial services. They've got artificial intelligence, mind-blowing kind of trading systems. They're not going to get caught off guard by something coming out of the valley. We own a company called Euro net headquartered in Kansas that I think is the best fintech company I've ever come across, but no one thinks of it as a fintech company. It started as a ATM cash dispensing company, and that's still a third of their business. That's been of course really impacted by COVID and the pandemic, those machines when you get off the airplane and in Paris you don't really want to go to them to get your cash, but you need some euros. That's their machine and they're also now managing networks for Spanish banks and French banks as those branch networks get compressed. But that's only one of their businesses. They're a global payment company. They're basically the backbone that services many of these fintech’s that are focused on getting the customer. Across the board, we don't own any car companies like OEMs, but we do own a company called Borg Warner, which is a global supplier to every major car company whether it's European, North American, Chinese. And Japanese. They started as an internal combustion engine company, superchargers and turbochargers, their biggest customer probably still is Volkswagen. Yet today they have a program called charging forward. When we met them years ago they were agnostic. They said, we don't know what's going to win, Ice hybrids, pure electric? So they were agnostic. They'd grown through acquisitions to be agnostic. Two years ago, they decided because they can see 10 years into the future with all the car companies and their programs they said electrification is happening way faster than anyone thinks because we can see it so they are in the process of selling their ice divisions and probably more to private equity people who would focus on cash flowing out those businesses and are going all in on electrification. So that's a company that is not getting caught off guard by technology change. That's why I started this by saying I really don't agree with the statement of technology. I want to own the company in an industry that is embracing technology. But I don't want to own the company that's swinging for the fence. That sounds great on paper and then 99 times out of 100 there's a fatal flaw that they didn't know about or they make stupid choices. 

Andrew L

That makes perfect sense. So you had you had mentioned there the dot com days and everything else and you have a slide pull up, but clearly we're in a different market dynamic and I know as I think everybody's got a great sense so far that you really do focus on the fundamentals of the business. Yes, looking out 5, 10, 15-20 years so that you are not caught off guard. But the economic cycle is the economic cycle and you can't really control that. So if you're looking now though, and say, alright, we're, in a higher inflationary period potentially slower growth, how does that or does that impact what you're what you're doing? I'm just going to pull up here your sort of 6 distinct markets that you've been investing with Turtle Creek since the late 90s. Maybe just sort of go through a bit where you think or how you think this might or might not impact you going forward.

Andrew B

Yeah, no, it's a good question. I get it a lot and I it's I kind of joke, if you look at this slide, it used to be 5. distinct markets and when it was five I would make the statements that we've been around long enough I think we've pretty much seen everything. Then I now say I didn't think about a pandemic. So we've added that as a as the 6th distinct market and maybe as you say, we might be entering another distinct market. I mean, I did have an email or a text from one of my longest investors who on the one hand is happy, but he's never really happy if you know what I mean. So he said yeah but you've never lived through a war in Europe and or he didn't even say where he said you've never lived through a war I said that's kind of ignoring what's been happening in the Middle East and places like Syria or Afghanistan. But let's accept that Ukraine different because it's in Europe. There are always new things that occur, and while Turtle Creek didn't exist back when there was stagflation. To your question, are we going to do anything different? No. we're really not going to do anything different if I look at that chart, I think if you had to guess we might be in the second market phase. In other words, the valuations have been pretty frothy. Everyone recognizes that. There have been a lot of articles written about that but the thing to remember about the dot com, there was a lot of enthusiasm about the Internet, so there has to be something that's really true and valid. But then things can get carried away on valuation and I feel like that's happened in a number of pockets of the market now. What happened post the dotcom, there wasn't a crash, it wasn't like the credit crisis or the COVID crash in March of 2020. It was a call it 2 1/2 year period of just the air coming out of the market. So it was kind of this jagged line. But when you looked at it over 2 1/2 years, I think the S&P 500 was down close to 50% at least in Canadian dollars. So there was a brutal bear market for people and Andrew, you mentioned you know, we weren't out talking to a lot of let's say the investment advisor community until a number of years in to Turtle Creek and as we did that, I still remember so many advisors saying I've made no money for my clients in the US for the last decade. I mean people forget that because, of course, the last 10 years have been terrific and it was because of that high starting condition that high valuations in 2000 we could be experiencing the same thing now going forward again, not a crash, but just air coming out inn valuations. That's why we work so hard to fight and take out any frothiness in our portfolio. When Badger runs to $50 or frankly, premium brands, which is a company that is one of our top holdings when it ran over a few years, a long time ago now, but over a 2-3 year period, it went from 25 to over 100. We owned a lot fewer shares north of a 100  dollars than we owned a 25 today. The stocks still at 100 it's moved around. We own a lot more shares now than we did call it four years ago when it first went through 100. I mean, it's four years later the companies worth a lot more. Being so focused on valuation means that there is no frothy valuation in the portfolio. If you look at what happened in that bear market, it's hard to see the green is us and the black is the market, but you can see that we really managed to be up a little bit in that 2 1/2 year period. I've view that as in a way a better accomplishment than how we did in the dotcom.  I had a comment years ago from an advisor who was a great, he said, the thing is I had managers who did really well in the dotcom like you did they just gave it all back after the dotcom bubble burst and you didn't and I think it's because of our activity. We're not a buying hold. If something is going up, we're trimming it. Yeah, because we are trying to own the right amount today for each of our holdings. we're not going to sit and say, look  we were right, the stocks going up, it's like I mentioned CarMax. If the stock goes down from here we're going to buy more, but if it's up a decent amount from where it is today, we're going to own less and we're applying that across the board. I think that provides I don't know what the right term is, a buffer, against a tough market. I don't worry as much about inflation, I think owning well managed companies that are able to take price and have a culture of taking price. Recognizing one of our large holdings is a US. company called Middleby Corp they make cookware, whether it's machinery for restaurants, food processing also residential like they have the Viking brand Aga, a big high end French brand. So high end kitchen appliances and they don't wait for a supplier to let them know, hey, stainless steel, your prices up. They have a team of people monitoring all of their inputs. And if nickel is up, which that means stainless steel is going to be going, they're putting price increases through before their suppliers let them know there's a price increase coming. So I think partly it's having companies that have a culture and are not afraid to take price even on supply chain issues. We've seen so far very little impact on our companies from supply chain issues and when we do see it in a in one or two cases it's just a reminder how we're not seeing in most of our companies and in one instance where they're having issues, it's caused me to kind of derate management, maybe it's out of their control, but I'm not convinced that they couldn't have done a better job of managing their supply chain. I think if you own well managed companies that aren't over levered, so rising interest rates really aren't going to have a much of an impact on them, they'll figure out how to manage through whatever comes at them, whether it's a pandemic whether it's a war in the Ukraine, whether it's higher inflation, higher interest rates, we think owning productive assets and for us it's common equity of public companies is a really good place to be in virtually any environment. The final point I'd make about the portfolio and let's assume that we're going through a bear market that we did in the early 2000s. We own, I looked at it the other day, 75% of our portfolio is actively repurchasing shares today and they were doing that before the based on the last quarter results before the market sold off. The way it has and some of our company share prices have sold off, so in a perverse way, lower share price is a better outcome than a higher share price. If you give yourself enough time, I mean that come back to home capital they still have a lot of surplus capital and they're buying back stock every day and once they finish that normal course repurchasing this year, they're going to have to do what's called another substantial issue where bid well. They did a substantial issue where bid late last year of a range of 43 to $48.00. dollars, I think. We had already sold the stock we wanted to up in. those levels. So, we didn't participate in that, they got it done at the bottom end. So they bought back all the shares they were trying to at the bottom end. That's great it's better that they  paid 43 than had to pay 48, the stock's $35 today. I don't view that as a bad thing I view that as terrific. They're getting to buy back more shares in the 30s, they're going to buy back shares every day. Isn't it better that they do it at 35 versus 40? It will in three years. The earnings per share are or the book value per share is going to be higher than it otherwise would be.

Andrew L

Thank you so much and like said, hopefully we'll get to see you down here soon and for everybody that joined, thank you. I will be getting a copy of this up on our website in short order. So as I said for any of your friends and family that couldn't make it feel free to send them the link and we'd be happy to chat with all of you about what you heard today. So thank you all. Appreciate it. Have a great afternoon. Thank you. Bye.

 

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