In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they’d never buy.
Which Sector Shows the Biggest Promise in 2022?
Energy, oil and gas upstream equities. Free cash flow yields are still exceptional, and managements are focused on returning capital to shareholders. In Canada you can find high quality companies yielding well into the mid-teens. As China re-opens and Strategic Petroleum Reserve releases end, supply and demand dynamics will likely stay tight.
What’s the Biggest Economic Risk Today?
The largest risk is probably an escalation in tension between the West and Russia/China. Inflation and higher rates are mostly an issue for investors in unprofitable companies, which is not our focus so higher rates and inflation have actually helped us. An escalation, particularly with China, could really negatively impact economic growth.
Describe Your Investment Strategy
We have defined our investment philosophy as the “three circles” where we try and incorporate, value, fundamentals, and momentum into our portfolios. In a simple sense we are fundamental value investors that are looking for mispriced businesses. One of the biggest risks with that is getting caught in value traps so by incorporating momentum it helps our strategies mitigate that risk. However, we won’t buy businesses that are expensive simply because they have positive momentum; there must be value.
Which Famous Investor Do You Admire?
Stanley Druckenmiller, because he went to my alma mater, Bowdoin College. A small but excellent university in Maine.
Name Your Favourite “Forever Stock”
The concept of a “forever stock” is dangerous as it implies a “forever” management team – and a bad management team can mess up a good company, capital allocation is important. If I had to pick one company that I think has a bright future, it would have to be STMicroelectronics. Their power semiconductors are critical in the electrification of the economy. If you think EVs have a bright future, then the cars require a lot of their chips and their profit margins on those chips are much better than manufacturing the EV. As EVs grow, so should STM’s profits.
What Would You Never Invest In?
We don’t like over-hyped concept stocks that produce no tangible earnings. I don’t like saying never, but you really won’t find a company with that profile in our portfolios.
Growth or Value?
Value, always. Earnings growth is a component of value. We are happy to buy growing companies if the stock is discounting lower earnings growth. Simply buying a growth stock but overpaying has historically been a losing strategy. Unfortunately, some investors over the last 18 months are coming to realise this.
House or Pension?
Tough choice, as both are important. I suppose a house if you can continue to work until the day you die!
Crypto: Brilliant or Bad?
Crypto: bad idea. Blockchain will likely be a very impactful technology, but it’s use in crypto coins looks like a classic bubble, in my opinion. It’s argument as a store of value similar to gold has some merits but gold has history on its side and no substitutes. New crypto coins are created all the time. I don’t get it.
What Can be Done to Improve Diversity in Finance?
Continuing to recruit and offering internship opportunities to those with diverse backgrounds seems to be the best way forward. Fund management isn’t a glamorous job but just like any other career, more opportunity and recruitment should lead to a more diverse set of backgrounds in the role.
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
Our ESG team does all the engagements, I get to see their work and speak with them about it. They are the experts and I can’t take credit for their impact, but they have done a nice job getting some of our companies that we internally rate as poor ESG businesses to improve their reporting and practices. It’s easy to invest in well rated ESG companies but much more effective to get poor ones to improve.
What’s the Best Advice You’ve Ever Been Given?
This business is a marathon, not a sprint.
What Would You be if You Weren’t a Fund Manager?
I suppose an economics professor. I also think I would enjoy running a business.
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