Fund identifies opportunities beyond common financial and energy themes that can provide growth in slowing economy
Canadian investors are often beaten with the home bias stick and urged to open their mind to opportunities overseas.
However, one contrarian strategy works on the premise that people miss out on opportunities by assuming their allocation in the Canada broad market should be dominated by energy and financials.
Jennifer Radman, lead portfolio manager on the Caldwell Canadian Value Momentum Fund at Caldwell Investment Management, told WP there are a lot of trends and companies that investors are not taking advantage of.
The strategy, which has been running since 2011, goes beyond the largest companies and finds opportunities beyond energy and banks.
Radman takes a three-pronged approach to this portfolio, breaking it down into niche, secular growth drivers, firms going through a restructuring or acquisition, and companies that have flown under many investor's radar.
She explained that when the broad-based economy falters – consumer concerns hurting banks and energy prices at massive lows - niche companies can still provide that growth.
She said: “For the broader market to go higher, you need broader-base growth or you need multiplies to expand and given where we are in the cycle, I think a lot of people are challenging whether that can happen. If you focus on niche, secular drivers, you don’t necessarily need that broad economic growth to continue working.”
This can also be found within the big shift towards real assets and alternative mandates, and Radman held up Brookfield as a massive player of a trend Caldwell does not see reversing. Firms involved in adapting technology across businesses and workplaces represent another area of growth (CGI Group), as does e-commerce (Cargojet) and factory automation.
Arguably, though, the more eye-catching investment opportunity the strategy identifies is the shift towards protein consumption.
Radman said: “Premium Brands is a company that is focused on clean label, on-the-go eating. It does a lot of work with Starbucks and makes sandwiches for them off-site. There is a focus on protein and a shift away from carbs – that’s a trend we’ve seen and I don’t think that is going to change just because there is a softer economy.”
For companies going through a restructuring, Radman’s ears perk up at two scenarios: if they are in a cyclical industry that’s coming off a low or if a firm has been mismanaged or underutilised.
For the former, the NFI Group, the biggest bus manufacturer in North America, is a prime example. Between 2008-10 the government bus replacement cycle was extended, meaning the industry got decimated by bankruptcies and consolidation, with NFI emerging as the last-man standing.
Radman said: “As the volume returns, you get better pricing and have more market share and less competition, so that’s a more powerful earning driver. That’s an example of a transformation going through an industry, although it takes time for investors to fully appreciate the change in the story and to get over the continual disappointment of an industry hitting the bottom and going through that recovery."
Imvescor Restaurant Group is representative of Caldwell’s approach for a firm that has been mismanaged but staged a turnaround, usually after a board review and/or reshuffle. Perpetually underperforming, it had been purchased by a consolidator but hadn’t been run by anyone with a strong operational restaurant background.
“They did a board review, a new CEO came in and they went back to basics,” Radman said. “They rationalised the menu, got customer service where they wanted it and renovated. They did a really good job of changing the trend of that sales profile, although it takes the market some time to realise the changes.”
She added: “Our portfolio is very complementary to what people already own in Canada and that’s where the appeal is. It has uncorrelated assets, so when one thing zigs the other zags and so forth but there is still an upward trend the lowers volatility.”