managed risk investing joe jugovic, cfa president & ceo qv investors
TRANSCRIPT
MANAGED RISK INVESTING
History
• Founded in 1996 on the principles of quality and value
• Employee-owned, independent investment counsel
• Repeatable, proven value-based processes
• Top quartile manager with returns for QV Small-Cap Fund of 15.5% (vs. 5.9% for the benchmark*) and returns of 14.6% for QV Canadian Equity Fund (vs. 6.6% for the benchmark**) over 14 years (July 31’13)
• All employees of QV are personally invested in the funds they manage
*BMO Small-Cap Unweighted Index**S&P/TSX Total Return Index
QV INVESTORS
We buy a portfolio of enduring businesses run by capable, committed, and candid people. We select equities on good value, that is the price we pay for a company’s assets and their return on equity. We hold our
good business positions for an indefinite period.
Investment philosophy
Objective: to create a portfolio of companies to provide consistent growth with below average risk
EQUITY INVESTING
Share ownership, years of leadership, succession planning, compensation, board and operational team, corporate governance.
Innovation, service, product or resource development. Competitive position. Business outlook.
Demonstrated record of growth in equity, earnings, sales and cash flow or demonstrated management of asset base.
Equity financed balance sheet versus debt. Sensible allocation of capital.
P/E’s, P/CF’s, P/B’s and NAV’s below market. Reasonable relative to ROE’s and ROIC’s above market. Assessment of downside risk.
Dividends and capital allocation
Valuation
Balance sheet strength
Franchise and outlook
Financial record
Management
Free cash flow to increase dividends. Culture of dividends. Sensible capital allocation.
Portfolio enhancement New selections enhance quantitative portfolio characteristics – quality, value, diversification and growth.
Company analysis and security selection
EQUITY INVESTING
Book value per share Return on equity (%) Dividends / Share
Consistent long-term appreciation in firm value with a commitment to shareholders
Source: Capital IQ
Buy discipline – Empire Company Ltd.
EQUITY INVESTING
Buy discipline – Empire Company Ltd.
EQUITY INVESTING
Source: Capital IQ
EQUITY INVESTING
Buy discipline – Empire Company Ltd.
Source: Capital IQ
Buy discipline – Atco Ltd.
Book Value per Share Return on Equity (%) Dividends / Share
Consistent long-term appreciation in firm value with a commitment to shareholders
Source: Capital IQ
EQUITY INVESTING
Source: Capital IQ
EQUITY INVESTING
Buy discipline – Atco Ltd.
Source: Capital IQ
EQUITY INVESTING
Buy discipline – Atco Ltd.
Failure of our buying tests or attractive alternative: Management turnover / material change in firm direction Breakdown in profit / cash flow consistency Erosion of competitive position / negative future outlook Increasing financial leverage Excessive valuation / dividend failure
Sales discipline
EQUITY INVESTING
Source: Capital IQ
Company analysis & security selection – Canadian equitySale candidate - Canadian Oil Sands Trust – P/B
Price to Book
EQUITY INVESTING
Source: Capital IQ
Company analysis & security selection – Canadian equitySale candidate - Research In Motion P/B
Price to Book
EQUITY INVESTING
Risk is the permanent loss of our clients’ capital. We manage the valuation, growth, balance sheet,
and diversification risks of the portfolio.
Risk management philosophy
Our process keeps us consistent over time
EQUITY INVESTING
Price to earnings Four-year average ROE
United Cdn Equity Small-Cap BMO Small Cap Index
United Canadian Equity Small-Cap Pool
Source: Capital IQ
EQUITY RISK MANAGEMENT
Debt to equity Dividend yield
United Cdn Equity Small-Cap BMO Small Cap Index
Source: Capital IQ
United Canadian Equity Small-Cap Pool
EQUITY RISK MANAGEMENT
Sector allocation – United Canadian Equity Alpha Corporate ClassAs of July 31, 2013
Diversification measures
Industry 25% maximum
Portfolio positioning
29 holdings
1% minimum - limit
6% maximum - limit
Source: QV Investors & Capital IQ
EQUITY RISK MANAGEMENT
Top 10 holdings – United Canadian Equity Alpha Corporate ClassAs of July 31, 2013
Issuer % Portfolio
EMPIRE LTD 5.9
E-L FINANCIAL CORP 5.8
ATCO LTD 5.3
POWER FINANCIAL CORP 5.0
TORONTO DOMINION BK 4.5
MULLEN GROUP 4.2
ALTAGAS LTD 4.1
JEAN COUTU GROUP 4.1
MANITOBA TELECOM 4.1
PASON SYSTEMS 3.8
Total 46.8
Issuer % S&P/TSX
Composite
ROYAL BANK OF CANADA 6.2
TORONTO-DOMINION BANK 5.3
BANK OF NOVA SCOTIA 4.6
SUNCOR ENERGY INC. 3.3
CDN NATIONAL RAILWAY CO. 2.9
BANK OF MONTREAL 2.8
ENBRIDGE INC. 2.5
CDN. NATURAL RESOURCES 2.3
TRANSCANADA CO. 2.2
MANULIFE FINANCIAL CO. 2.2
Total 34.3
Source: QV Investors & Capital IQ
EQUITY RISK MANAGEMENT
3 Mos
(%) 6 Mos
(%) 1 Year
(%) 2 Year
(%) 3 Year
(%) Incept.
(%)
All Cap Cdn Equity 4.8 10.9 26.1 15.1 14.3 9.9
S&P/TSX Composite Index 1.1 0.0 10.5 1.2 5.1 1.3
United Canadian Equity Alpha
Annualized returns as at July 31, 2013
United Canadian Equity AlphaAnnual calendar returns
Source: QV Investors
PERFORMANCE REVIEW
Sector allocation – CI Can-Am Small Cap Corporate Class As of July 31, 2013
Sector CI Can Am
Fund
Cash 10.5%
Energy 12.7%
Materials 5.4%
Industrials 11.2%
Cons. Disc. 2.6%
Cons. Staples 9.1%
Health Care 3.4%
Financials 19.8%
Info. Tech. 12.2%
Telecom Services 6.0%
Utilities 7.0%
Diversification measures
Industry 25% maximum
Portfolio positioning
31 holdings
1% minimum - limit
6% maximum - limit
Source: QV Investors
EQUITY RISK MANAGEMENT
Top 10 holdings – CI Can-Am Small Cap Corporate Class As of July 31, 2013
Issuer % Portfolio
EMPIRE LTD 5.8
ATCO LTD 5.1
E-L FINANCIAL CORP 4.6
NEW YORK CMNTY BANCO 4.3
MANITOBA TELECOM 3.9
PASON SYSTEMS 3.8
ALTAGAS LTD 3.7
JEAN COUTU GROUP 3.4
VARIAN MED SYS INC 3.4
SCANSOURCE INC 3.4
Total 41.4
Source: QV Investors
EQUITY RISK MANAGEMENT
3 Mos
(%) 6 Mos
(%) 1 Year
(%) 3 Year
(%) 6 Year
(%) Incept.
(%)
CI Can Am Fund 7.4 12.7 30.9 16.7 8.5 9.1
S&P/Citi EMI Cdn /US 50:50 6.6 8.2 22.4 12.5 3.4 5.5
CI Can-Am Small Cap Corporate ClassAnnualized returns as at July 31, 2013
CI Can-Am Small CapCorporate ClassAnnual calendar returns
Source: QV Investors
PERFORMANCE REVIEW
Current environment and outlook
Prefer equities over bonds
Businesses are generally healthy
Would the real economy please stand up!
Investor psychology
Paying the right price for yield
WHAT’S NEXT?
Source: John Aitkens, TD Securities, July 2013
EQUITIES BETTER VALUED
Source: John Aitkens, TD Securities, August 2013
VALUATION
Source: RBC Capital Markets, Haver Analytics
DIVERSIFICATION WILL MATTER
After-tax profit margin from current production, 1948-201016
15
14
13
12
11
10
09
08
07
0648 50 52 54 56 58 60 62 64 65 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
16
15
14
13
12
11
10
03
08
07
06
Source: Ed Yardeni, www.yardeni.com The Gloom, Boom & Doom Report, October 2010
ECONOMICS VS. COMPANY ANALYSIS
Source: BMO Capital Markets, Global Equity Weekly June 07, 2013
CORPORATE CASH BUFFER
Source: Thomson Reuters and A. Gary Shilling & Co., March 2013
S&P 500 Index and quantitative easing
Last Point 2/27/13: 1,516
FADING EFFECT OF INTERVENTION
Source: Barry Bannister, Stifel Nicolaus
PSYCHOLOGY
Source: IFIC & BMO
PSYCHOLOGY - INDIVIDUALS
- GRANT’S Interest Rate Observer, Vol. 30, No. 7, April 6, 2012
“For the first time in at least 12 years, reports the 2012 Milliman Pension Funding Study, a canvass
of corporate America’s 100 largest defined benefit plans, pension managers have ear-marked more funds for fixed income (41.4%)
than equities (38.1%). Just five years ago, stocks got twice the allocation of bonds (60.3% vs. 29.3%)…”
BONDS: THE FAVORED ASSET CLASS
Source: RBC Capital Markets Quantitative Research
OPPORTUNITY – DIVIDENDS MATTER
Source: Ned Davis Research Group (S&P Capital IQ Compustat, S&P Index Alert)
THE PRICE OF YIELD
Strong companies provide more stability
Great businesses provide growing income
Risk management protects capital
CONCLUSION
Thank you
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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