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Market Insight 2015

Market Insights – Winter 2015

Provided below are a few thoughts outlining how we plan to protect investors capital and generate equity-type returns while managing the risk. Going into Q1 2015, we will be acting upon a number of investment themes…

BT Global Growth Market Insights going into 2015

We will be long-biased with significant cash positions and short positions of between 25-35%. In general, we are still constructive on the equity markets as they are not yet expensive while the bond markets, including government bonds, appear to us to be significantly overpriced. As was the case in 2014, the Canadian equity markets will likely underperform US markets, but will still have positive performance. The best opportunities are likely to be through US focused growth companies that are listed in Canada.

We will make concentrated investments in certain sectors where we see significant opportunity and at the same time avoid many sectors we believe to be fully valued or relatively unattractive. We believe Sector allocation to be the single most important decision to determine satisfactory results.

We believe the US Housing market shall continue to recover and new home construction will surpass the 1.1 million annual level. We are long the lumber companies including West Fraser, Canfor and our favorite Interfor Corporation, as they offer very good value and have very reasonable EV/Ebitda or cash flow multiples of 6-7 x. These same names were our preferred commodity picks in both 2013 and 2014 and they performed magnificently. They will continue to outperform. The industry in total is a miniscule percentage of the larger equity indices so they continue to be under-owned by pension funds and index-chasing mutual funds. As the companies continue to prosper, these large investors have no choice but to buy these stocks, pushing them higher.

We would advise investors to continue to buy US real estate opportunities and avoid Canadian REITs which have become fully valued. Furthermore, US Financials are preferable to Canadian Banks, as they offer better value with more upside as they continue to recover from the 2008-09 financial crisis. The best Canadian Financials will likely be the non-bank players or special niche opportunities (EasyHome, EH.to or Element Financial EFN.to).

For the first time in years, we will avoid both oil and natural gas companies. The problem is rather simple, energy prices are being determined by geopolitical and not only fundamental behavior. The price of both WTI and Brent oil could rebound to US$80 or fall into the US$35-40 range. Who knows which? We will be a buyer when prices stabilize and anticipate that new lows may well be the intention of several Western governments, giving investors a headache now, but a terrific opportunity later, likely sometime in Q3 2015.

We have been neutral on our exposure to Gold and gold stocks for years now. It was simply too volatile and unpredictable a sector. Given the volatility in the currency markets, this will be a good year to be long bullion as well as a few gold names. We will increase our exposure to a minimum 10% weighting and recommend the mid-cap rather than large cap players. They have lower cashflow multiples, less debt, better management and are more likely to be someone’s acquisition target (KDX.to, RIO.to, LSG.to look good to us).

The best opportunities for out-sized returns may well be via investing in Canadian equities linked to the US economy. Our favored investments would be the auto-parts players like Magna International and Martinrea International; the large cap industry leaders such as Amaya Gaming, Gildan Activeware and Couche-Tarde; and the smaller cap technology players like Guestlogix. This theme is not going away for years to come and has become a core philosophy of the Fund.

Another recent theme that has been working well and will likely continue is companies with a roll-up strategy to grow their businesses. Many of Canada’s top performers during the LTM are roll-up acquisition stories including, Patient Home Monitoring (PHM), Element Financial (EFB) and Concordia Healthcare (CXR).

As in 2014, we expect the currency markets to provide excellent opportunities. We plan to stick with the successful trades of being short the Euro, Canadian Dollar and Japanese Yen in favor of the US dollar.

Management Philosophy

  1. We are committed to the first rule of investing: preserve capital.
  2. We believe value investing based on cash flow analysis is the best method to truly protect a portfolio. We stay away from the darling stocks, concept stocks, negative cash flow businesses and high-multiple stories, while seeking value plays that could easily double or triple over time.
  3. We will not use excessive leverage. In fact, the Fund is not permitted to be levered more than 30% of invested capital. This restriction includes using leverage in the form of options, futures, etc.
  4. We prefer to “average up” rather than “average down”. More than any other strategy for investing, this practice will keep the Fund out of trouble and ensure superior performance. In so doing, we reduce our mistakes and accentuate our successes.
  5. We believe the Canadian equity markets are anything but efficient. These volatile markets continue to produce extraordinary opportunities, with dozens of companies trading at very reasonable values, while highly speculative, underfunded or excessively levered companies often trade at surprising lofty valuations. We have observed relatively little market-making from the Canadian brokers on many equity names, resulting in considerable volatility and reduced volumes. We constantly witness $300-$500 million and even billion dollar companies having their value fall 10% in a day, based on minimal trades that total less than $1 million. Such short term volatility presents trading opportunities for value investors like ourselves.
  6. The current popular trend of Index investing (ETFs and Index Funds etc.) strikes us as somewhat ill-timed and practically guaranteed to disappoint. If there was ever an equity market to emphasize sector rotation strategies and stock picker expertise, this is it. Good managers should outperform the larger Indices over the next few years. Index investing shall likely prove to be a better tool for “shorting” strategies than anything else.
  7. Finally, investing today requires a global perspective and experience, which the majority of Canadian investment professionals simply do not have. This presents a problem for many Canadian companies, which are more properly valued based on international, not domestic, parameters and allows us to continually arbitrage international investment opportunities.
  8. Investing on a long-only basis is simply inferior to long-short portfolio strategies. This is particularly true in either a low interest rate environment or highly volatility markets. Now and for the next several years, North American investors will likely continue to experience both. Our preferred philosophy is to embrace and accept the volatility.

For more information about our Global Growth Fund, we invite you to contact us today. It will be our pleasure to answer your questions.

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