GLC’s Mid Cap Canadian Equity portfolio – Video and Podcast

The Mid Cap Canadian Equity (GWLIM) portfolio strategy invests primarily in mid-sized Canadian companies, and to a lesser extent, smaller capitalization Canadian companies with the potential for high growth and long-term capital appreciation. Watch Chris Lane, VP and Bryan Shearer, VP and lead portfolio manager of GLC’s Mid Cap Canadian Equity portfolio, speak about the construction and management of the mandate, which has delivered strong performance over the long term. 

There's a podcast too.

Mid-cap companies tend to be less well-known than their dominant large-cap peers, making in-depth and in-house research and analysis a must. That’s where GLC’s disciplined and well-defined investment processes come in – there are no shortcuts to the hard work of research and deep analysis if you want to find the most attractive opportunities to hold. 

Chris and Bryan add more detail to the types of holdings held within the portfolio in GLC’s podcast:  GLC’s Mid Cap Canadian equity portfolio – delivers strong returns, a compelling growth outlook and strong diversification. 

Chris: Thanks for listening into our call, which is being recorded on June 16th 2020, I'm Chris Lane, vice president at GLC and I'm joined by Bryan Shearer vice president and portfolio manager of the Mid Cap Canadian Equity fund with our GWL Investment Management team. It's probably as good a time as ever to get a better understanding of this fund having delivered some pretty solid performance over many years while also generating more interest among advisors. Over the next few minutes or so, we're going to get some great insights into the investment process. Bryan and his team take the outlook for stocks and the industries they invest in and spotlight a few stocks they currently own. Thanks for being here, Bryan.  

Bryan: Thanks, Chris it's good to be here.  

Chris: Bryan, when compared to the performance of the overall market, when looking at the S& P TSX composite index in Canada, your fund has done quite well over the past 15 years and especially over the volatile first quarter of 2020. Can you tell us a little bit more about what's behind that?  

Bryan: Sure, Chris. Our strategy is to buy quality stocks, with quality management teams, and that generate consistent and growing earnings over time.  It sounds very simple on the surface, but companies like this are few and far between. Many companies can execute in the short term, but we search out those that are exceptional and execute on a consistent basis over the medium and long term. We are continuously evaluating and re-evaluating hundreds of different stocks, with very few actually being selected for investment. And when we do make an investment, we make it with the intention of holding the stock for 3, 4, 5 plus years and to capture the strong share price returns that typical follow a company that successfully executes its high growth phase of its life cycle. We have a disciplined investment process, based on strict investment criteria. We like to be long term in the names that we invest in and we typically don’t deviate from them when the market swings up or down. In fact market corrections typically give us opportunities to increase our position size as others flee, and when the market gets overheated, we take the opportunity to reduce, but generally not eliminate positions, if the risk vs reward gets too thin.  Our performance has been strong, and our unit holders have been and will continue to be rewarded by sticking with these quality stocks run by quality management teams.      

Chris: That’s interesting, I like the disciplined management of position size while embracing market corrections to add to certain holdings.  Bryan, there’s historically been a lot more attention on large cap or dividend stocks in Canada. Can you elaborate a little bit as to why Mid Cap is also worth focusing on as well as the basic differences between Mid-cap and Large Cap?  

Bryan: Sure, well, Mid-cap companies are defined as having a market capitalization of no more than $3.5 billion in Canada and $10 billion orunder in the U.S. while Large cap exceeds those thresholds. My experience is that many investors associate mid cap stocks as “boom or bust” stocks. Higher risk stocks that are usually in very cyclical sectors like energy and materials, which share prices that can highly fluctuate both up and down. People view larger cap stocks as less subject to these share price fluctuations.  I believe that’s an incorrect generalization of mid cap stocks, and that if you find the correct mid cap stock to invest in, you can capture greater share price returns without an outsized increase in risk or volatility. The stocks we focus on have the potential to provide growth in all types of market environments. They are smaller companies, earlier in their growth cycle, that are capturing revenues in large total addressable markets, either organically or through M&A activities. While financial and economic markets swing up and down, the companies we focus on have the ability to continue to capture share and in fact grow, even if the overall market is slowing.    

Chris:  So, if you are looking at smaller companies and trying not to add outsized risk to the portfolio, what does this mean from a return perspective?  

Bryan:  So, I do agree that given the size of many of the companies that we invest in and the focused nature of their revenues there should be a risk premium associated with their expected rewards, meaning you should expect higher returns that larger cap stocks. But these are just generalizations. What we have found as we have meticulously developed our investment criteria over many years, is that we are able to offset some of this increased risk by selecting the best of the best management teams, in companies that focus on the large and growing Total Addressable Markets, without having to sacrifice the greater rewards. Management consistency and execution is key to the success of a small company growing through its life cycle into a larger company.  A good management team can create an extraordinary amount of value over time.  Our job is to select them, get comfort that the Total addressable markets they are operating in is large enough to provide many years of successful growth, and monitor them to make sure they execute.  The proper investment in a mid cap stock can provide many, many years of growth and strong share price returns, even in the face of fluctuating market conditions.       

Chris: With that in mind how do you approach this at the sector level within the fund?  

Bryan:  The Mid Cap fund is a diversified mandate invested in at least 8 of the 11 sectors.  Our primary focus is first and foremost to find the best individual stocks, with the sector weights being generally more influenced by a macro overlay.  The sector weight ultimately ends up being a combination of our ability to source exceptional stocks in that sector, overlayed with an expectation of the headwinds or tailwinds facing that sector.          

Chris: Considering the current environment, how confident are you with respect to valuations today?  

Bryan: Valuations are important, but they are only one factor in our decision-making process.  We place a great deal of value on management teams and their ability to guide the company towards consistent growth.  If a company continues to meet or exceed realistic expectations, we are comfortable with a higher valuation as we have more confidence that those earnings will be met, or exceeded, which in turn supports a higher valuation. I think its important to note however, that we do generate our own internal forecast of a company’s earnings potential, which is often different that that of the street. I find that many times the street estimates are highly influenced simply by the movement of the overall stock market and not the actual underlying earnings potential of the company, so its very important for us to remain anchored and not get subjectively pushed around by short term sentiment. And what we’ve found is that often what appears expensive on consensus, may not actually be expensive.  It’s the street estimates that were incorrect. And this is where we can create real value, finding earnings power where others don’t see it. As other investors follow external estimates or even short-term share price, we create our own path, and evaluate the long-term potential of a stock which has led to success. However, even the best stock can get too expensive, such that the risk reward profile favours reducing the position. As I’ve mentioned previously, we like to invest in companies for the long term, so generally speaking if an owned stock becomes too expensive we would look to reduce, but not eliminate our position. Generally speaking, we only eliminate a position for two reasons. The first is if we feel the earnings profile of the company has structurally changed in a negative way and the second is if it successfully becomes a large cap stock and its growth profile slows. We prefer to hold quality names for as long as possible, taking the opportunity to trim when valuations get excessive, which usually is as a result of strong execution or market action, but almost always with the intent of adding back to that same stock when valuation corrects.  As an example, during the significant downturn in the market in the first quarter/half of 2020, we took the opportunity to add back to names that we had trimmed late in 2019 as the valuations had improved, supporting an improved risk versus reward profile.     

Chris:  Can you tell us a little bit about whether or not you've got specific criteria that businesses should possess for you to consider investing in them?  

Bryan: We minimize our exposure to the boom and bust stocks that most people associate with the small/mid cap world either golds, base metals, and more recently energy. Instead, we focus on quality, well run companies, which we define as they are smaller companies that are accessing large total addressable markets. They have a disruptive technology or competitive advantage that allows them to capture market share. Has consistent growth through both organic growth and by consolidation  or M&A activity. And have the management team in place to successfully guide the company through growth. These traits produce companies that generate consistent and sustainable earnings per share growth and lead to stronger and more consistent share price performance.

Chris: Great insights into your process and philosophy Bryan.   I'm wondering if you can give us a couple of examples of businesses that exhibit some of these characteristics we've talked about.  

Bryan: A good example is Kinaxis. Kinaxis has been a significant holding for us for many years and is an excellent example of a high growth company progressing from the early to the mid stages of its life cycle.  At a high level, it provides cloud-based supply chain management and planning solutions to Fortune 1000 companies. A service that continues to become increasingly important for any company.  We became investors shortly after its IPO in 2016 when it was around $300 million in market cap and have held it past  $3 billion in market cap.  Our initial investment was small. The company had just IPO’d and we were only able to get comfort on two of our criteria,  1) we knew it was a small company accessing a large and growing total addressable market and  2) we also knew it had a disruptive technology that gave them the potential to quickly capture marketshare. We did know that management team was experienced on paper, but we did not have enough of a track record with them personally to accurately assess their ability to manage and guide a company successfully through a period of high growth.  So what we did is we continued talking with management, constantly evaluating their ability to meet and exceed our expectations.  Over time, our confidence in management grew and so did the size of our investment, even though the share price continued to rise.  They consistently put up strong growth by successfully winning new Fortune 1000 companies.   In fact, through successful product performance and evolution, the total addressable market that they are accessing today is even greater than we had forecast when we made our initial investment.  And along the way, they have successfully evolved the business model such that margins have expanded with revenue growth.  In short, we took the time to get comfort with not only the product they offer and the market they live in, but also with the people that are tasked with the successful execution of the business plan.  And as our confidence grew, so did the size of our investment.  It’s been a rewarding relationship with strong share price returns.

Chris: That sounds like a great example of a business that's got a higher reward and heightened relevancy in todays climate. Bryan I know you have the ability to hold some US exposure, can you talk to us about a US company you'd hold in the fund?  

Bryan: An example of a US holding that meets our criteria is Cyrus One (“CONE”).  CONE owns, operates, and develops enterprise-class and carrier-neutral data center properties, providing mission-critical data center facilities that protect and ensure the continued operation of IT infrastructure.  Its customer list is large and well diversified, providing a service in a large TAM that exhibits high growth rates.  The services that it provides are essential to companies, with their provision essentially a mission critical service, meaning they are very high on the CEO/CIO list of expenses.  This helps to support revenues and growth, even in a weaker economic environment.  The demand for their product remains constant, providing a consistency to earnings and growth.  CONE is only one of a few US data centers that we have invested in, with two previous holdings being acquired recently, adding support to our internal valuation.     

Chris: Bryan, from this conversation, it's reassuring to know that you feel that there's long term growth opportunities that continue to surface. It's just a matter of having the patience and temperament to hold through periods of volatility and uncertainty.   

Bryan: Yeah, absolutely.  

Chris: Thanks Bryan. I appreciate you taking the time, sharing your outlook and some of these investment ideas.  

Bryan: You're welcome Chris. It was my pleasure.   

Chris: We've been speaking to Bryan Shearer, vice president, portfolio manager of the Mid-Cap Canadian Equity fund with our GWLIM team. If you want to find out more information about this or any of our other mandates, please visit the GLC asset management group website. You can also follow us on LinkedIn or Twitter: @glcasset, as well as subscribe to our podcasts on Apple iTunes, GooglePlay Music and Spotify Thanks very much for joining us and see you next time.  

Disclaimer: The views expressed in this commentary are those of GLC asset management group limited as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances.  

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Check out our other portfolio spotlight page under News & Insights: GLC’s Mid Cap Canada portfolio delivers a compelling growth outlook. 

Copyright 2020 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).

This commentary represents GLC’s views at the date of publication, which are subject to change without notice. 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 commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.