One of the advantages that portfolio managers of funds in the Canadian Focused Equity category enjoy is the considerable latitude to invest outside Canada when they're finding better stock picks elsewhere.
This is certainly true currently for Brandon Snow, chief investment officer at Cambridge Global Asset Management, whose mandates include CI Cambridge Canadian Equity Corporate Class.
Funds in the category can hold up to half of their portfolio outside Canada, and the CI fund's holdings are not far from that limit. The fund is currently weighted 33% in U.S. equities, with 7% in international equities, 4% in income-trust units and a substantial 22% in cash. The remaining 34% is held in Canadian stocks.
In sectors such as technology and health care and in the consumer sectors, "there's just a lot more opportunity when you open up to the U.S.," says Snow. Somewhat surprisingly, given Canada's well established financial sector dominated by a small number of profitable major banks, Snow and his colleagues also favour U.S. names. Included among the top 10 holdings are New York-listed 
Chubb Ltd. (CB) and Morgan Stanley (MS).
In what amounts to a major active-management bet, CI Cambridge Canadian Equity currently holds no Canadian banks. As Snow explains, when the team looks at the domestic banks today, taking into account the steep debt levels of Canadians, elevated housing prices and a slowdown in the West that's affecting the entire country, "we actually think the risk is skewed to the downside."
Snow and his teammates favour attractively valued companies with long-term growth potential. That growth may come from dividends, buybacks, return of capital, investing in the business, or through mergers and acquisitions.
Though some might argue that Canadian bank stocks fit this description and have defensive characteristics, Snow isn't convinced. "There's this dichotomy going on in the market right now," he says, "where low volatility names, such as defensive stocks, are the ones I feel are the most expensive. With asset valuations high, it makes it increasingly difficult to find returns without taking on more risk."
In Snow's opinion, the Canadian sectors that offer the greatest number of potential equity investments tend to be energy and materials. Traditionally, he says, these commodity-based sectors have not been the biggest creators of shareholder value over time. Moreover, when investors get interested in these sectors, they tend to favour the same companies. This often leads to overvaluation and excess risk.
But being selective when investing in resources stocks can pay off, Snow says. "If you're willing to dig into the industrial or commodity space, you can still find a reasonable amount of attractive opportunities."
For example, Snow says Tourmaline Oil Corp. (TOU), among the top five holdings, is a low-cost producer "with a tremendous asset base and a management team that's very diligent in capital allocation." As well, the cash flow is there and when times are tough, they can find organic opportunities to allocate for growth. "Based on our expectations for natural gas into next year," Snow adds, "we think the price will continue to improve and we still find it very attractive from a risk/reward perspective."
Outside the resource sectors, Brookfield Infrastructure Partners LP (BIP.UN) is also among the top five holdings. The property developer and manager wins praise from Snow for its underlying cash flows and organic growth. "They pay out a reasonable dividend," he says, "but more important, they retain a lot of capital to reinvest in their business over time."
Among U.S.-based companies, Walgreens Boots Alliance Inc. (WBA) is the largest holding of Cambridge Global Asset Management as a whole, and in CI Cambridge Canadian Equity. "We like the company," says Snow, "for the long-term growth potential from improving the stores and merchandising and driving more consumers through."
As well, Walgreens Boots has a strong balance sheet that enables it to reinvest in the business through share buybacks, and the valuation is cheap relative to other alternatives in the market. The business is "trading mid-teens," says Snow, "for what we think can be double-digit compound returns going forward."
California-based Activision Blizzard Inc. (ATVI), a developer and publisher of videos and games for personal computers and mobile devices, illustrates Snow's strategy in the U.S. technology space. "They probably have the best platform in the market," says Snow, citing opportunities for monetization in the future.
For example, he thinks Activision is the most forward thinking as far as things like e-sports and engagement with individuals. There is some volatility around title releases, people can get a little too excited or too bearish at periods of time, "and that gives us an opportunity to build or reduce our position," says Snow. "We do think it's a long-term compounding business that continues to take share."
In positioning the fund, "what we want to be doing," says Snow, "is uncovering opportunities that hopefully can double over the next three to five years. In a short period of time, if they decline 20% or 25% because we didn't quite catch the bottom, that's okay as long as that value creation and compounding engine continues over time."
