To give our clients at the Susan O’Brien Group more financial clarity during a pandemic and illustrate how we can react to our investment changes, I’ve been hosting a five-part webinar series titled, Financial Wellness During a Pandemic.
In the third call in our series, I hosted Kim Shannon, President and Co-Chief Investment Manager, and Stephen Jenkins, Co-Chief Investment Manager, of Sionna Investment Managers. Sionna is one of my Calgary wealth advisory firm’s partners in investment management and I’ve been working with them for about 10 years. They’re a bottom-up value investor and manage assets on behalf of institutions and private clients.
In the webinar, Kim and Stephen discussed how to execute a plan that’s focused on process and not emotion, as well as how to look at your investment portfolios with confidence. The talk gives a glimpse into what teams are doing the behind-the-scenes right now to take advantage of opportunities for you.
Kim, who founded Sionna in 2002 and has more than 35 years of industry experience, started the discussion. She began by talking about the environment in which we invest. She said the market is just as much about human emotion getting embedded in stock prices as it is underlying fundamentals. You have to appreciate and understand that both come into play. How a value manager works is by looking at the long-term fundamentals of a stock. That doesn’t tend to change a lot over time but the sentiment or emotion in the market overall or around an individual stock can change dramatically and that leads to all of these market movements.
Kim noted if you can keep your emotional steadiness in the middle of all of that emotional chaos, you will be presented with opportunities. She said by standing aside, you can take advantage of those market moves by buying when a stock is cheap and then patiently waiting to sell it until people are willing to pay you a very rich price.
There’s also another behavior that’s common in the market. Because we’re social herding animals, we’re very curious about what other people are doing and we often want to join the trend or the in-crowd. Kim said you have to have a very disciplined process and a lot of knowledge of financial market history to stay the course.
Kim said there is volatility in the market right now because of human emotion. This recent dramatic shift in the market is bigger than others in our investing lifetime. However, using historical data, she illustrated that after every expansion in history we got a pullback and after a pullback, we always get another expansion. The upside is always greater than the downside. In the short term, there can be a loss but in the long term, it all adds up and investors make and create long-term wealth.
Kim brought up another chart with historical data showing that when there’s very narrow leadership or the market is concentrated in names, that’s when it’s the riskiest. For example, in 2000, it was an interesting market. The combination of Northern Telecom and BCE represented a significant weight in the overall benchmark. They represented over 75% of the returns but then it corrected very dramatically. Investors who stayed the course and didn’t chase the expensive stocks did well for a longer period of time and had a much gentler ride.
We still see that narrowing in Canada and in the United States, as well. Now, Shopify is currently the largest stock in Canada and it represents a significant part of the market return. It’s the same in the United States. Look at the NASDAQ. 10 stocks represent 43% of that index. The market is a little bit riskier and it behooves investors to be cautious. We expect a bit of a rough ride but we know it won’t last long overall.
Kim then turned the call over to Stephen Jenkins, who has more than 25 years of experience in both domestic and global equity markets. Stephen started off by saying that as Kim alluded to, as long-term owners of companies, Sionna gets excited when prices fall to what they deem irrational levels relative to the long-term view or long-term value of that business. How does one step in and make high conviction moves during dark days like we saw back in March where uncertainty is very high and the future outlook is murky? He said, for his team, that guiding light is their long-term view and the deep research at Sionna, which ensures they know their businesses really well.
In reference to Sionna’s holdings, he said when they’re looking out over three, five or 10 years, he knows that not only will these companies be financially sound and stable but they’re in competitive positions that will allow them to get bigger and stronger. So, when they emerge from an environment like we’re in today, they’re going to be fortified relative to the positions they’re currently holding.
Stephen said the stock market is driven by fear and greed and as long-term investors, what they try to do is take advantage of those often very extreme emotions. He referred to the old story of your local BMW dealership where the dealer says all cars on the lot will be 50% off tomorrow. The line would certainly be around the block. However, when stocks fall and the underlying business is being valued at similar discounts, often, the reverse scenario unfolds. That’s when the fear sets in. What Kim, Stephen and the Sionna team try to do is selectively take advantage of those sale prices and it’s something they’ve been doing a lot of over the recent months.
Stephen said a lot of folks are spending a ton of time speculating about what will happen going forward and what will happen to certain industries. Will people still travel? Will people still want to go out to eat at restaurants? It’s very difficult no matter how skilled you may be at forecasting. It’s almost a futile exercise. Stephen said that at Sionna, they spend their time trying to understand the financial durability of the businesses they own. Can they withstand a long period of a business slowdown? Will they be able to take advantage of this period and emerge as a stronger business? That’s where they’re focusing their efforts.
While the Sionna team has been working from home, the team comes together every morning. They have a lengthy call where they discuss things like portfolio construction, specific research, etc. Constant communication is always key but especially during a time like this since decisions need to be made quicker and conviction levels have to be high.
Stephen talked about how one of the biggest impacts you can have on your portfolio over time is adding to your existing holdings and Sionna has been doing that. In terms of specific opportunities Sionna has been capitalizing on, Stephen said they are companies they already have a great deal of knowledge about that they’ve built over time. They have a deep database of knowledge, which is a real asset, so they’re able to move with a great deal of conviction when adding companies to their portfolio.
Some examples include Methanex and Nutrien. Methanex is a leader in the production of methane globally and Nutrien is a global leader in fertilizer. Both companies were very depressed and cheap in respect to their earnings and cash flow. Methanex has been a long-term holding for Sionna and they took advantage of their knowledge base. They trim the position when they feel it’s overvalued and add to it when they feel it’s undervalued, as is the case today. They continue to believe these businesses are operationally sound and have cash flow that will be strong and robust in the years ahead.
Stephen also said they’ve been adding to their bank holdings. For some time, they have held positions in Royal Bank, TD and Bank of Nova Scotia, the preeminent banks here in Canada. TD is very conservatively run and has a growing footprint in the U.S., which he said they admire. Bank of Nova Scotia has a footprint globally. There’s attractive growth in that business long-term. They took advantage of the downturn to add to their position in Royal Bank and TD. Both stocks were somewhere near 30% off in March. They had concerns with the banking sector in Canada coming into the year but when the stock fell 30%, they felt the near-term risk was more than priced in at that level. From a historic perspective, the banks are very cheap on all metrics and they’re a very resilient business. These banks have some of the highest returns on equity in the global banking industry. The dividends appear very safe and the long-term franchise value is very much intact. Sionna believes the long-term return potential for these banks over a five-year view is attractive.
Another area that Sionna has been selectively adding to, which Stephen admitted is a controversial area, is the energy sector. He said it’s important to keep in mind that during dark days like this when there’s little to no visibility, good, long-term assets can be found on the cheap. Sionna hasn’t been running for the exits like many others have. They took the opportunity to increase their holdings within the sector, favoring businesses with a low cash cost, break even. They’re looking for companies with cost structures that will feed them through these tougher periods and where their balance sheet strength will also provide for reactions to opportunities that may present themselves because in times like this, there will always be opportunities that are financially sound.
Sionna has been adding to companies like CNQ and Suncor, two of their key holdings in this sector. After decades of innovation and investment, they’re at the lower end of the cost curve. They’re financially strong and will generate high levels of cash flow over the coming years in what Stephen believes will be a much higher oil price environment than what we’re experiencing today.
Sionna has also added to its position in Pembina Pipleline. Stephen remaked that it’s a good holding for them. It’s an infrastructure company that operates in the oil and gas pipeline business on the processing and gathering side of the industry. It’s a business that isn’t directly impacted by movement in the commodity price but it’s stock certainly got caught up as if it was directly impacted. A lot of stocks get painted in the same brush in an environment like this and Pembina was one of them. The stock came down quite hard and Sionna took advantage of what they felt was undue punishment and built their position in what they feel is a quality, financially sound business with very durable characteristics and high growing cash flow that will be consistently generated over the coming years.
Sionna also added a new holding as well and took a stake in CP Rail, a company they’ve admired for some time. The research was already completed months earlier and they had been patiently waiting for the price to come their way. It came quicker than expected but that was okay. They took a stake in it and it provides them with that margin of safety they were looking for. They also have a large holding in CN Rail. It’s an industry Stephen said they like a lot because of competitive advantages like pricing power and high barriers to entry.
Stephen wrapped up by saying on the flipside of this, Sionna has done some selling and trimming in their portfolio. Most of this was largely in areas where they felt businesses and stocks were trading closer to their assessment of their long-term fair value and they were sources of cash for Sionna.
As you can see from both Kim and Stephen’s input, sticking with sound processes and leaving emotion out of it, can go a long way in not just riding out a storm but coming out stronger. If you need help ensuring that for yourself, contact me today.