managed risk investing joe jugovic, cfa president
TRANSCRIPT
Managed risk investing
QV Investors
History
• Founded in 1996 on the principles of Quality & Value
• Employee-owned, independent investment counsel
• Repeatable, proven value-based processes
• All employees of QV are personally invested in the funds they manage
Equity investing
Investment philosophy
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.
Our goal is to provide consistent growth with below average risk
Equity investing
Company analysis & security selection
Share ownership, years of leadership, succession planning, compensation, board & 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 & capital allocationDividends & capital allocation
ValuationValuation
Balance sheet strengthBalance sheet strength
Franchise & outlookFranchise & outlook
Financial recordFinancial record
ManagementManagement
Free cash flow to increase dividends. Culture of dividends. Sensible capital allocation.
Portfolio enhancementPortfolio enhancement New selections enhance portfolio characteristics, quality, diversification and growth.
Book Value per Share Return on Equity (%) Dividends / Share
Consistent long-term appreciation in firm value with a commitment to shareholders
Source: CPMS
Equity investing
Buy discipline – Canadian equity example – Canadian utilities
Source: Capital IQ
CFPS
Price
CFPS
Equity investing
Buy discipline – Canadian equity example – Canadian utilities
Dividend/share $0.90 $0.94 $0.98 $1.02 $1.06 $1.10 $1.40 $1.25 $1.33 $1.41 $1.51 $1.61
Source: Capital IQ
$4,615
$19,692
$37,949
$58,410
-$32,000
-$24,000
-$16,000
-$8,000
$0
$8,000
$16,000
$24,000
$32,000
$40,000
$48,000
$56,000
$64,000
$72,000
$80,000
$75,000
$100,000
$125,000
$150,000
$175,000
$200,000
$225,000
$250,000
$275,000
$300,000
$325,000
$350,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Cumulative Dividend Income
Share Value
Cumulative Dividends from 100K Investment
$100K + Dividends + Capital Gains = $390K
Equity investing
Buy discipline – Canadian equity example – Canadian Utilities
Consistent long-term appreciation in firm value with a commitment to shareholders
Book Value per Share Return on Equity (%) Dividends / Share
Source: CPMS
Equity investing
Buy discipline – Canadian small cap equity example
– Leon’s Furniture Ltd.
Source: CPMS
0.92 -
0.79 -
0.66 -
0.53-
0.40 -
0.27 -
0.14 -
0.01 -
24.55
21.74
18.94
16.14
13.34
10.54
7.74
4.94
EPS
Price
EPS
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Equity investing
Buy discipline – Canadian small cap equity example
– Leon’s Furniture Ltd.
Dividend/share $0.10 $0.10 $0.25 $0.13 $0.19 $0.20 $0.38 $0.28 $0.38 $0.48 $0.32
Source: Capital IQ
$1,619
$9,231
$21,538
$40,000
-$32,000-$28,000-$24,000-$20,000-$16,000-$12,000-$8,000-$4,000$0$4,000$8,000$12,000$16,000$20,000$24,000$28,000$32,000$36,000$40,000$44,000$48,000
$0
$25,000
$50,000
$75,000
$100,000
$125,000
$150,000
$175,000
$200,000
$225,000
$250,000
$275,000
$300,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Cumulative Dividend Income
Share Value
Cumulative Dividends from 100K Investment
$100K + Dividends + Capital Gains = $285K
Equity investing
Buy discipline – Canadian small cap equity example
– Leon’s Furniture Ltd.
Equity investing
Sales discipline
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
Source: Capital IQ
Price to Book
Equity investing
Company analysis & security selection – Canadian equity
Sale candidate – Canadian Oil Sands Trust – P/B
Source: Capital IQ
Price to Book
Equity investing
Company analysis & security selection – Canadian equity
Sale candidate – Research In Motion P/B
Equity investing
Risk management philosophy
Risk is the permanent loss of our clients’ capital.
We manage the valuation, growth, balance sheet,
and diversification risks of the portfolio.
Our process keeps us consistent over time
Price to earnings 4-year average ROE
QV Cdn Small Cap Equities BMO Small Cap Index
Source: Capital IQ
13.3
16.9
8
15
22
29
36
11.9
5.5
0
5
10
15
20
Equity risk management
Canadian small cap equity
Debt to equity Dividend yield
QV Cdn Small Cap Equities BMO Small Cap Index
Source: Capital IQ
0.38
0.53
0.2
0.4
0.6
0.8
1.0
2.4
2.6
0.0
1.5
3.0
4.5
6.0
Equity risk management
Canadian small cap equity
Equity risk management
Sector allocation – all cap Cdn. EquityAs of March 31, 2012
Diversification measures
Industry
• 25% maximum
Portfolio Positioning
• 25 holdings
• 1% minimum - limit
• 6% maximum - limit
Equity risk management
Top 10 holdings – all cap Cdn. EquityAs of March 31, 2012
3 Mos
(%) 6 Mos
(%) 1 Year
(%) 2 Year
(%) 3 Year
(%) Incept.
(%)
All Cap Cdn Equity 8.2 10.3 2.0 8.8 19.5 6.9
S&P/TSX Composite Index 4.4 8.1 -9.8 4.2 15.6 0.4
All Cap Cdn. EquityAnnualized returns as at March 31, 2012
All Cap Cdn. Equity
Performance review
Annualized returns as at March 31, 2012
Equity risk management
Sector allocation – CI Can Am FundAs of March 31, 2012
Diversification measures
Industry
• 25% maximum
Portfolio Positioning
• 29 holdings
• 1% minimum - limit
• 6% maximum - limit
^ S&P Citigroup EMI 50:50: 50% S&P Citigroup EMI (CDA); 50% S&P Citigroup EMI (US)
Equity risk management
Top 10 holdings – CI Can Am FundAs of March 31, 2012
CI Can-Am Small Cap Corporate Class
YTD1
Year3
Year5
Year10
Year
CI Can-Am Small Cap Corporate Class 7.2% 0.1% 8.1% 3.9% 10.8%
Quartile 2 1 3 1 1
At March 31, 2012
Current environment & outlook
What’s next?
• Artificially low rates = artificial growth = high volatility
• Government austerity = slow growth/private sector healing
• Dividend yields = support in tough markets…to a degree
• Value & strong balance sheets = positive risk management
“There is no such thing as a free lunch”
Source: John Aitkens, TD Securities, March 2012
TSX Forward Earnings Yield ( )And Long Term Canada Bond Yield ( )
M1941 MAR 2012
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 282 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
2.48
7.63
TSX Forward Earnings Yield ( )And Long Term Canada Bond Yield ( )
M1941 MAR 2012
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 282 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
2.48
7.63
Equities better valued
Source: RBC Capital Markets, Haver Analytics
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
Source: RBC Capital Markets, Haver Analytics
4
5
6
7
8
9
10
11
12
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
Source: RBC Capital Markets, Haver Analytics
Diversification will matter
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
CRB Raw Industrials / S&P 500
Source: RBC Capital Markets, Haver Analytics
4
5
6
7
8
9
10
11
12
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
TSX / S&P 500
Source: RBC Capital Markets, Haver Analytics
5
10
15
20
25
30
35
40
45
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
MSCI Emerging Monthly / S&P 500
Source: RBC Capital Markets, Haver Analytics
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
Source: RBC Capital Markets, Haver Analytics
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
CRB Raw Industrials / S&P 500
Source: RBC Capital Markets, Haver Analytics
4
5
6
7
8
9
10
11
12
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
TSX / S&P 500
Source: RBC Capital Markets, Haver Analytics
5
10
15
20
25
30
35
40
45
Jan-93 Jan-98 Jan-03 Jan-08 Jan-13
MSCI Emerging Monthly / S&P 500
Source: RBC Capital Markets, Haver Analytics
Source: Ed Yardeni, www.yardeni.com The Gloom, Boom & Doom Report, October 2010
Economics vs. company analysis
After-tax profit margin from current production, 1948-2010
Source: Barry Bannister, Stifel Nicolaus
Equities…the lost decade
Source: IFIC & BMO
Psychology
Bond Funds
Equity Funds
Money Market Funds
30
25
20
15
10
5
-
(5)
(10)
(15)
(20)
Net Sales for Canadian Mutual Funds
Bonds the favored asset class
“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%)…”
– GRANT’S Interest Rate Observer, Vol. 30, No. 7, April 6, 2012
Source: RBC Capital Markets Quantitative Research
11.8
10.1
6.5
2.6
1.0
-4
-2
0
2
4
6
8
10
12
14
Dividend Growers Dividend Payers TSX Composite Dividend Cutters Non-dividend Payers
Total Portfolio Returns (Dec 1986 - Apr 2012, Equal Weighted, %)
Source: RBC Capital Markets Quantitative Research
Opportunity – dividends matter
Source: Capital IQ
Dividend/share $0.23 $0.15 $0.15 $0.15 $0.08 $0.20 $0.30 $0.40 $0.50 $0.50 $0.50 $0.75 $0.75
$100K + Dividends + Capital Gains = $400K
Cumulative Dividends from 100K Investment
Power of dividends: dividends + asset
Canadian equity example – Astral Media Inc.
Conclusion
• Strong companies provide more stability
• Great businesses provide growing income
• Risk management protects capital
Thank you
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods less than one year, the indicated rates of return are the historical annual compounded total returns including changes in security value. All performance data assume reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder 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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