Year End 2020
2020 was an eventful year on many fronts, including the investment world. Equity markets swooned in the first quarter of the year, only to turn around and go on a tear fuelled by accommodative central bank policy which snow-balled into speculative excess.
This rise in markets was overrepresented by companies with highly stretched valuations, causing value approaches to lag in recent quarters. Periods of prolonged and excessive rises in stock markets inevitably lead to choruses of “value doesn’t work anymore” and how it’s time to focus on stocks with aggressive growth expectations (even if their valuations are divorced from the underlying economics of their businesses). I am of the belief that value investing always works, but it depends on how you define “value” and it depends on how you define “works”.
There are different styles of “value” investing, but the process I follow is to invest in companies that are building shareholder wealth, and be disciplined about the price I buy them at and hold them at (what I call “Fundamental Value”). Growth in a company’s revenues and earnings might result in the growth of shareholders’ wealth, but not necessarily. Making that determination is a central element of the work I do for you. And even if a company is growing its intrinsic value at a meaningful pace, if you overpay, it can turn out to be a lousy investment and result in losses.
How one defines what “works” is a key concept in defining the difference between true investing and mere speculation. Short-term results are meaningless in the realm of investing in stocks, because strong short-term results can mask unsustainable situations where the price of a company’s stock is far ahead of a reasonable estimate of its underlying valuation. The converse is also true when a depressed stock price sometimes underprices growth in a company’s intrinsic value (the kinds of situations I look for).
Lionridge’s focus is on the long-term compounding of wealth in a rational and gradual manner, as opposed to the realization of short-term trading gains (the latter mindset can cause people to take on too much risk and lose money in an attempt to “get rich quick”). Strong long-term returns with lower exposure to risk is how an effective investor defines what “works” (although this might run counter to the sales-orientation of many investment firms).
Lionridge’s focus is on the long-term compounding of wealth in a rational and gradual manner, as opposed to the realization of short-term trading gains.
The advantage of this approach is that I can be patient with our holdings, knowing that under the surface these companies are steadily building your wealth, whether or not that’s immediately reflected in their market prices. I do this with the knowledge that as long as a company is compounding shareholders’ wealth, that growth in value will eventually be reflected in its stock price.
One example is Baidu, which I began purchasing in the first quarter of last year. The “Google of China” had been lagging in the markets for various reasons, including a fear of US regulatory actions disfavouring shares of Chinese companies. Despite the headline risk, I went in with confidence that the ranges of underlying valuation were likely well above the depressed stock price, and as the company is generating and compounding underlying wealth, I didn’t worry about how long it would take for the market to correctly value this company. Patience has been rewarded, as this stock’s price has more than doubled since my initial purchases last year.
What’s the big picture result? Since inception*** the Lionridge Total Equity Portfolio has achieved average returns exceeding 9% per annum** and has experienced far less downside volatility than its benchmark*. My approach is unexciting, and it works.
At Your Service,
Hardev Bains, LLB, MBA, CFA
President and Portfolio Manager
* Benchmark from November 30, 2017: 40% S&P/TSX Total Return; 60% MSCI World (Gross in CAD$). Benchmark from inception to November 30, 2017: 45% S&P/TSX Total Return; 35% S&P 500 Total Return (CAD$); 20% MSCI EAFE (CAD$).
** Average annualized returns.
*** Inception date: March 31, 2011.
The Composite consists of all fully discretionary accounts managed by Lionridge Capital Management Inc., according to the investment objective of the Lionridge Total Equity Portfolio. The objective of the Lionridge Total Equity Portfolio is to maximize long-term returns while minimizing long-term risk by investing in a concentrated portfolio of undervalued securities. The manager seeks to invest in securities only at prices offering a margin of safety, with a view to achieving the dual objectives of outstanding returns along with protection of capital. The strategy has a global focus and the manager has discretion over the geographic allocation of assets. Return figures are presented in Canadian dollars, are gross of management and custody fees but are net of all trading expenses, and include cash holdings. There is no minimum portfolio value required for inclusion.
Lionridge utilizes a combination of broad market indices such as the S&P/TSX Composite Total Return index and the MSCI World index (Gross in CAD$) as the blended benchmark for comparison purposes. The blended benchmark is historically a general reflection of the nature of the securities held in the Lionridge Total Equity Portfolio Composite. The indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with managed accounts.
The content of this report is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter. The opinions, estimates and projections contained in this document are those of the author as of the dates indicated and are subject to change. Every effort has been made to ensure the accuracy of the contents of this report. Performance reports may be compiled utilizing information provided by third party sources. Every effort has been made to ensure the accuracy of such third party information but such information cannot be guaranteed to be accurate.