A value-oriented approach

Empire Life Investments CIO Ian Hardacre outlines his investment strategy and extols the benefits of having a contrarian mindset

A value-oriented approach

The past year was one of great upheaval for Ian Hardacre. His time with Invesco Canada (formerly Trimark) came to an end last February after 19 years, but by May, he was already back in the saddle as a senior portfolio manager for Canadian equities at Empire Life Investments. His 2016 was bookended by a promotion – Empire Life selected him as its new chief investment officer in December.

In doing so, the board chose a portfolio manager with decades of investment experience and a strong belief in what he does. Canadian equities had a record year in 2016, but chasing the markets isn’t part of Hardacre’s strategy.

“We are value-oriented investors – we don’t change our strategy depending on the market,” he says. “We focus on a longer timeframe, three to five years usually. What I like to do is buy high-quality companies when they are out of favour.” These companies aren’t exactly easy to come by; otherwise, every investor would take this approach. It’s a strategy that requires patience, which is a virtue not often found in the investment industry. But for Hardacre, patience is a basic tenet of an investment strategy that has served him well for decades.

“You need to be contrarian and think outside the box,” he says. “You need to take a long-term timeframe and not worry about what is happening this quarter or the next. If a company misses earnings and the stock goes down based on that, we will take advantage. I like to call it ‘time arbitrage.’”

The most important part of this process is finding companies that have flown under the radar, but have great potential to take off. Discovering such firms may be akin to locating the proverbial needle in a haystack, but the rewards can be huge.

“For a margin of safety and to avoid a permanent loss of capital, we do that by staying away from companies that have too much debt or are over-leveraged,” Hardacre says. “We also avoid unethical or dishonest management teams.”

While accessing the financials of publicly listed companies is easy enough, Hardacre’s approach involves examining more abstract factors as well. If a company’s earnings results don’t tell the full story, then he embarks upon a closer investigation before committing to an investment.

“You make sure to meet with the CEOs and senior management of any Canadian company you plan to invest in,” he says. “The track record of the management team and the overall culture of the company is key. If you look at companies that have had large price declines after large run-ups, you will probably see that the culture of the company is somewhat flawed. Compensation almost always dictates the performance of the management team, so you also have to look at how that is structured.”

It’s an investment strategy he has developed over many years, first at the Ontario Teachers’ Pension Plan, then with Trimark and now Empire Life Investments. Such tenure gives Hardacre perspective, especially when it comes to outside forces and the impact they can have on an investor’s portfolio. The past year saw large market swings facilitated first by Brexit and then by the surprise election victory of Donald Trump. For a value-oriented investor like Hardacre, the uncertainty such events create is often a positive.

“Volatility in the markets is good for us – it creates buying opportunities,” he says. “Our model is to do our homework on companies we want to own, pick a buy price that we feel is a discount to what the company is worth, and then macro events like Brexit provide opportunities to buy those stocks.”

In the case of the UK referendum, the markets reacted violently immediately after the results of the vote were announced, but stabilized soon after. Negotiations are ongoing over the terms of Britain’s exit from the EU, and the future is still very much unknown, but value investors will be keeping a close eye on developments across the Atlantic.

Closer to home, the ramifications of Donald Trump’s victory are being felt far and wide. The stock markets have rallied strongly since November, while bond values sank on expectation of inflationary pressure. For the team at Empire Life Investments, the uncertainty generated by Trump’s presidency means taking a closer look to find some hidden gems.

“The unfortunate thing about Brexit for us was that it really only lasted two days,” Hardacre says. ”We were buying in the UK and Europe right after the election. I think we will have a lot of volatility this year due to some of the policies coming out of Washington.”

Domestically, he expects growth trends to continue in the same vein as last year, with Canada’s main drivers in 2017 coming from the traditionally dominant industries.

“When it comes to Canada, it is really driven by three sectors,” Hardacre says. “Energy should continue to do well this year. The banks and the insurance companies I see doing well too. Materials is a bit harder to analyze and predict. When it comes to the US market, we have had a large run-up since the election. We would be a little more cautious on the US market in terms of valuations, but that doesn’t mean there aren’t good opportunities on a one-off stock basis.”

Ian Hardacre