Investing in Canada for Downside Protection
TWST: What do you believe are the most compelling reasons to invest in Canadian stocks right now?
Mr. Bhatia: Well, Canada, from a stability standpoint, has fared well versus most of the world. Our financial system is quite sound. We endured the credit crisis better than most nations. While our unemployment is higher than average recently, it remains muted relative to most countries in Europe and marginally lower than the United States.
TWST: Do you believe global investors have a solid understanding of investment opportunities? And what are some common misconceptions or little-known facts about investing in Canada?
Mr. Bhatia: That’s a great question. Canada represents about 4% of global investment opportunities. If I am a global investment manager, the question is how much of my time and effort am I going to spend on a region that represents 4% of the world economy, albeit a quality 4%? The current situation in Canada is approximately 75% of the S&P/TSX 60 Index, is represented by energy, materials and financials. If I'm a global manager looking for exposure to those specific sectors, I'd see Canada as a strong opportunity despite the fact that it's small.
Given the fact that Canada is relatively small by market cap, it has created some opportunities for diligent fundamental research conducted by global managers. There are definitely diamonds in this market. I think the world has started acknowledging more Canadian opportunities, but I don't think we are where we can or will be.
TWST: How would you describe your overall investment philosophy?
Mr. Bhatia: We focus our efforts on finding high-quality subadvisers for our mandates. The vast majority of our funds have third-party subadvisers, and we utilize manager oversight as our value-added focal point. From an investment philosophy standpoint, we ensure to the best of our abilities that our subadvisers have philosophies compatible with ours. These tend to include fundamental, bottom-up security selection, risk management via diversification across sectors, a focused mandate with a disciplined buy and sell approach where investing in select companies is the key to adding value through active management, quality investments, and environmental and social governance criteria for our Meritas Fund family.
To give you an example of one of our subadvisers, the adviser on the OceanRock Canadian Equity Fund is GLC Asset Management, and specifically, Brad Cann. Brad's focus is definitely on downside protection through investment in dividend-bearing investments, which have held up very well over the market volatility since the credit crisis in 2008. This mandate is currently overweight financials, underweight energy and overweight consumer discretionary stocks.
In these types of situations, we like the fact that our manager is doing some significant fundamental analysis, which is not only based on current dividend yields, but also the sustainability of those dividend yields, and hopefully, the growth of that yield. There’s little interest in a security paying a dividend today that may or may not be there tomorrow.
This goes back to our philosophy on quality. High-quality companies emphasize dividend sustainability and growth, which fits well into our ultimate philosophy in protecting our client’s capital. Our goal is to utilize subadvisers that are not necessarily going to shoot the lights out in any given year for a 40% return, but follow our principal of mitigating downside risks. As I mentioned, we believe in managers that use a diversified approach, focused on analysis of individual securities rather than going too broad-based and providing us with index-like exposure.
In the example of the OceanRock Canadian Equity Fund, there is currently no exposure to materials, technology or health care stocks. This is due to the fact that technology and health care have minimal representation in the Canadian markets and are generally not high dividend-yielding sectors.
TWST: Please talk about the sectors you do have heavy weighting in, such as financials, energy and consumer discretionary. Why are those the right places to be in Canada right now?
Mr. Bhatia: Well, as I mentioned before, it's tough to construct a Canadian equity fund without exposure to financials. Financials are the single biggest sector in Canada, representing over 30% of the benchmark. Energy is approximately 25% or so of the benchmark, and similarly, it’s tough to ignore this sector as a result.
With regards to the Canadian energy sector, we are more dependent on global demand than we are for the financial sector. The energy sector has traditionally had some relatively strong dividend yields, which represents an opportunity for downside protection in a volatile market. Since we can't predict the future, especially what’s going to happen over short term, the only thing you can bank on is a dividend yield that provides you with a base level of protection. So the Canadian financial and energy sectors tend to provide strong dividend yield and downside protection for client investments.
TWST: At the beginning, we talked about the compelling reasons to be invested in Canadian stocks. So on the flip side, what are the most significant risks to investing in Canadian stocks at the moment, and how does OceanRock's investment strategy seek to minimize those risks?
Mr. Bhatia: The fact is that Canada is a component of the global economy, so we are subject to risks on a global basis as well. A slowdown in countries such as China will definitely have a significant impact on certain sectors of our economy. For our export business, China represents a growing portion of revenues to our nation. The United States remains our largest trading partner, and as such, we remain sensitive to slowdowns or recessions in that nation as well.
Being a commodity-based economy, our currency is also sensitive to the price of oil and other commodities. As the price of these commodities decreases, the Canadian dollar takes a hit as well.
The current situation in Europe is another example of a risk to the Canadian market. If the large portion of the world is undergoing sovereign debt problems, the Canadian market is not immune to the risks stemming from decreased demand from these countries and Canadian institutional investments within these countries.
For example, the lack of infrastructure expansion in nations with mounting deficit or debt issues are going to result in lower material prices stemming from decreased demand. This will in turn hurt the bottom line of Canadian material companies. A key to protection against these downturns is avoiding concentration only within two or three sectors, and diversifying investments across a broader range of investment options.
TWST: How would you describe the investor who is going to be a good match for the OceanRock or Meritas Funds or the OceanRock Canadian Equity Fund?
Mr. Bhatia: One of the key differences with OceanRock is our investment opportunities across two fund families: the Meritas Funds, which offer investments screened for socially responsible criteria, and OceanRock, offering traditional investment screens.
Meritas has been around for more than 10 years now, and I believe it remains the only fund family in Canada which invests in community development or microfinance loans. These microfinance loans provide an opportunity to help finance small businesses in underprivileged nations around the world. These investments provide investors with the opportunity for a social return in addition to financial returns. Investments may be flat, marginally up or down, but other good is being done within these mandates and our clients appreciate that.
Having both of these fund families available to investors gives us the opportunity to offer choice to our clients depending on their specific investment and socially responsible needs.
We also emphasize a portfolio-based investment approach, which during times of increased volatility or a downturn can help mitigate risk by combining investments across securities and sectors worldwide. Right now, many investors are looking at problems on a global scale, where we have seen a dichotomy between several have and have-not nations. The relative strength of the Canadian dollar has also made foreign investments cheaper for Canadians as well.
For the OceanRock Canadian Equity Fund, a good match would be an investor looking for diversified exposure to the large-cap Canadian market through a relatively conservative, low-turnover mandate with a manager focused on security selection rather than market timing, making prudent investment decisions reflective of long-term fundamental analysis rather than short-term decisions based on externalities, and strong downside protection from dividend-yielding stocks. The mandate, like our balanced portfolios, is ultimately designed for individuals who want to minimize volatility while holding investments capable of achieving their long-term investment goals.
TWST: Thank you. (MES)
Chief Investment Officer, Vice President & Portfolio Manager
OceanRock Investments Inc.
505 Burrard St.
Vancouver, BC V7X 1M6
(866) 924-6767 — TOLL FREE