by Tom Bradley

Earlier this week we emailed our clients to inform them of a manager change for our Global Equity Fund. Aristotle Capital Management has taken over sub-adviser responsibilities for the Fund, replacing Velanne Asset Management.

About Aristotle

Aristotle was founded in 2010 and is an independent, employee-owned investment manager backed by an experienced leadership team that has worked together for over 25 years. The Los Angeles-based firm has built an impressive, index-beating track record* over its 10-year history, and has attracted a team of experienced, like-minded investment professionals.

The manager has an investment process which we admire. They look for high-quality companies in great and/or improving businesses, and assess their value utilizing a private equity approach (i.e., as if they were buying the entire business). They also seek to identify catalysts that fall outside the market’s short-term focus, such as changes in leadership, divestitures/acquisitions, margin improvements and/or productivity gains.

While Aristotle places significant emphasis on a company’s valuation, they do not invest solely in businesses traditionally defined as “value stocks” (i.e., those with low P/E multiples and low price-to-book value ratios). They are a style agnostic manager with investments in both fast-growing and more mature companies. This is a feature of the firm that sets it apart from Velanne, and an attribute we think will help lead to smoother, more attractive returns.

We feel Aristotle has three key advantages that help set the firm apart and have enabled it to flourish:

1. Independence — Aristotle is controlled by their working partners, and they are not beholden to external shareholders and potentially competing interests.

2. Owner’s mindset — Similar to private equity investors, they take a long-term view, valuing the entire business and focusing on operating fundamentals rather than macroeconomic factors beyond management’s control.

3. High conviction — They build focused portfolios of businesses that they know well and do not “rent” stocks or trade pieces of paper based on a hunch.

More on the change

The timing of the change was precipitated by Velanne’s decision to wind down its business. A poor start to performance weighed on their growth. The environment for value stocks (Velanne’s area of focus) has been especially difficult over the past few years. The challenges brought on by COVID-19 have also been arduous for the young firm, notably the inability to get out and meet potential clients.

Nonetheless, we are always prepared to change a fund manager if circumstances require it. Salman and I continuously meet with and evaluate investment managers from which we develop a ‘bench’ for each fund. We were able to move quickly when we received the news from Velanne, narrowing down our list to a handful of firms and conducting extensive due diligence on each. From this process, we’ve found a world-class money manager whose investment philosophy is closely aligned with ours.

The transition

The Fund will go through a transition over the next few weeks and the changes will be fully reviewed in our Q4 Report. As part of this process, there will be capital gains realized on some of the stock sales and we anticipate that the December fund distribution will be higher than normal (remember, capital gains are exempt from tax if you hold the Global Fund in a registered account such as an RRSP, RRIF or TFSA). If you have any questions on how this might impact your personal tax situation, please reach out to one of our Investor Specialists.

Going forward, the Fund will consist of 45-55 companies and continue to look nothing like the index. Yes, Aristotle is an ‘Undexer’ to the core: they invest with a long-term view, build focused portfolios, and keep trading activity to a minimum.

For those who want more information on Aristotle, I encourage you to read the Fact Sheet we have put together and watch the video of Greg Padilla (one of the firm’s lead portfolio managers) in which he discusses the owner’s mentality they take when it comes to investing. And as always, we can be reached at 1-888-888-3147 if you’d like to speak with us about the change.

(*Aristotle’s track record is from 9/30/2011 – 9/30/2021.)