Portfolio Update

Brandon Snow's picture

As we get into the busy fall season I wanted to offer an update on portfolio positioning and our views on the market.

A large macro risk we have discussed previously, the credit and property bubble in China, deserved further investigation over the summer.  We sent Dan, our financials analyst, to China and Hong Kong for a week to see if he could untangle the financing webs and help us understand how close we are to a crisis moment.  It became clear that, for now, the government has control over the situation. At some point they will have to take their medicine and correct the imbalances. Over the last two months we have seen targeted liquidity injections and stimulus, which has temporarily stabilized growth and financing markets. We will be watching the property markets for any indication they are losing control.

With more comfort around this risk, and continued rolling sector-corrections through equity markets, we were able to once again find companies that met our risk-reward framework. Across most portfolios cash levels have come down, from the 20% range to 10-12%. The only portfolio where cash didn’t change significantly was Cambridge Canadian Asset Allocation Corporate Class, where our team has decided to hold cash instead of fixed-income securities, with the risk-reward unfavourable across the asset class. Our asset allocation team will provide a follow-up blog on fixed-income markets, interest rates and how the funds will evolve as these factors change.

When looking across our holdings, our skew towards quality and core names has increased. At this point in the economic cycle, and with where valuations are, we are focused on business models and management teams that can create value in a low but stable growth environment. Pricing power and business flexibility is at a premium in this regard.

Over the next few months we have no idea what the market will do.  Economic growth seems fine, valuations seem fair and volatility seems unsustainably low. This is why our focus continues to be on internal value creation potential of the companies we own, and holding cash in our portfolios to take advantage of volatility if it does come back again.

We know we have been relatively silent through the summer (there wasn’t a lot to talk about!), but the conversation is going to pick up from here. As mentioned, expect a blog on our rate strategy, a post by Greg Dean on the recently launched Cambridge Growth Companies Fund, and company updates from conferences we are attending. And as always, feel free to ask questions or provide comments. We really want to keep this a conversation.

Comments

Submitted by Darren Shellbor... on

I love that you guys offer this blog. I feel connected to your team and am continuously given comfort and encouragement as I have entrusted my clients money to you. Thank you for the diligence and care that you show and I am a very happy supporter of Cambridge.

Submitted by arpadCANADA on

What overlap is there between the new Cambridge Growth Companies Corporate Class and Cambridge Canadian Growth Companies Fund in terms of stock selection?

In regards to the Cambridge Growth Companies: What is the market cap of the companies in this portfolio (large, small, medium)? What is the current AUM? What is the current geographical focus? Are you hedging currency where it is feasible and cost effective?

Greg Dean's picture
Submitted by Greg Dean on

Thanks for the interest. The Cambridge Growth Companies Fund was designed to be evolutionary from the existing Cambridge lineup and thus will have modest overlap with our existing funds. Part of this will be due to style differences among managers but we have also imposed a 10% cap on Canadian equities within the fund in comparison to the Canadian Growth Companies Fund having to be at least 51% Canada. You will recall, we soft-capped the Canadian Growth Companies Fund back in March to help manage the overall exposure to Canadian small cap companies and to ensure it could continue delivering the types of returns we expect and not need to deviate from its focus as the fund grew in size. We would rather the fund grew through performance and not net sales.

The geographic breakdown is roughly 75% U.S., 15% Europe/other, and 10% Canada with the focus being on small and mid-cap companies in all geographies. We are able to hedge currency but will not be doing so at the current exchange rates. It is entirely at our discretion.

Hope this helps and stay tuned for a more detailed review in the coming days.

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