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Analysis: The team of Stuart Kedwell and Doug Raymond utilize a multi stage portfolio construction process that incorporates both quantitative screening and fundamental, bottom up analysis.
The first stage in their process is a series of quantitative screens which basically weed out the undesirable companies in their selection universe. Then the team conducts a fundamental analysis on each of the companies and conducts a series of scenario analysis, looking at a wide range of possible outcomes for each stock. Stocks are also evaluated using a 2 Factor Matrix Model which evaluates earnings projections relative to valuation. They are looking for companies that are attractively valued, are fundamentally sound, and offer above average returns on capital.
The fund can invest up to 49% in non Canadian stocks. They look at both Canadian and U.S. stocks, with the country allocation being a by-product of the stock selection process. The fund’s cash position will be determined by two main factors; the availability of quality opportunities and the team’s macro call on the markets. As a policy, half of the fund’s foreign currency exposure is hedged.
The portfolio tends to be fairly well diversified holding more than 100 names, with the top 10 making up 32% of the fund. The managers do tend to be active, with high levels of portfolio turnover.
The fund has performed very well of late, outpacing the S&P/TSX Composite and its peer group, posting solid first quartile performance. Volatility of the fund has also trended lower than both the broader market and the Canadian equity category average.
In recent months, the managers have been increasing their exposure to the U.S. market. As of December 31, the fund was 51% in Canadian equities, 38% in U.S. equities and 9% in cash. From a sector perspective, the fund is 34% invested in Financials, 16% in Energy with 10% each in consumer discretionary and materials.
We like the fund for a number of reasons including the management team and process, the volatility profile of the fund, and the fact that the fund is still small enough at $424 million to allow the managers to implement their process.