Canadian equities are managed in-house by Terry Bacinello. Phillips, Hager & North sub-advises on U.S. equities and Sprucegrove on international equities. All key decision makers share a common history with Confederation Life and, as a result, apply common approach to equity investing.
Style
Our approach is driven by relative value. We believe that superior long-term investment returns are a function of purchasing quality securities at attractive prices and having the patience to wait until the value is recognized in the market. Through our proprietary research, we assess the quality of the investment and determine the expected Investment Growth Rate (IGR), which is based mainly on our evaluation of a company‘s expected return on equity (ROE). Valuation relative to the market and to peers is a critical consideration.
Process
Our equity process is based on “bottom-up” stock selection and is supported by proprietary research.
We start our analysis from a qualitative standpoint, looking for quality businesses as defined by:
- a strong leadership position or competitive advantage
- a history of profitability
- a solid financial position
- opportunities for growth
- capable management
We look for companies that embody as many of these characteristics as possible, recognizing that for any particular company, the relative importance of each factor may vary. Our investment horizon is typically between three to five years.
Common Stock Rating System: Once we identify a company that meets our qualitative criteria, we set about determining the “right” price to pay for it. To aid in this calculation, we use the Common Stock Rating System (CSRS), a proprietary valuation tool that has been employed successfully for almost 30 years to rank the relative value of stocks against the market.
Important valuation parameters within the CSRS are the Investment Growth Rate (IGR) and Normalized P/E measures, which are also key inputs into our Quadrant System of analysis. The Quadrant System is outlined in the following figure.
In building a diversified portfolio, we choose the companies from each quadrant with the best relative value. As a rule, we prefer to select stocks from Quadrant 1 as they are typically of higher quality. However, we do not overlook stocks that fall in the other quadrants, recognizing that they also include excellent businesses that may trade at premium valuations, and average companies trading at deeply discounted valuations that represent promising investment opportunities. Sensitivity testing is also performed to determine how susceptible a company‘s performance might be to changes in key inputs.
Canadian equity portfolios are well diversified and typically hold about 40-60 stocks, with an annual turnover rate of about 15-30%. U.S. equity portfolios typically hold about 40-50 stocks, with an annual turnover rate of about 25-30%.
Risk Controls
BonaVista has developed a number of risk control guidelines. These include setting a target range around the benchmark weights for each GICS (Global Industry Classification Standards) sector in the benchmark, where the range is a function of the sector‘s respective weight in the index. Exceptions to these constraints are only be made under special circumstances. In addition, each equity style has its own specific risk controls, as described below:
Canadian equities: Specific controls are applied to exposure by quadrant (see discussion of Quadrant System of Analysis on previous page), i.e., minimum of 70% exposure in Quadrant 1, and portfolio exposure limits of 15% in each of Quadrants 2, 3 and 4.
US equities: Controls are also applied to exposure by quadrant for US equities portfolios, i.e., minimum of 66% exposure in Quadrant 1, and portfolio exposure limits of 20% in Quadrant 2, 20% in Quadrant 3 and 10% in Quadrant 4 – with a 25% maximum for Quadrants 3 and 4 combined.
International equities: Country limits, in addition to sector limits also apply.