Last updated: Mar-18-2019

3/18/2019 10:33:57 PM
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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Tuesday, April 03, 2018

Tough times for Canadian equities, especially compared with our southern neighbors – for the six months through February 2018, Canadian equity funds delivered an average return of 2.68% compared with 11.6% for U.S. equities. Over the 5-year period through February, Canadian equities delivered an average annual compounded rate of return of 6.7%, compared with 15.9% for U.S. equities. Clearly Canada hasn’t been the best place to park your savings these past few years, although there are nevertheless some bright spots in the Canadian equity performance statistics, including the FundGrade A grade Caldwell Canadian Value Momentum Fund.

Caldwell’s Canadian equity entry was able to deliver 6.9% for the six months ended Feb. 28, and a 5-year average annual compounded rate of return of 11.4%. For the 12-month period ending Feb. 28, the fund gained a solid 13.0%, compared with the relatively weak category average of 2.4%.

According to Jennifer Radman, vice president, head of North American equities, and senior portfolio manager at Caldwell Investment Management in Toronto, the main reason this fund has bucked the tide is its proprietary Momentum at a Reasonable Price (MARP) screening and stock selection process.

Caldwell’s MARP model combines screening and ranking methodologies on a custom set of 16 factors to produce a list of strict buy and sell decisions. These choices are then further vetted by the portfolio management team, using a fundamental research overlay that is geared to minimizing risk. “We screen the markets daily based on 16 value and momentum factors in order to rank all companies,” Radman explains. “The quantitative modelling gives us buy signals, and then we vet the best ones, because we’re not just going to buy whatever the screens show. We do a qualitative analysis – is this something we want to own?”

The aim is to find companies that are undergoing a positive fundamental change driven by company or industry-specific events. Since these events are often independent of factors driving the overall market, there is usually a low correlation to broader market moves – one obvious reason for the fund’s outperformance relative to its peers. The portfolio itself is highly concentrated and can range between 15 and 25 names, although the count typically hovers around 20, according to Redman.

While value is a primary consideration, Radman points out that trying to make decisions based on value alone can have some disadvantages. “ Traditional value stocks may have a lot of assets, but the problem is that you often get periods of dead money,” she says. “These stocks may look cheap, but they can get even cheaper. The best example recently was Home Capital [Group of Toronto], which blew right through its asset base.

“It’s particularly interesting when you combine value and momentum,” Radman adds. “When you put them together, you can get a better risk-adjusted return over time. The momentum is going ahead of the stock price, and it is an indicator that the market has started to recognize the stock’s true value.”

As an example of the type of company that results from their screening and research processes, Radman cites Cambridge, Ontario-based ATS Automation Tooling Systems Inc. (TSX: ATA), a provider of robotics systems for industrial manufacturing operations. “It’s a market with strong secular growth resulting from several factors,” she notes. “The use of robotics is increasing because of a tighter labor market, higher wage rates, and quality control concerns.

“Also, the company recently hired a new chief executive officer with a strong track record for optimizing efficiencies,” says Radman. “He has a plan to increase margins by 400 to 500 basis points, and he has the experience to be able to execute this plan. Meanwhile, the company continues to benefit from strong secular growth.”

With $36.8 million in assets under management, as of Feb. 28, top holdings included CGI Group Inc. (TSX: GIB.A), Premium Brands Holdings Corp. (TSX: PBH), Cargojet Inc. (TSX: CJD), IBI Group Inc. (TSX: IBG), and Empire Co. Ltd. (TSX: EMP.A). The fund was overweighted to industrials, which comprised 36% of the portfolio, with information technology at a 10% weighting. The fund remained underweight in energy and consumer discretionary stocks.

Cash was a relatively high 36% at the end of February, but in their February report, the managers stated, “we expect cash balances to move lower as we progress through the CCVMF’s investment process.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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