How a TD ETF unearths 'rational growth'

John Miller, Managing Director, Epoch Investment Partners Inc. (Epoch), wholly-owned subsidiary of The Toronto-Dominion Bank and an affiliate of TD Asset Management Inc. (TDAM), explains how a global screening process offers selection that is optimized, not compromised

How a TD ETF unearths 'rational growth'

Given the markets’ volatility and meagre expected returns offered by fixed income securities, how do advisors capture quality growth to elevate portfolio return potential? Epoch believes the answer lies in capturing “rational growth” unhindered by geography. Epoch implemented this philosophy in the TD Active Global Equity Growth ETF (TGGR)1 for which it acts as a sub-advisor.

John Miller, Managing Director, Client Portfolio Manager, Global and U.S. Portfolio Management, Epoch, explains how Epoch, through active management, seeks to identify quality businesses that exhibit above average growth.

Having outperformed its benchmark (MSCI All-Country World Index) year to date by 563 bps (as of September 30, 2021), Miller believes that TGGR’s success is based on a rigorous screening process, which identifies companies that have a high return on invested capital (ROIC). Epoch also utilizes what Miller calls the “Epoch core model”, which focuses on a variety of metrics, including free cash flow growth of the business, and specifically the management's ability to reinvest that cash flow at a high ROIC.

"We seek to invest in companies with consistently high returns on invested capital as ultimately, it is the ability to earn a return on capital that is greater than the cost of that capital, which makes the value of a business grow. In addition to high return on capital, we look for high or rising profit margins which indicate that the high return on capital is sustainable, and growing cash flow which indicates that the firm is taking advantage of opportunities to grow the business," adds Lilian Quah, CFA, Managing Director, Epoch and Portfolio Manager of the TGGR ETF.

With a mandate of between 60-80 holdings – it was around 65 at time of writing – TGGR can be tilted towards businesses that generate free cash flow, with a focus on reinvesting for future growth (e.g., capital expenditures and acquisitions). Miller goes on to explain that "there are 5 possible uses of free cash flow that we look at, and we bucket those into 2 areas: i) shareholder yield – this includes dividends, share repurchases and debt reduction; and ii) capital reinvestment - this includes cash used for acquisitions and internal investments.  We typically seek companies in this second bucket when constructing our more growth-oriented portfolios like TGGR.

Many investors might be tempted by businesses that tout their top-line growth only with promises to make up profits down the line. Miller reminded Wealth Professional (WP) that “top line is vanity, the bottom line is sanity” and that the portfolio management team of TGGR seeks to identify companies that convert top line growth to the bottom line.

Miller said: “You're getting more rational growth; a collection of higher growth businesses that are still profitable and that have a spread between their return on invested capital relative to their weighted average cost of capital.

“Epoch believes that TGGR is more rational as the portfolio is handpicked and built with active management as opposed to simply following the index weights based on market capitalization.”

"Active management – in this case at the cost of 65 basis points – means, as an advisor or end client, you aren’t letting index providers decide what’s in your portfolio", Miller added. He highlighted Tesla, Inc., which was added to the S&P 500 Index after showing four consecutive quarters of profits but was barely profitable, achieving that status only by selling off carbon tax credits and later even more inflated by their Bitcoin holdings, despite a market cap of $700 billion.

Miller explained: “Tesla is an example of a company that would not show up in our screening because it doesn't have a sufficiently high ROIC without all these other add-ons (e.g., sale of tax credits, Bitcoin holdings). That's where we look at some of these accounting metrics like sales growth, accruals, return on invested capital and consistency. This will screen out some of those businesses.”

Another advantage of TGGR being actively managed is being able to cut across the full market-cap spectrum and not be restricted to the top 20 names. Instead, the screening process narrows down TGGR’s investable universe of about 9,800 names to a more manageable size and allows the portfolio management team to look across geographies. The top 5 country weights of TGGR (as of August 31, 2021) were U.S, Denmark, Sweden, China, and Japan.

Miller adds: “People tend to be more comfortable thinking of businesses that are in their own backyard. For example, investors may be familiar with Loblaws but not necessarily a supermarket located in Spain that has a similar growth profile and in a country with a population of 60 million. However, it should still be in the investable universe when comparing businesses across industries and geographies. This way a portfolio manager can make investment decisions seeking to achieve a portfolio that is appropriately optimized and not compromised.”

Through its disciplined screening process, TGGR tends to get higher weightings in some of the sectors that have higher returns on invested capital, like information technology, healthcare, and consumer discretionary. While this may sound familiar, Miller said this is an offering for an advisor that's looking to add a growth element to a client's portfolio in a more rational manner that takes into consideration sales growth, and a profitable bottom-line contribution.

Being actively managed, there’s “somebody at the wheel” which can be important when the markets go through a period of elevated volatility.

Miller said: “TGGR is supported by a team of fundamental analysts that are familiar with the businesses in the portfolio, and they can back up each name with a rational, logical investment thesis."

"If an advisor was looking to add quality growth to a portfolio, we believe that it makes sense having portfolio managers actively picking what they believe to be quality companies instead of following an index that is market-cap weighted."

“TGGR does not just offer exposure to growth, it's profitable growth; which is built upon a combination of the logic associated with the screening process and the discipline of running an actively managed global growth ETF.”

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TD Active Global Equity Growth ETF






100% MSCI AC World Index ND - C$






Added Value:






Note: Data as of September 30, 2021. All performance numbers greater then 1 year are annualized.

Epoch Investment Partners Inc. is a portfolio adviser of TD Active Global Equity Growth ETF.

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