{"id":7550,"date":"2024-07-02T19:24:23","date_gmt":"2024-07-02T19:24:23","guid":{"rendered":"https:\/\/www.guardiancapital.com/investmentsolutions\/?post_type=insight&p=7550"},"modified":"2024-09-25T16:25:25","modified_gmt":"2024-09-25T16:25:25","slug":"conviction-over-convention-in-canadian-equities","status":"publish","type":"insight","link":"https:\/\/www.guardiancapital.com/investmentsolutions\/insights\/conviction-over-convention-in-canadian-equities\/","title":{"rendered":"Conviction over convention in Canadian Equities"},"content":{"rendered":"

Canadian investors like the familiarity of core Canadian equities. But are they missing opportunities to unlock the value in allocations to quality companies with better risk\/reward profiles; that is, stocks that may be underrepresented in the traditional index or less correlated to the broader market? Guardian Canadian Focused Equity Fund<\/a> is a concentrated portfolio quite different from a traditional basket of Canadian stocks. Thinking outside the box means being index-agnostic in favour of a \u201cbest ideas\u201d portfolio.<\/p>\n

Canadian equities have served as a core holding across many domestic investment portfolios for decades. Familiarity with the household names of Canadian stocks across the Financials, Energy and Utilities sectors have been staples in a passively managed portfolios but is this the best way to be invested in Canadian equities? The traditional benchmark for Canadian equities, the S&P\/TSX Composite Index, has a significant sector bias that is difficult to ignore, especially when sector concentrations can lift or depress the market all by themselves.<\/p>\n

The Guardian Canadian Focused Equity Fund<\/a> is here to provide a fresh perspective for an asset class ripe with potential.<\/p>\n

Canadian equity markets can be seen as anything but stagnant in recent times, contending with a variety of fiscal and monetary shocks, including:<\/p>\n

\u2022 persistently elevated short-term interest rates
\n\u2022 rising borrowing costs
\n\u2022 rising refinancing costs with the knock-on effect on consumer discretionary spending
\n\u2022 rising cost of capital for Canadian companies, elevating risks to continued sustainable growth.<\/p>\n

Elevated interest rate regimes can create environments of greater uncertainty, especially in key sectors of the Canadian economy. These risks also happen to impact a large portion of passive investments in Canadian equities, such as high-beta and index-tracking investments with more concentrated allocations to Financials, Utilities, and Telecommunication Services, the most interest-rate sensitive sectors.<\/p>\n

What do all these mean for the Canadian equity market and how can portfolios be positioned to navigate these risks?<\/p>\n

Challenging the status quo<\/h2>\n

Guardian Canadian Focused Equity Fund<\/a>\u2019s portfolio managers, Ted Macklin and Sam Baldwin, take a different approach to investing in Canadian equities, favouring a more diversified perspective to uncovering opportunities and hedging against some of the inherent concentration risks in the S&P\/TSX Composite Index.<\/p>\n

We take a truly active approach that looks beyond Canada\u2019s lopsided index to seek out the best risk-reward opportunities. While the fund\u2019s top 10 holdings often look quite different than what investors are used to seeing in the index, this is purely a reflection of where our team has bottom-up conviction.\u201d <\/em>\u2013 Sam Baldwin<\/em><\/h6>\n

S&P\/TSX Composite Index Performance<\/strong><\/h3>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Sectors<\/strong><\/th>\nWeight<\/strong><\/th>\nYTD<\/b><\/span><\/th>\n1 YR<\/strong><\/th>\n<\/tr>\n<\/thead>\n
Financials<\/td>\n30.74%<\/td>\n6.28%<\/td>\n21.62%<\/td>\n<\/tr>\n
Energy<\/td>\n18.42%<\/td>\n18.59%<\/td>\n34.10%<\/td>\n<\/tr>\n
Industrials<\/td>\n13.82%<\/td>\n6.23%<\/td>\n14.51%<\/td>\n<\/tr>\n
Materials<\/td>\n12.26%<\/td>\n19.12%<\/td>\n17.68%<\/td>\n<\/tr>\n
Information Technology<\/td>\n7.78%<\/td>\n-7.34%<\/td>\n10.90%<\/td>\n<\/tr>\n
Consumer Staples<\/td>\n4.12%<\/td>\n7.72%<\/td>\n16.73%<\/td>\n<\/tr>\n
Utilities<\/td>\n3.82%<\/td>\n1.60%<\/td>\n-5.41%<\/td>\n<\/tr>\n
Consumer Discretionary<\/td>\n3.48%<\/td>\n3.89%<\/td>\n12.97%<\/td>\n<\/tr>\n
Communication Services<\/td>\n3.17%<\/td>\n-7.38%<\/td>\n-11.89%<\/td>\n<\/tr>\n
Real Estate<\/td>\n2.04%<\/td>\n-4.74%<\/td>\n-0.26%<\/td>\n<\/tr>\n
Health Care<\/td>\n0.28%<\/td>\n-5.16%<\/td>\n8.58%<\/td>\n<\/tr>\n
S&P\/TSX<\/strong><\/td>\n100.00%<\/strong><\/td>\n7.58%<\/strong><\/td>\n17.55%<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Source: Bloomberg (as at May 31, 2024)<\/em><\/p>\n

The Fund\u2019s portfolio managers believe a better approach is to have high conviction and be index-agnostic by focusing on growing, quality companies that they believe can potentially provide strong returns over the long term. The Fund\u2019s portfolio managers have conviction that their approach makes for a more resilient strategy, focusing on 15-20 of their \u201cbest ideas\u201d in Canadian equities. Maintaining a high active share and a lowered correlation to the S&P\/TSX Composite Index (the Fund\u2019s benchmark), the Fund offers access to a portfolio of \u201call-weather\u201d companies that the portfolio managers believe are strong, fundamentally, and are undervalued.<\/p>\n

Correlations converging<\/h2>\n

When thinking about portfolio defensiveness, a typical association is the principle of diversifying across asset classes, such as fixed income and equities. While historically true, this pattern has been challenged in recent times as the correlation between the two (fixed income and equities) has shown signs of converging and offers altered risk-return profiles. An alternative to this is buying into \u201cbond proxies\u201d, seen as equities with lower volatility and stable dividend yields, such as (Banks, Utilities, Real Estate, Communication Services, and Oil & Gas Storage) to serve as ballast in a portfolio seeking shelter from outsized volatility. The S&P\/TSX Composite Index has a forward-earnings yield favourable to corporate bond yield and cash yields on a relative basis, indicating that dividend-paying equities can remain resilient, but they are not bulletproof. These defensive sectors tend to be asset-heavy, highly indebted, and dilutive through share issuance.<\/p>\n

\"Graph<\/p>\n

Source: BMO Capital Markets Investment Strategy Group, FactSet, Compustat, IBES. As at October 11, 2023<\/em><\/p>\n

\"Graph<\/p>\n

Source: BMO Capital Markets Investment Strategy Group, FactSet, Compustat, IBES. As at October 11, 2023<\/em><\/p>\n

The portfolio managers believe that a better way to tilt a portfolio to a more defensive positioning is by investing in \u201casset-light(er)\u201d companies with strong balance sheets. Fundamentally, emphasizing asset-light companies with financial flexibility (i.e., TMX Group Ltd (TSE: X)\u2019s most recent, and one of its largest, M&A transactions was financed all with cash) and accretive business practices (M&A and share buybacks) adding to shareholder value. These equities tend to have a strong margin of safety and free cash flow (FCF) and can serve as a hedge against the impact falling bond yields may have on interest-rate-sensitive sectors like Financials, which tend to make up a large portion of the benchmark index. It has become far more costly to take on debt and, as a result, grow in a persistently high-rate environment. The portfolio management team believes defensive alternatives, rather than traditional defensives can add more value to a Canadian equity portfolio.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Traditional Defensives<\/strong><\/th>\nDefensive Alternatives<\/strong><\/th>\n<\/tr>\n<\/thead>\n
Pipelines<\/td>\nTMX Group<\/td>\n<\/tr>\n
Utilities<\/td>\nFairfax Financial<\/td>\n<\/tr>\n
Telcos<\/td>\nLoblaw<\/td>\n<\/tr>\n
REITs<\/td>\nElement Fleet<\/td>\n<\/tr>\n
Renewables<\/td>\nCCL Industries<\/td>\n<\/tr>\n
Characteristics<\/strong><\/td>\n<\/tr>\n
Asset-heavy<\/td>\nAsset-light(er)<\/td>\n<\/tr>\n
Highly-indebted<\/td>\nFinancial flexibility<\/td>\n<\/tr>\n
Share issuance<\/td>\nShare buybacks<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

For Illustrative Purposes Only<\/em><\/p>\n

Our approach<\/h2>\n

The Guardian Canadian Focused Equity Fund<\/a> invests from a benchmark-agnostic perspective, aiming for a better defensive allocation from the portfolio manager\u2019s \u201cbest ideas\u201d in the Canadian equity market without sector bias.<\/p>\n

The portfolio managers\u2019 universe of investible securities goes through a vetting process of more than 250 Canadian stocks to arrive at between 15-20 high-conviction holdings.<\/p>\n

\"Canadian<\/p>\n

For Illustrative Purposes Only<\/em><\/p>\n

The quality analysis consists of an assessment of a company\u2019s growth potential, profitability, risk, and stewardship. Equity selection focuses on finding high-quality, growing companies with a meaningful valuation asymmetry (i.e., where the team sees greater upside vs. downside risk).<\/p>\n

The team refers to these opportunities as \u201ccoiled springs\u201d, where the current valuation implies a less robust outlook than that of the investment team.<\/p>\n

\"Art<\/p>\n

For Illustrative Purposes Only<\/em><\/p>\n

\u201cWalking the walk\u201d \u2014 Fund holding examples<\/h2>\n

MDA Space Ltd. (TSE: MDA):<\/strong><\/p>\n

Falling launch costs have led to an inflection point in space exploration and space-based communications. As more satellite constellations are being announced and awarded, MDA has a technological advantage and is expected to be a prime beneficiary. As the manufacturer of the iconic Canadarm, MDA is also an incumbent in robotics and its radar satellite technology positions the company well for growth in earth observation. As the company completes a key growth project in the coming year, MDA\u2019s capital-light business will begin to produce strong FCF, making it an excellent re-rating candidate.<\/p>\n

Maple Leaf Foods Inc. (TSE: MFI):<\/strong><\/p>\n

Maple Leaf is another company whose improvements are hiding in plain sight. Major capital projects have been successfully completed and margins are generally expected to rise as agricultural markets normalize after a period of disruption following the pandemic. FCF is expected to dramatically improve as margins expand, paving the way to rapid deleveraging and increased shareholder returns. Cloud software, on the other hand, has yet to harness the power of AI and has a much longer runway to do so. The returns haven\u2019t yet been fully priced in, which is why we see great potential in this segment.<\/p>\n

Summary<\/h2>\n

The Canadian equity market has long been a poster child of high concentration, and investors are faced with difficulty when it comes to finding a truly differentiated and diversified portfolio within which to invest. There will likely always be the traditional passive security selection process tied to the index, however, the Fund\u2019s investment team believes active management, focusing on a high-conviction, benchmark-agnostic portfolio of defensive companies is the best way to invest in Canadian equities.<\/p>\n\n\n\n\n\n\n\n
Ticker\/Fund Code<\/strong><\/th>\nSeries<\/strong><\/th>\nDistribution<\/strong><\/th>\nMER1<\/sup><\/strong><\/th>\nManagement Fee2<\/sup><\/strong><\/th>\n<\/tr>\n<\/thead>\n
GCFE<\/a><\/td>\nETF Series<\/td>\nAnnual<\/td>\n0.76%<\/td>\n0.50%<\/td>\n<\/tr>\n
GCG692<\/a><\/td>\nSeries F<\/td>\nAnnual<\/td>\n0.74%<\/td>\n0.50%<\/td>\n<\/tr>\n
GCG592<\/a><\/td>\nSeries A<\/td>\nAnnual<\/td>\n1.85%<\/td>\n1.50%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

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Key reasons to consider Guardian Canadian Focused Equity Fund<\/a>:<\/p>\n

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  1. \n
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      1. High-conviction holdings<\/li>\n
      2. Focus on high-quality growth companies<\/li>\n
      3. Benchmark-agnostic<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n

        To learn more about Guardian Capital LP\u2019s Guardian Canadian Focused Equity Fund<\/a>, please visit guardiancapital.com\/investmentsolutions<\/a><\/p>\n

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        1<\/sup> The Management Expense Ratio (\u201cMER\u201d) represents the trailing 12-month management expense ratio, which reflects the cost of running the Fund, inclusive of applicable taxes including HST, GST and QST (excluding certain portfolio transaction costs) as a percentage of daily average net asset value the period, including the Fund\u2019s proportionate share of any underlying fund(s) expenses, if applicable. The MER reported herein is from the Fund\u2019s most recent Management Report of Fund Performance (\u201cMRFP\u201d), as updated semi-annually, and which can be found on our website<\/a>.
        \n2<\/sup> The Management Fee is the total fee paid to the Fund\u2019s Manager for managing the investment portfolio and for the day-to-day operations of the Fund.<\/p>\n

        Series A Units may pay sales charges at the time of purchase and have ongoing trailer fees paid to the Dealer, as outlined in the Fund\u2019s prospectus. Series F Units are available to investors who have a fee-based account through their Dealer. Instead of paying sales charges, such investors pay fees directly to their dealer for investment advice and other services. The Fund does not pay any sales charges or services fees in respect of Series F Units and, thus, can charge a lower management fee.<\/p>\n

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        DISCLAIMER<\/strong><\/p>\n

        This communication is for informational purposes only and does not constitute investment, financial, legal, accounting, tax advice or a recommendation to buy, sell or hold a security, and shall under no circumstances be considered an offer or solicitation to deal in any product or service mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP. This information is not intended for distribution into any jurisdiction where such distribution, publication, availability or use is restricted by law or regulation.<\/strong><\/p>\n

        The opinions expressed are as of the date of publication and are subject to change without notice. Assumptions, opinions and estimates are provided for illustrative purposes only and are subject to significant limitations. Reliance upon this information is at the sole discretion of the reader. This commentary includes information concerning financial markets that was developed at a particular point in time. This information is subject to change at any time, without notice, and without update. This commentary may also include forward-looking statements concerning anticipated results, circumstances, and expectations regarding future events. Forward-looking statements require assumptions to be made and are, therefore, subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. Investments in foreign securities involve certain risks that differ from the risks of investing in domestic securities. Adverse political, economic, social or other conditions in a foreign country may make the stocks of that country difficult or impossible to sell. It is more difficult to obtain reliable information about some foreign securities. The costs of investing in some foreign markets may be higher than investing in domestic markets. Investments in foreign securities also are subject to currency fluctuations. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed-income securities. Diversification may not protect against market risk and loss of principal may result. Certain information contained in this document has been obtained from external parties which we believe to be reliable, however, we cannot guarantee its accuracy.<\/p>\n

        Please read the prospectus, Fund Facts or ETF Facts before investing. Important information, including a summary of the risks, about each Fund is contained in its respective offering documents. Commissions, trailing commissions, management fees and expenses all may be associated with investments in mutual funds and ETFs. You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on a stock exchange. If the units are purchased or sold on the stock exchange, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.<\/p>\n

        Guardian Capital LP is the Manager of the Guardian Capital ETFs and mutual funds. Guardian Capital LP is a wholly-owned subsidiary of Guardian Capital Group Limited, a publicly traded firm, the shares of which are listed on the Toronto Stock Exchange. For further information on Guardian Capital LP or its affiliates, please visit www.guardiancapital.com<\/a>. All trademarks, registered and unregistered, are owned by Guardian Capital Group Limited and are used under license.<\/p>\n

        Published: July 2, 2024<\/em><\/p>\n