Mr. Thomson: We manage approximately CAD19 billion. About a third of that is Canadian equities, both large and small cap. We define small cap as stocks with a market cap of less than 1.5 billion. We are bottom-up value investors. Preservation of capital is paramount to what we do. This holds true right across all of our asset classes, whether it be fixed income or equities. On the equity side, we believe that the value of a business is determined by the present value of future free cash flows. If we can find stocks that are trading at a sufficient discount to this business value such that they provide us with a minimum of a 50% return over the next three years, we buy them. We also believe that if we purchase companies at a significant discount to their business value, not only will there be an adequate return, but we will minimize risk.
TWST: Tell us about the Canadian equity markets, and how they were impacted by the events in the United States on the economy in the markets.
Mr. Thomson: A significant portion of the Canadian market has high economic sensitivity. Materials at 19.5% and Energy at 26.5% account for 46% of the Canadian Index. These cyclicals, by definition, have a significant exposure to the economy and when investors in 2008 were concerned about an economic freefall, the stocks were hit. At the same time, the global banking system was severely stressed. The market extrapolated problems in other banking markets into the domestic domain. This happened despite low exposure to many of the issues that came to the fore in other markets. This low exposure, however, provided scant support for Canadian bank stocks in a market that was looking for themes rather than anomalies. Historically, if you review the bear markets of the 1960s, 1970s and 1980s, Canadian bank stocks declined by approximately 30-35%. This time they dropped more than 50%. By 2009, the declines in the cyclicals and banking sectors provided a price opportunity and the stocks exhibited exceptional performance. As economically sensitive stocks rebounded, many of the names that held up in 2008, with their lower economic sensitivity, lost their lustre and underperformed.
2009 was also a market where the smaller the market cap and the lower the quality of a company, the higher the return. Large cap, high-quality companies that paid dividends returned on average 24% last year. This is in the context of market returns of 35% for the S&P/TSX. On the other hand, companies under 1.5 billion in market cap that paid no dividends, returned 143%.
Tickers included in this excerpt: CM, CVE, NXY, QBR.B, RIMM, ROG, TAP, TD, TU
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