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Value's time to shine – Investment Executive



Several drivers are set to continue supporting a value cycle, including healthy consumer and corporate balance sheets and a resilient banking system. Fiscal spending will also play a big part in this cycle and should support economic and wage growth.

Value investing also will benefit from rising inflation and the potential for higher interest rates.

“Moderately rising inflation is constructive for value strategies,” said Richard Wong, senior vice-president, portfolio manager and head of the Mackenzie Cundill team with Toronto-based Mackenzie Investments. “If rising inflation is due to good economic growth and leading to higher interest rates, it’s very good for value strategies and quite negative for growth strategies.”

Wong, portfolio manager of the $1-billion Mackenzie Cundill Value Fund, said he anticipates the value rotation will accelerate if inflation stays above 2%.

Furthermore, “earnings over the next year could trigger the shift away from growth stocks because we believe the pandemic pulled forward a lot of revenue and profit growth for technology companies into 2020 and early 2021,” he said. “The current multiples on growth stocks don’t account for this potential future weakness.”

As of July 31, the Mackenzie fund had a one-year return of 22.6%, while the Morningstar Global Markets GR CAD index was up by 25.3% over the same period.

The Mackenzie fund uses a bottom-up strategy to invest in global equities and usually holds about 60 securities. The fund invests in three types of value stocks: deep value stocks, which are significantly out of favour and very cheap; cyclical value stocks, which lead their respective sectors but are cheaply valued and near the trough of their industry cycles; and quality value stocks, which have recurring revenue and can compound their earnings over time.

“During the initial and middle phases of an economic cycle — where we think we are now — we would have more exposure to deep value and cyclical value,” Wong said. “As the economic cycle slows and the risk of a recession emerges, we would move more exposure to quality value stocks, which are more resilient.”

The Mackenzie fund is currently overweighted in cyclical sectors such as financials, consumer discretionary, energy and materials. “We see many businesses yet to fully capture the improved economic and demand environment in their valuations,” Wong said.

Meanwhile, the Mackenzie fund is underweighted in consumer staples and health care. “These sectors could face less upside in a strong economy,” Wong said. The fund also is underweighted in technology “as it’s more difficult to find out-of-favour and low-valuation stocks in that sector,” he said.

One of the fund’s largest holdings is Montreal-based SNC Lavalin Group Inc., a fully integrated professional services and project-management company. “Under the leadership of a new management team, SNC is transitioning to a pure-play engineering services firm, where it will have better visibility and less volatile earnings — which should re-rate the stock meaningfully higher,” Wong said. “We believe that on a sum-of-the-parts basis, SNC is significantly undervalued relative to peers.”

Another major holding is General Motors Co., the multinational auto manufacturer and distributor. Wong said GM is one of the few manufacturers that can make EVs “that consumers want to buy and at scale, given the significant [research and development] investments required to succeed.”

Within the past six months, Wong also bought shares in California-based Skechers USA Inc., the world’s third-largest footwear brand. “The brand is positioned to deliver quality and style at mass price points,” he said, and is “investing heavily in direct-to-consumer and e-commerce.”


In recent years, “the valuation discrepancy between growth and value stocks became so large that people started to take notice,” said Don Simpson, vice-president and portfolio manager with Dynamic Funds, a division of Toronto-based 1832 Asset Management LP. “The bigger the discrepancy, the better for value stocks.”

Simpson, who manages the $1.3-billion Dynamic Value Fund of Canada, said conditions favoured a rebound in value stocks once the economy began to improve and interest rates began rising. Like Wong, Simpson believes “a little bit of inflation” is good for value stocks in sectors that benefit from higher prices, such as commodities, consumer staples and financial services.

As of July 31, the Dynamic fund had a one-year return of 28.7%, while the Morningstar Canada GR Canada index was up by 29.0% over the same period.

The Dynamic fund invests in a diversified mix of businesses that have the ability to grow and generate good cash flows. The companies should have strong balance sheets and management teams that “we know and trust,” Simpson said. The portfolio is diversified by industry and ideas, and comprises 30 to 40 names.

Simpson said he determines which businesses are undervalued by meeting with management teams in order “to find out what makes the businesses tick.”

Simpson uses a bottom-up investment strategy to select stocks, but pays attention to how his ideas will play out in macro conditions. “What will happen if something goes wrong?” he asks himself.

The Dynamic fund’s heaviest weighting is in financials, with one-third of that in alternative asset managers such as Power Corp. of Canada and Onex Corp. Such companies are extremely undervalued in the current environment, Simpson said.

Power Corp., a major holding in the Dynamic fund, is trading at a 30% discount to its net asset value. Simpson said the firm has taken steps “to collapse its complicated holding structure,” and that its subsidiaries continue to experience strong growth under good management. Onex Corp., meanwhile, is trading at a 25%–30% discount, he said.

Within the past six months, Simpson bought shares in Fairfax Financial Holdings Ltd., a company with interests in insurance and investment management. Simpson said the company has a solid balance sheet, good execution capabilities and the potential for healthy growth. Further, its insurance business will benefit from higher prices.

Simpson also bought shares in Winnipeg-based Winpak Ltd., a leading manufacturer of plastic packaging for the food industry. The company is a “Steady Eddy business with a reliable stream of free cash flow,” he said. Winpak also has a large amount of net cash on its balance sheet and “a lot of room to grow.”

The energy sector comprises 9% of the Dynamic fund’s holdings and the fund “has been rotating back into pipelines, which have good free cash flows,” Simpson said. “The valuation discount is so wide that you are getting paid for the risk.”

As of July 30, the fund has a 5% weighting in communication services, 8.5% in industrials and 6% in health care.

Within the past six months, Simpson sold the fund’s holding in Minn.-based Ecolab Inc., a water purification company, because “its multiple got too stretched.” He also sold Apple Inc. because of its high valuation. Apple is a quality company, Simpson said, but he “found better ideas” in Canada.

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Canada’s third-largest pension fund beefs ups plan to cut carbon emissions



CALGARY, Alberta/TORONTO (Reuters) – Ontario Teachers’ Pension Plan Board (OTPP), Canada‘s third-largest pension fund, announced on Thursday new interim targets to cut the carbon emissions intensity of its portfolio as part of a plan to reach net-zero emissions by 2050.

OTPP, which manages C$227.7 billion ($180.11 billion) in assets, plans to reduce emissions intensity by 45% by 2025 and 67% by 2030, from 2019 levels.

Fellow pension fund Caisse de dépôt et placement du Québec also has a net-zero target by 2050, but environmental campaigners said OTPP’s interim targets are the strongest climate commitment yet from a Canadian pension fund.

Ziad Hindo, OTPP’s chief investment officer, said the fund would be looking to invest more in clean-energy companies, as well as firms offering software and services that allow other companies to transition to a lower carbon economy.

“Climate change permeates the entire investing landscape. Tackling it requires substantial effort and massive amounts of capital,” said Hindo. He compared the climate sector today with the technology sector in the 1990s, and predicted it would cause huge disruption across every industry.

OTPP is increasing staffing across various asset classes to keep up with growing investment in the climate sector, Hindo added. The fund’s portfolio currently includes more than C$30 billion in green investments such as renewable energy, energy storage, electrification, electricity transmission, energy efficiency and green real estate.

Unlike some large pension funds in the United States, OTPP is not divesting from oil and gas altogether, although it stopped actively investing in listed exploration and production companies in 2019.

“OTPP will need to go further if it wants to be considered a global leader on climate,” said Adam Scott, director of pension activist group Shift. “While this announcement describes how the OTPP will invest in solutions to the climate crisis, it makes no mention of how it will eliminate its exposure to the causes of it, namely high-risk fossil fuels.”

($1 = 1.2642 Canadian dollars)


(Reporting by Maiya Keidan and Nia Williams; Editing by Peter Cooney)

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A16z in talks to back CoinSwitch Kuber in first India investment – TechCrunch



A16z is inching closer to making its first investment in a startup in India, the world’s second largest internet market that has produced over two dozen unicorns this year.

The Menlo Park-headquartered firm is in final stages of conversations to invest in Indian crypto trading startup CoinSwitch Kuber, three sources familiar with the matter told TechCrunch. The proposed deal values the Bangalore-based firm at $1.9 billion, two sources said. Coinbase is also investing in the new round, one of the sources said.

CoinSwitch Kuber was valued at over $500 million in a round in April this year when it raised $25 million from Tiger Global. If the deal with A16z materializes, it will be CoinSwitch Kuber’s third financing round this year.

TechCrunch reported last week that CoinSwitch Kuber was in talks to raise its Series C funding at up to $2 billion valuation. The report, which didn’t identify a lead investor, noted that the Indian startup had engaged with Andreessen Horowitz and Coinbase in recent weeks.

Usual caveats apply: terms of the proposed deal may change or the talks may not result in a deal. The author reported some details about the deal on Wednesday.

The startup declined to comment. Coinbase and A16z as well as existing investors Tiger Global and Sequoia Capital India did not respond to requests for comment.

The investment talks come at a time when CoinSwitch Kuber has more than doubled its user base in recent months — even as local authorities push back against crypto assets. Its eponymous app had over 10 million users in India last month, up from about 4 million in April this year, the startup said in a newspaper advertisement over the weekend.

A handful of crypto startups in India have demonstrated fast-pace growth in recent years — while impressively keeping their CAC very low — as millions of millennials in the South Asian nation kickstart their investment journeys. Several funds including those with big presence in India such as Accel, Lightspeed, WEH and Kalaari recently began working on their thesis to back crypto startups, TechCrunch reported earlier.

B Capital backed CoinDCX, a rival of CoinSwitch Kuber that has amassed 3.5 million users, last month in a $90 million round that valued CoinDCX at about $1.1 billion.

Policymakers in India have been debating on the status of digital currencies in the South Asian market for several years. India’s central bank, Reserve Bank of India, has expressed concerns about private virtual currencies though it is planning to run trial programs of its first digital currency as soon as December.

About 27 Indian startups have become a unicorn this year, up from 11 last year, as several high-profile investors — and global peers of Andreessen Horowitz — such as Tiger Global and Coatue have increased the pace of their investments in the South Asian market. Apna announced earlier on Thursday that it had raised $100 million in a round led by Tiger Global at $1.1 billion valuation, becoming the youngest Indian firm to attain the unicorn status.

Groww, an investment app for millennials, is in talks to raise a new financing round that would value it at $3 billion, TechCrunch reported on Wednesday. The startup has engaged with Coatue in recent days, the report said.

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Why Canadians are still struggling to understand investment fees – The Globe and Mail



Advisors can ensure investors understand as much as possible by avoiding ‘using all kinds of fancy terms for all the different types of fees,’ one expert says.

gustavofrazao/iStockPhoto / Getty Images

Financial advisory fees remain a confusing subject to the vast majority of Canadian investors despite a decades-long effort by the investment industry and its regulators to provide greater clarity and transparency. That means financial advisors remain in the ideal position to help close that comprehension gap.

According to the results of a survey the Mutual Fund Dealers Association of Canada (MFDA) released in June as part of a more expansive research report, fewer than one in five Canadian investors could identify correctly what types of costs are included in current fee summaries.

“The challenge we have today is that most investors don’t get a full picture of all the fees,” says Jean-Paul Bureaud, executive director of the Canadian Foundation for the Advancement of Investor Rights (FAIR Canada), “they only get a partial picture and they might not appreciate that it’s a partial picture.”

Advisors can clarify that to clients relatively easily by making clear that current fee summaries only include the fees for advice and trailing commissions on mutual funds, he says, and that other costs – such as fund management fees and operational costs – also apply.

Advisors can also ensure investors understand as much as possible by avoiding “using all kinds of fancy terms for all the different types of fees,” Mr. Bureaud says.

In fact, the MFDA’s report states, “Even experienced investors struggle to understand key terms and how their choices influence the type and amount of fees they pay.”

That means even when dealing with sophisticated clients, advisors should not assume “MER” is universally understood to stand for management expense ratio, or what it means. Breaking down jargon such as “trailing commissions” in simple terms – perhaps as an annual fee the advisor receives each year a client holds a particular investment – will also help avoid misunderstandings.

Instead of simply noting what fees are or are not included in existing disclosures, the MFDA report urges advisors to get as close to total cost reporting as possible.

London-based global firm The Behavioural Insights Team ran an experiment on behalf of the MFDA testing four formats of expanded cost reporting. Three of them specified investment fund charges while the fourth, known as the “control” option, included only a disclosure that other charges, such as fund management and operation costs, applied.

Only 23 per cent of investors exposed to the control option were able to identify their total cost of investing correctly, while between 54 per cent and 70 per cent of investors exposed to the other three options were able to do so.

Karen McGuinness, the MFDA’s senior vice president of member regulation and compliance, says part of the reason the experiment succeeded was a focus on using plain language.

“When we did the format, initially, we were using industry terminology because it was just second nature to us, but we brought in the behavioural research firm and they were the ones who said we need to set up this information in a way that’s more easily digestible for the average retail investor,” Ms. McGuinness says.

Nevertheless, the MFDA report warns that dealers and advisors shouldn’t assume sharing more cost information will always lead to better comprehension among clients as they will eventually hit a point of diminishing returns.

Rather, the report recommends they should “eliminate any information presented in the fee summary that is unlikely to be useful to investors. People have limited attention [and] this is especially significant when information is complex.”

To establish a baseline for how much any given client already understands – and therefore how much education advisors should attempt to provide – regulators have developed a number of quick and straightforward tools for that purpose.

For example, the B.C. Securities Commission runs the InvestRight website that includes fee calculators and a short quiz designed to gauge investors’ overall comprehension of investment fees.

“It only takes about five minutes to answer the questions, and a lot of people would be surprised at what they learn,” says FAIR Canada’s Mr. Bureaud.

The Ontario Securities Commission (OSC) operates a similar website – GetSmarterAboutMoney – that offers even more comprehensive tools and resources.

Meanwhile, regulators are working on a new set of disclosure rules to replace the second phase of the customer relationship model (CRM2) that has been in place since 2016. The goal of what’s being called CRM3 is to provide what the MFDA’s Ms. McGuinness calls “total cost reporting,” as it should get disclosures as close as possible to breaking down all the fees investors pay and not just those their advisor receives.

Although there’s no timeline for when CRM3 will be complete, Greg Pollock, president and chief executive of Advocis, says advisors will need to be more transparent with their clients on fees before the current bull market goes bust.

“Investors tend to look at the bottom line, and if they see that year-over-year returns are looking pretty good, they don’t get too focused on the fees simply because they’re satisfied with the overall performance,” he says. “But it does raise the question of what happens in a bear market when performance suffers. That really gets people’s attention.”

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