2015 portfolio update

Brandon Snow's picture

Another year has passed and with the changing of the calendar we repeatedly get asked what's in store for the next 12 months. Of course it's impossible to predict the future, and a calendar year is an arbitrary timeframe, but we are always happy to discuss opportunities we are seeing as we go through our investment process.

We have started the year with a slight case of volatility. It's amazing how the bearish news reports pick up at the first downdraft in the market. And while a few negative trends do exist such as the oil price collapse and its impact on commodity producing nations, continued slowdown in China, renewed European strife, and risk of deflation, the positive drivers of the equity cycle remain intact. We still see good economic momentum, lots of liquidity, and fair valuations.

With a team of 11 experienced investment professionals out there turning over rocks, we are finding more potential investment opportunities than ever. We believe the key to achieving the best return is remaining patiently objective in what we add to the portfolio – we take what the market gives us during these bouts of volatility and don't fall in love with “names” or “stories”.

We still believe the best opportunity for value creation remains in the U.S. The breadth of companies available for investment and the underlying economic strength – especially with the tailwind of cheap oil – are clear positives. However, these positives are already understood and priced in. So we have to rely on our stock picking abilities to find the best opportunities. Four years ago you could just buy the market and feel confident you were getting an attractive risk-reward, but this isn't the case today.

In Europe, there seems to be a lack of the same potential for value creation while offering attractive valuations. Sentiment is extremely low and the market is ripe for investment in our core type of companies with low expectations and valuations.

Canada, on the other hand, is becoming more and more difficult to uncover opportunities. As oil has joined the list of commodities that have collapsed in the last few years, Canadian dedicated mutual funds continue to squeeze into a smaller percentage of the domestic market. Because of the search for anything other than commodities, our core names are not as cheap as they once were, and the commodity complex still lacks the type of businesses that consistently create value for shareholders over time. We are still digging around for potential non-core investments in the carnage. And, while a fall in the oil price from $90 to $70 is a problem for oil producing companies, a fall to $50 is a problem for oil producing nations. We have yet to see the economic impact of this low level of oil prices in Canada and we remain cautious on adding domestic exposure.

With an expanded team and a world of potential investments, we are finding a number of new opportunities for our funds but few are coming from the Canadian market. Our Canadian funds continue to bump against our foreign ownership restrictions, with much better opportunities in our U.S. and international mandates. For this reason, we will be adding to our personal holdings in Cambridge Growth Companies Corporate Class, our most flexible mandate and probably the best opportunity to capitalize on the opportunities we are finding these days.

Here's a quick update on Cambridge Growth Companies Corporate Class by lead manager, Greg Dean:

I would like to say thanks to those who have already supported the fund. We had a strong finish to 2014 and there are things we can improve on in 2015. As a “best ideas” global fund it has been an exciting time to be putting our clients' money to work. The focus remains squarely on cash flow per share growth, be it from organic or inorganic growth (M&A). In an environment where growth is tough to come by, unless you want to meaningfully overpay, we have been rewarded by remaining patient and trying to identify inflection points before they are obvious to others.

Over the last two to three months, the European weighting in the fund has increased from 10% to 20%, as we have been getting the fund more fully invested. I see Europe as an area ripe with companies that have clean balance sheets and that have a lot of their growth within their control.  These companies also have very strong stewards of capital at the helm and are finally starting to see the value of their efforts rewarded by the stock market. It could be a very significant area of positive surprise in 2015 but given the uncertain fiscal and monetary issues in Europe, I am unwilling to meaningfully increase the weight beyond where it is today.

The majority of the fund (60%) is still invested in the U.S. and has remained consistent since inception (July 2014). A few months ago, I wrote about the positive impacts that accrue to the U.S. consumer from lower oil prices. If you missed it you can re-read it here but suffice it to say the consumer, industrial, and financial companies we own in this fund are very well-positioned. In terms of sector weightings, consumer discretionary remains the largest at roughly 25%, followed by financials, then industrials. I will be eating my own cooking, so to speak, as I will be adding to my personal holdings in the fund this week. 2015 will be a busy travel year in terms of site visits, global conferences, and management meetings and I look forward to updating you on our travels.

Comments

Submitted by Max Xing on

Your dedication to meaningful active management of Cambridge funds is very appreciated and highly recognized.

Could you please compare/comment on the growth funds (e.g. Cambridge Growth Companies Corporate Class) and dividend funds (e.g. Cambridge Canadian Dividend Fund, Cambridge U.S. Dividend Fund, and Cambridge Global Dividend Fund) taking the current economic cycle into consideration?

Thanks.

Brandon Snow's picture
Submitted by Brandon Snow on

Like everything in investing the answer is – it depends. I think growth funds, even though we are later in the economic cycle, deserve a part of any portfolio focused on the long term. But, I do prefer the global growth these days due to the multitude of secular (rather than cyclical) growth opportunities globally. The Cambridge Growth Companies Corporate Class can be a core equity portion of any portfolio.

For someone with a lower risk profile who is looking to add to its equity holdings today, I feel the dividend funds are the better option. I also believe they offer better risk-reward than many fixed-income funds today. The fact is you need to buy either emerging market or high-yield bonds to get more than a 4% yield in the current environment, which doesn't compensate you for the risk of those underlying assets. In my opinion, some combination of our dividend funds and cash would offer a better, low risk portfolio.

The other thing to note, of course, is I believe stock picking will matter more in the dividend area going forward than it has to date, and our portfolios are differentiated from most. We do think we have built the dividend portfolios of the future.

Thanks for the question, I hope that helps.

Brandon

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