What’s the strategy?
The Canadian All Cap Growth Equity (GWLIM) portfolio invests primarily in medium- to large-cap Canadian stocks with above-average growth potential to achieve long-term capital appreciation.
It follows a growth-oriented management style that blends top-down macro-analysis with bottom-up fundamental stock research.
Within well-defined risk parameters, the portfolio manager seeks out companies across the market cap spectrum, and will take meaningful positions in select companies when opportunities present. To a moderate degree, the portfolio manager can invest in U.S. stocks.
Christine: Hello, I’m Christine Wellenreiter, Vice-President of Marketing and Communications at GLC Asset Management Group. On today’s podcast, we’re going to bring you a recent interview that was recorded in January with two of GLC’s portfolio managers, Patricia Nesbitt and Dylan Fricker. Hear Patricia and Dylan speaking with Great-West Life’s Ashike Akbar on a featured series of podcasts about the London Life Pathways funds and specifically about the GWLIM Canadian All Cap Pure Growth equity fund Patricia and Dylan manage. We hope you enjoy it!
Ashike: Hi Everyone, this is Ashike Akbar, welcoming you to the fund manager podcasts brought to you by Wealth Sales Strategy and the marketing team. This is one in a series of 12 fund manager podcasts on the London Life Pathways Funds. In today’s podcast we have with us Patricia Nesbitt and Dylan Fricker from GLC Asset Management to talk about the Pathways Canadian Equity fund. Patricia, Dylan, thank you so much for being here with us today. Can you tell us a bit about yourselves, your past experiences and the great team that you work with?
Patricia: Sure. I’ve been with Great-West Life for 32 years. I graduated from the business school at the University of Manitoba and started with GWL in their Investment Analyst training program. I earned my CFA designation, and started in the equity management operations after completing that program. And there began my love of equities! I’ve been a specialist in Canadian equities for my entire career, taking on more responsibility for the larger team and the Strategic Asset Mix Committee over the past 10 years. I’m really proud of the team we’ve built – we have superb portfolio managers and analysts who work incredibly well together. One of the key members of that team is Dylan Fricker who works with me on the Pathways portfolio.
Dylan: I started in the investment industry in November of 1999, near the peak of one of the biggest stock market bubbles in history. Being a part of the subsequent period of unwind, from 2000 to 2003, and watching a lot of people learn a lot of expensive lessons had a huge impact on my approach to the industry. It was around this time that I was introduced to the Benjamin Graham and David Dodd school of thought, which focuses heavily on company-specific research. While those gentlemen are often associated with “Value” investing, their lessons are still relevant to the “Growth” investing that we do for the Canadian All-Cap Growth fund. This school of thought has factored heavily into my company research work, consciously or otherwise, ever since I joined the Great-West Life in 2007.
Ashike: Tell us what a typical day looks like in the office? What keeps you engaged and excited to come back to work everyday?
Patricia: Every day is different. Even though I’ve been doing this a long time, it’s always interesting and challenging. Every morning when we come into the office, something has happened somewhere in the world that’s relevant to the markets or to a company we own. This is an incredibly challenging and competitive business, and we thrive on that challenge.
Ashike: And Dylan, what about you?
Dylan: I refer to myself as a “Bottom line dweller.” I’m most engaged at work when I’m buried in spreadsheets or talking to analysts, trying to figure out what makes a company “tick.” Why is the market so negative about it? Or why is the market so positive about it? And, above all else, does it make sense? On any given day, there are usually a handful of negatives and a handful of positives, and I spend a lot of time trying to figure out which side of the argument I fall into.
Ashike: Patricia, can you tell us a bit about your process and investment philosophy and what from that is key in generating returns?
Patricia: Our investment process is really an integrated one where we blend our top-down work on the market and economy with our rigorous stock selection process to construct the portfolio. We undertake extensive top-down analysis of key macro variables to determine our asset allocation and sector emphasis. Along with that, our team is constantly at work, screening and researching our universe of stocks to find compelling opportunities that meet our buy criteria.
Ashike: What are your buy criteria? In other words, what are you looking for in a stock?
Patricia: We want companies that demonstrate:
· Consistent earnings growth
· A competitive advantage – or a “moat” around their business
· High and consistent returns on invested capital
· A strong balance sheet
· An exceptional management team, and
· Reasonable valuation
Ideally, and particularly at this point in the business cycle, we want to invest in secular growth opportunities – businesses that are more resilient to rising interest rates or a slowing economic cycle. We want to see strong recurring revenue and earnings streams, which are markers of more predictable businesses. I also want to add that GLC is a signatory to the United Nations Principles of Responsible Investing. So part of our analysis includes looking at environmental, social and governance factors to identify any additional risks. This has always been an important part of our process.
Ashike: Dylan, would you like to add anything to that?
Dylan: At the risk of sounding like a bit of a dinosaur, I’m not at all convinced that there is a replacement for good old fashioned hard work in this business. Our investment team literally studies hundreds of companies over the course of a year. We study industries to identify macro changes, we meet with management teams to understand how they approach the business, and we spend hundreds of hours updating financial models so that we know what companies we would be willing to buy and at what price. We pretty much know which companies will ever have a chance of making it into one of our portfolios long before they get there. We spend a lot of time assessing risk and looking to mitigate it.
Once in the portfolio, the companies get even more intense scrutiny, but we’re happy to own them so long as they stick to their plans. Assuming they do that, the exit decision is generally a function of the share price no longer providing an adequate margin of safety for the risks inherent in the business. They also get replaced if they don’t stick to their plans.
Patricia: When building a portfolio, Dylan and I work together to blend our top-down and bottom-up approach. Having a strong view of where we are in the cycle, coupled with a clear understanding of the risk and reward of each holding in the fund, serves us well at points of inflection in the market. 2018 is a perfect example of how we leverage each other’s strengths and the result was a significant outperformance versus the S&P/TSX for the year.
Ashike: Having finally left 2018 behind, what is your outlook in 2019?
Patricia: Well, the fourth quarter of 2018 was certainly challenging for the global equity markets. We had talked for much of the last six months about the risks of being in the late cycle and what that might mean for equities. As the Federal Reserve moved to raise interest rates and withdraw liquidity from the financial system, this was bound to have an impact on stock valuations. We undertook extensive de-risking activities within the portfolio – exiting positions where valuations looked vulnerable, rotating into less cyclical companies and raising cash.
As we move into 2019, we expect to see further volatility, as investors navigate several headwinds: softer global economic growth, slowing earnings growth, tariffs and trade wars, an environment of uncertain oil prices and Brexit, to name a few. The good news is that equity valuations have undergone a significant correction and in many cases, have fully priced-in a recession. We’re excited to identify great companies at bargain prices.
Dylan: To understand where you’re going, you have to remember where you came from. When I started in the business in 1999, the signs of excess, particularly in the credit markets, were everywhere. Banks were lending huge sums of money to fledgling enterprises to build fiber infrastructure, often completely on speculation. I fondly remember a conversation with one of my early, grizzled mentors warning me in no uncertain terms that it was “going to end in tears.” We know how that turned out.
In the fallout of that crisis, the Federal Reserve held interest rates at unusually low levels well after the crisis had passed. This, combined with deregulation in the housing and banking markets, meant that banks lent huge sums of money to consumers, mainly to fund speculation in housing—and a new, even larger bubble was born. And we know how that turned out.
In the fallout of that crisis, central banks around the world held interest rates at unusually low levels well after the crisis had passed. They also resorted to unconventional monetary policies such as quantitative easing. In short, printing money. So, effectively, for the past 10 years, investors have been enjoying a massive wave of liquidity that has pushed asset prices higher around the world. Now, however, the same central banks are trying to “normalize” their balance sheets…in short, take away the punch bowl. The impact that this will have on general economic conditions is unclear at this point, but, logically, investors need to prepare themselves for a return to a landscape that looks more like the distant past than the recent past. My bet would be that returns will be lower and volatility will be higher, but I could be wrong. But no matter what happens, our process won’t change.
Patricia: Yes, this is when our process really pays dividends. Now is when active management – with a clearly defined process and a skilled team of managers – can add huge value. Our disciplined approach to managing the portfolio ensures we hold best-of-breed companies and allows us to identify quality growth stocks when they’re on sale.
Ashike: I completely agree, when we’re in a bull market, we forget about the value added by active managers. It’s in times of volatility and uncertainty that we can clearly see its benefits. Moving on to our last question, I would like to point out that one of the key differentiators of this Canadian Equity fund is that it holds stocks across the cap-size spectrum, including small- and mid-cap companies. How do you use this to your advantage in managing the fund and do you see it contributing to stronger returns for investors?
Dylan: Given our process, market cap is really just a function of where the company is in its development. While we have to be mindful of liquidity at times, everything else about our process is the same. A great example of this is Boyd Group Income Fund; an operator of collision repair centers across North America.
We initiated our position in Boyd almost a decade ago when the company was well into “Small Cap” territory. The company “checked all the boxes” we look for and we have owned it ever since. The position has now grown to be significantly larger than we ever could have imagined when we purchased it—it’s now well into “Mid Cap” territory. And we’re optimistic that, in time, it will be well into “Large Cap” territory.
If you think about owning a position that long, it really adds some perspective around our process. That’s 40 quarterly reports and conference calls, 12 annual reports, countless meetings with management, and hours upon hours of financial modeling time. It just goes to show that there’s no replacement for hard work!
Patricia: Boyd is a great example of our team’s expertise in finding emerging growth leaders across the capitalization spectrum, and exemplifies a key advantage of our highly skilled team and our integrated process. This allows us to effectively position the fund throughout various market cycles while our research capability allows us to uncover the very best growth opportunities. We have a long-term track record of outperforming in the Canadian market, and we look forward to bringing this skill set to the London Life Pathways Canadian Equity Fund.
Ashike: A hearty thanks to both of you for making the time for this podcast. We’ve heard some great insights form you both about this fund and your team.
Hi folks, hope you enjoyed listening to this podcast on the Pathways Canadian Equity Fund managed by GLC. Please tune in to the other podcasts to hear about all the great funds available through the London Life Pathways shelf and Constellation Managed Portfolios.
Why invest in this portfolio strategy?
Ideal for investors seeking exposure to Canadian equities with strong long-term growth potential.
The portfolio is well diversified across sectors and offers a portfolio of companies with higher growth potential than the broad market. Typical portfolio characteristics include higher return on equity and stronger growth momentum than its benchmark, the S&P/TSX Composite Index.
The portfolio has the flexibility to hold U.S. stocks which provides the opportunity to add diversification and seek out attractive opportunities often not available in the Canadian market.
This is a diversified Canadian equity portfolio that tends to have lower volatility than a Canadian small- or mid-cap portfolio.
Data for institutional investors
Senior Vice-President, Equities
Patricia oversees GWLIM’s equity portfolio management, analyst and research teams. She’s also the lead portfolio manager for the GWLIM Canadian All Cap Growth equity mandate. In addition, she chairs the GLC Asset Mix Committee, which oversees all of GLC’s balanced portfolios.
Patricia joined the GWLIM team in 1986 and has been leading the group since 1991.
Patricia is a CFA charterholder and holds an honours bachelor of commerce degree from the University of Manitoba. She’s also a former president of the Winnipeg Society of Financial Analysts and past chair of the Winnipeg Humane Society.
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Portfolio attributes and rates of return reflect the portfolio strategy used by the London Life segregated fund shelf.
Past performance is no guarantee of future results.
There is no guarantee that investment objectives, or risk or return targets discussed in this material will be achieved. No part of this material may be reproduced or redistributed in any form without express written permission of GLC Asset Management Group Ltd. The data provided is for information purposes only. This material is not intended to be read in isolation and may not provide a full explanation of all the topics that are presented and discussed. Information contained in this material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This material should not be considered a recommendation or offer to purchase or sell any particular investment.