Invesco Canada blog

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Brian Tidd | October 16, 2015

Actively taking advantage of volatility

I don’t focus on short-term price movements of our funds versus our peers, the TSX, or our formal benchmark, but the stock volatility of the last few months has been exceptional. It’s understandable for unitholders and advisors to be interested in how the funds have been positioned and managed over this period. I believe that our activity over the last few months sets us up nicely for outperformance in the future. Let me tell you why.

Our investment discipline

To give you some context around these portfolio movements over this period, I’ll briefly revisit the key tenets surrounding how we manage Trimark Canadian Plus Dividend Class and Trimark Diversified Yield Class:

  • We utilize a bottom-up approach to create a concentrated, but well-diversified, portfolio of our best ideas. As a result, the fund bears little resemblance to the index and short-term performance will differ
  • We invest with a long-term view and are willing to look very different in the short term in pursuit of long-term outperformance
  • We apply a total-return approach (income + capital appreciation). This means we do not “reach for yield,” but rather focus on attractively-valued companies that can grow their dividends over time
  • Risk-reward considerations drive our actions. We are looking for disproportionate upside relative to the downside risks that we take

Activity in Q3

During the third quarter, markets sold off over investor concerns regarding a number of issues, including energy prices, a potential recession in Canada, a global slowdown led by China and a potential Greek exit from the Eurozone, to name a few. This created a period of fear in the market that resulted in shares of a number of quality companies becoming significantly oversold.

We view this type of short-term market noise as an ideal time to invest, and we actively deployed capital over this period. Over the last 12 months we have taken the cash position of Trimark Canadian Plus Dividend Class down from 8% to less than 2% and reduced the number of stocks in the portfolio in order to focus on the best identified investment opportunities.

We have significantly increased our energy weight in both Trimark Canadian Plus Dividend Class and Trimark Diversified Yield Class, while the energy weight in the TSX has fallen significantly. We have also added to names in that have been unfairly punished by investors running for cover. This was particularly apparent for some of our smaller-cap names including AutoCanada Inc., Rocky Mountain Dealerships Inc., Chemtrade Logistics Income Fund and Canexus Corp.

Eric and I are not “market timers” or “sector allocators” and while we have been buying shares on weakness, we are not trying to pick the bottom. Instead, we resolve to add to our holdings at prices that are extremely attractive relative to our view of the intrinsic value of each business. We have been methodical in adding to these positions. We ended up following many of our stocks down as their declines accelerated during the quarter, which has hurt our short-term performance. Our goal is to look back five years from now and be satisfied that we secured attractive value for our unitholders during a rare buying opportunity.

While our down-capture numbers tend to be good, volatility is not something that we actively manage – it is a byproduct of our investment process. For example, we tend to benefit  from the following factors:

  • superior diversification, compared to the highly concentrated S&P/TSX Composite Index and many of our peers;
  • avoidance of highly priced “glamour” stocks that often experience larger downside exposure on price multiple re-rating events; and
  • “flight to quality” during periods of fear.

A closer look at our relative underperformance over the last 12 months revealed that we didn’t benefit from a “flight to quality” toward our global multinational names. Companies such as Accenture PLC, Johnson & Johnson, Novartis AG, Unilever N.V., and The Walt Disney Co. actually sold off significantly on global growth fears. We believe that the long-term outlook for each of these names remains very attractive. In contrast, perceived “safe” names in Canada such as BCE Inc. benefitted from the herding mentality among Canadian long-only portfolio managers. While some managers were parking funds in stocks with overly high valuations, we were out actively buying deeply discounted quality businesses.


Overall, the third quarter was eventful for us – a period during which we were able to deploy capital in a way we believe will be advantageous for our unitholders. As noted above, risk-reward considerations drive our actions. I believe the portfolios should benefit from share price appreciation in the future, and a key benefit of our unique dividend mandate is that unitholders are earning a very attractive yield while they wait for this value to be unlocked.

We don’t know exactly when the stock market will recover, but as evidenced during the first full week of October, market turns can be very dramatic as hedge funds scramble to cover short positions and long-only institutional investors struggle to get back to market-weight sector positions.

The short period of increased volatility in the funds should not be construed as there being an elevated level of risk in the fund. I would like our unitholders to rest assured that we are actively managing risk and reward in the portfolio, as we seek to compound investor wealth over time.

If you have any questions, please feel free to leave them in the comments area below.

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