There’s been a lot of negative news headlines about the Canadian economy lately, ranging from consumer indebtedness, poor productivity growth and subscale innovation hubs. All of this doesn’t paint a rosy picture for investors.
But it must be noted that these funds are not directly linked to the Canadian gross domestic product, but to the 40-to-45 businesses that we own in the funds. While most are based in Canada, we aim to take full advantage of the foreign content allowances in our funds’ mandates to invest in attractively valued world-class businesses that can help to strengthen and diversify the portfolio.
With respect to the negative backdrop in Canada, I could see many investors asking why anyone should invest in Canada at all. The answer, for the select number of Canadian companies the funds own, is that we see a potential value in those stocks right now.
When I’m constructing the portfolios, I don’t worry about whether the funds are overweight or underweight countries or sectors versus their benchmarks. I’m more interested in finding great ideas that meet my quality and valuation criteria with the potential to offer attractive risk-adjusted returns. This approach of actively seeking mispriced gems is what drives the resulting sector and country weights.
We live in a world where an increasing percentage of daily trading volume is conducted machines that incorporate daily information into buying and selling decisions. These buyers of stocks today seem to be more focused on momentum and short-term trading strategies and investor sentiment can take priority over stock fundamentals, at least in the short term.
The result I believe is a market where share prices often overreact to news flow. This was very much the theme for 2018, and particularly in December. Now, while this type of market volatility certainly creates short-term pain, it can also provide great opportunities for fundamental value investors. We search out high-quality businesses that we believe have a favourable long-term outlook that are trading significantly below what we believe to be their intrinsic values.
Its important to note that the volatility of share price movements does not necessarily reflect the volatility of cash flows for the underlying companies.
We invest with the long-term view and this allows us to be able to look past the market noise to make investments without the need to identify some sort of near-term catalyst that might improve the market sentiment. At times, we may suffer the “value investor curse” of being too early on investments that we have found. But we believe our process can drive solid risk-adjusted returns over the long term.
I can’t control irrational share price volatility, but I can most definitely try to profit from it as the market refocuses on fundamentals.