by Scott Ronalds

Last month, we hosted a lunchtime investment discussion with Nessim Mansoor, the manager of our Equity Fund. Nessim shared insights into his investment approach and discussed several of the fund’s holdings.

We’ve held similar events in the past, “pre-Covid”, and wanted to gauge interest in face-to-face events again now that virtual meetings have become so popular.

Your participation confirmed there is still a strong appetite for in-person events. We plan to host more of these sessions in the future, with the next one scheduled for Vancouver in February. Connor, Clark & Lunn’s Carolyn Kwan (the manager of our Income Fund and Savings Fund) will lead a discussion on interest rates, inflation and all things bonds. More details to come.

For those who were interested in Nessim’s discussion but couldn’t attend, here’s a recap of the key topics.

A new U.S. president and potential tariffs

“The companies we own have been through recessions; they’ve been through all sorts of tough times.”

Many investors are curious how President-elect Trump’s return to the White House might impact our investment decisions. Nessim explained that the impact is expected to be minimal. His team focuses on building a portfolio of strong businesses with good long-term track records that have done well regardless of the administration in power.

A prime example is S&P Global. The company provides credit ratings, market data, and analytics to a wide range of industries. With roots dating back to the 1860’s, S&P Global has thrived through many presidencies and economic policies. Its success is due to the high value it provides to customers and its expertise in what it does. Moreover, S&P Global operates in an industry with very few competitors and high barriers to entry (building 160 years of trust and expertise doesn’t come easy). So regardless of who is in the oval office, the company remains well positioned to succeed.

Turning to tariffs, where there is perhaps the most uncertainty, Nessim doesn’t foresee widespread impacts on our holdings. This is because we don’t own a lot of companies that are shipping physical goods to the U.S., like auto supplies, oil, or lumber.

Rather, our Canadian investments that conduct meaningful business in the U.S. tend to operate in the service industry. Examples include Thomson Reuters and CGI. Thomson Reuters is the world’s largest supplier of legal software and generates three-quarters of its revenues in the U.S. but doesn’t ship anything across a border. Likewise, CGI is a software company that has business contracts with the U.S. government but isn’t moving nuts and bolts potentially subject to tariffs.

Two exceptions are our railroad holdings, CN Rail and Canadian Pacific Kansas City. Both companies transport goods across the border and would be affected by tariffs or a trade war. Yet, because the talk is still aggressive rhetoric at this point, it’s difficult to forecast any potential impact. Of note, the two companies’ operations and earnings weren’t significantly impacted during Trump’s previous term.

Focus on companies that provide compelling value to their customers

“We look for companies with durable competitive advantages and strengths that will endure over time.”

A key trait that Nessim looks for in a business is an edge in the value proposition it offers its customers. Dollarama, Costco, and TJX Companies are examples.

• Dollarama: Known for its low prices and operational efficiency, Dollarama has doubled its revenues and quadrupled its net income over the last decade without spending a dime on advertising. How? It offers great value. What it sells is 30-50% cheaper than anywhere else. Dollarama is obsessed with low prices and is very shrewd about sourcing products. Management is also smart with real estate: the company has figured out a formula for fitting stores anywhere.
• Costco: The bulk retailer has an obsessive focus on lower prices; it’s the source of its competitive advantage. The company has doubled its revenues over the last 10 years and tripled its net income. Its balance sheet is rock solid, with no net debt. Half of its operating earnings come from membership fees, which is a powerful recurring revenue stream, so it can afford to take lower margins on its products. And with 900 stores globally, the company still has lots of room to grow. 
• TJX: The parent company of Winners, Marshalls, HomeSense, and TJ Maxx is the world’s leading off-price retailer for apparel and home goods. Like Dollarama and Costco, it offers great value and has been very astute and flexible on how it sources products (it taps 21,000 vendors across four countries and has a very sophisticated supply chain). The company has grown its earnings per share by more than 20% per year for decades and has maintained a consistent culture. When you walk into a TJX store, you always know it will be good value.

All three stocks have performed well this year, rising 30-50%.

A few words on debt

“We don’t like debt.”

Nessim prefers companies with low or no debt. Examples include Microsoft, S&P Global, Costco, and Keyence, all of which have more cash than liabilities; while Constellation Software and CGI are examples that have very little debt.

This bias is rooted in Nessim’s approach, which favours businesses that have proven they can operate well regardless of the prevailing interest rate environment.

Weaker performers

“We don’t like to make knee-jerk decisions, because we never want the stock price to tell us what we should do. That’s a recipe for buying high and selling low.”

While the fund has had a solid year since Nessim took over in January, not everything has worked out.

Nestlé and McDonald’s are two holdings that have struggled due to aggressive price increases that alienated customers. The question Nessim and his team ask when a company has a misstep is, “What are they doing about it?” In other words, does management understand where they went wrong, and are they taking action? In both cases, the answer is yes. McDonald’s is going back to its popular value menu, and Nestlé fired its CEO, replacing him with a long-time executive who knows the company culture well. Nessim is cautiously optimistic that both companies can right the ship but will be keeping a close eye on their results.

In situations where questions arise over whether an investment thesis on a stock is still intact, Nessim will have one of the analysts on his nine-member team conduct a fresh review. Sometimes, a fresh set of eyes can reveal faults about a company that may have been missed or overlooked. “We try to never keep our head in the sand”, is the mindset.

The Equity Fund’s place in your portfolio

As a reminder, the Equity Fund is a core component of the Founders Fund (20% of the portfolio) and Builders Fund (35%). You can always view its performance, composition, and latest commentary on our website.

If you have any questions about the fund or how it fits into your portfolio, please contact us at 1-888-888-3147 or book a meeting with one of our Investor Specialists.