Jennifer Radman, Head of Investments & Senior Portfolio Manager at Caldwell Investment Management Ltd. was featured in Investment Executive article Canadian stocks offer opportunity in tumultuous times
Keeping tabs on evolving trends is more important than ever
By: Katie Keir Source : Investment Executive
January 25, 2021 00:03
After plunging in March 2020, the S&P/TSX composite index recovered throughout the rest of the year and boasted a one-year return of more than 7% in early January.
Canadian stocks lagged their U.S. counterparts last year, however. The S&P 500 index had a one-year total return of more than 17% over the same period, despite geopolitical and economic hurdles south of the border.
While energy and financials were hit particularly hard, finding opportunities anywhere was far from easy last year, said Hugo Lavallée, portfolio manager with Toronto-based Fidelity Investments Canada ULC in Montreal and lead manager of the Fidelity Canadian Opportunities Fund.
Lavallée took a defensive stance at the beginning of 2020, when record-high markets made it harder to find attractive opportunities.
“And then you were hit with the mother of all shocks,” Lavallée said.
When the pandemic struck, his first step was to check his cash reserves and “reinvest more aggressively” with a focus on small- and mid-cap stocks.
The Fidelity fund, which had assets under management (AUM) of just under $2 billion across all series as of Dec. 31, 2020, uses a contrarian strategy that seeks out-of-favour stocks.
Its top three sectors as of Nov. 30 were consumer discretionary (19.7%), financials (14.5%) and materials (13.2%), each of which had much heavier weights than a year earlier.
Investing in small- and mid-caps requires a lot of due diligence, Lavallée said.
“You have to connect with the companies, understand the balance sheets and how things are changing,” he said. “Things were so fluid. I hadn’t worked that hard, frankly, in 12 years.”
For the 12 months ended June 30, the Fidelity fund’s portfolio turnover was 100.6% — higher than the 94.1% average for the preceding two years.
Lavallée initially looked at consumer staples stocks and grocery chains, based on demand early in the pandemic, before pivoting to analysis of bicycle manufacturers and work-from-home stocks.
All that work paid off: series F of the Fidelity fund returned 29.1% in 2020, versus 3.22% for its benchmark, the S&P/TSX completion index.
By the end of September, the Fidelity fund’s top three names were all long-time holdings that remained resilient: Montreal-based Dollarama Inc., Brookfield Renewable Partners — owned by Toronto-based Brookfield Asset Management Inc. — and Laval, Que.-based Alimentation Couche-Tard Inc.
The lockdowns caused Dollarama and other retail stocks to become undervalued, Lavallée said. He added to his position in Dollarama in the third quarter of last year, due to his positive outlook on seasonal sales heading into the holidays. (In December, Dollarama opened 19 stores; it reported higher quarter-over-quarter sales and gross margins in Q3 2020.)
Alimentation Couche-Tard is “a mobility play” for Lavallée. The convenience store chain remains a shopping option during lockdowns.
Looking ahead, Lavallée expects leisure stocks to rebound and he’s watching the growing appetite for renewables, an area he’s been keeping an eye on for several years.
The Fidelity fund has international exposure, and Lavallée is looking at names such as Texas-based Darling Ingredients Inc., an agri-food manufacturer, and other renewable energy stocks.
The pandemic, Lavallée said, has “accelerated” a trend toward environmental, social and governance investments, especially with political leaders in both Canada and the U.S. encouraging people to think about their responsibility and impact.
Jennifer Radman, head of investments and senior portfolio manager with Caldwell Investment Management Ltd. in Toronto, manages the Caldwell Canadian Value Momentum Fund, which had AUM of $102 million as of Dec. 31.
The Caldwell fund seeks a concentrated portfolio of 15 to 25 stocks — it had 22 in December — and looks for opportunities by examining how companies are rated and re-rated.
The fund had high turnover — expected to be more than 120% — in 2020, compared with 75% in 2019.
Such turnover isn’t unprecedented: the Caldwell fund saw turnover of 167% in 2014 and 162% in 2018, although those were “very active years,” Radman said.
The Caldwell fund had a strong year in 2020, with series A achieving a net return of 10.81%. That compares to 5.60% for the fund’s benchmark, the S&P/TSX composite total return index.
Radman was looking for resilient companies when the pandemic struck. “We saw [several] themes in the portfolio that really drove a lot of our outperformance,” she said.
Radman and her team were on the defensive and looking at grocery names and safe havens, such as gold.
She sought companies with predictable earnings and revenue models (e.g., utilities stocks), as well as companies that benefited from the pandemic, such as Kinaxis, an Ottawa-based software provider.
Radman also looked to the cleantech space, including Toronto-based Northland Power Inc. While she sold Northland Power in November, it was part of the Caldwell fund’s top 10 holdings for much of 2020.
“When people were trying to figure out what trends would remain in place through Covid-19, it became clear that there was a commitment on behalf of governments globally to continue and maybe even accelerate clean investments,” Radman said.
One of the Caldwell fund’s top-10 names is Blainville, Que.-based Xebec Adsorption Inc., a renewable energy firm, at about 5% of the portfolio.
“We’ve done quite well on that position,” Radman said. “[Xebec is] one of those companies that has some compelling technology, and it’s seeing some very strong demand for its products, with decades-long tailwinds behind it.”
The Caldwell fund’s top holdings as of Nov. 30 included Valcourt, Que.-based BRP Inc., a consumer name, alongside Mississauga, Ont.-based Cargojet Inc. and Montreal-based TFI International Inc. The latter two are in the industrials sector.
In late summer and early fall, the Caldwell fund rotated toward industrials, materials and more cyclical players — areas Radman expected to rebound after the market bottomed in 2020.
“Having a strategy that’s nimble and that can adjust quickly is becoming more and more important,” she said.
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