Market volatility and uncertainty are creating decades-low value opportunities for Marian Hoffmann, the lead portfolio manager for the Gold-rated Counsel Canadian Value Sr. I.
“We’ve certainly been excited,” says Hoffmann, “to be able to add to some of our higher quality holdings and to initiate positions in companies that were previously out of reach due to higher valuations.” Hoffmann is a senior vice-president, research director, and lead portfolio manager for the large-cap strategy at Sionna Investment Managers Inc. in Toronto, a sub-advisor to Counsel Portfolio Services Inc.
As value investors, the firm seeks to invest in businesses that meet their criteria when the stock prices are trading at 25% to 30% discounts to the estimated intrinsic value.
The Canadian banks represent one area where the managers have been adding to their positions. “When we look at the metrics,” says Hoffmann, “the Canadian banks are trading at the low end of their valuations range going back 30-plus years.” In the past few months, the portfolio has moved from being underweight the Canadian banks to moving “to an advantage” in an overweight position.
The overall mandate of a fairly concentrated 30 to 40 names in Canadian equities is weighted approximately 35% in the financial sector. The fund is historically weighted in the 5% plus or minus range of the TSX Composite Index but that is a guideline, not a hard rule.
A Select Few Financiers Make the Cut
Only a select three of the banks are held in the fund and are among the top 10 holdings of high-conviction names, the Royal Bank of Canada (RY), Toronto-Dominion Bank (TD) and Bank of Nova Scotia (BNS). According to Hoffmann, the investment team thinks they represent the most well-capitalized banks, the most resilient, and the ones they feel most comfortable with concerning their risk culture.
Yet the team is very cognizant of the challenges that are facing the banks. The industry has a pretty severe set of operating issues that they are working their way through, Hoffman says. And an economic slowdown will lead to lower earnings and lower returns. In addition, loan losses have been near historical levels and Hoffman expects to continue to see those loan losses rise.
“But we think what’s often not focused on,” says Hoffmann, “is that the banks are entering this downturn in a position of strength in terms of their capital and profitability levels. We think they have room to cover costs to help offset some of the pressures that they face.”
A name that was added during the volatility is Canadian Pacific Railway Ltd. (CP). “In March,” says Hoffmann, “when the market really fell off and [the stock] reached our price, we were thrilled to be able to add this kind of quality business at a discount to our intrinsic price.” Despite declines in rail volumes and less trade, the company is favoured for its high-quality, infrastructure-like assets, the very stable industry structure, and its pricing power. In addition, the company has a history of good performance-type earnings and returns, a solid balance sheet, and a strong management team. “Even if they were to have pressures over the next 12 to 18 months, we think long-term term there will be no impairment to the business.”
Very Rare Discounts in Real Estate
Another name that was added recently is Allied Properties Real Estate Investment (AP.UN), a real estate investment company that offers unique “brick and beam” open-concept office space. The Covid-19 quarantine certainly impacted office real estate in the short-term, but in the long-term Hoffman thinks that the demand remains strong for these kinds of very unique assets. “They have close proximity to the downtown core,” says Hoffman, “and we think they have ways to accommodate and adjust with more social-distancing practices. The negative sentiment towards office space put pressure on the shares and they started to trade at a discount to its net asset value, which is very rare in its history.”
The predominantly bottom-up research process includes fundamental tools to assess valuations over at least 10 years of history and includes how a business is positioned in the industry. The broadly-diversified team of nine also spend a lot of time on what they call “premortem” research to force themselves to think of all the ways the business could go wrong. “So we’re really trying to understand,” says Hoffmann, “all the potential risks because so much of our philosophy is preserving capital and minimizing risk.”
Along with attractive, discounted valuations, the holdings in the fund reflect businesses with resilient business models, management teams that are conservative and prudent capital allocators, and strong balance sheets to withstand challenging periods. The overall portfolio turnover historically ranges between 20% to 25% and characteristically looks at investments from a two to five-year perspective.
For investors considering the fund, value investing can take time and be cyclical. “I certainly think having patience is an important virtue,” says Hoffmann, “because it can take time for your thesis to transpire. You have to be willing to look long-term in a market that is very short-term focused. You have to be willing and able and comfortable looking different for a considerable period of time.”
