By Canada Life Investment Management | August 5, 2022
On the Canada Life™ Portfolio Manager Connect Series, we were joined by two partners from Galibier Capital Management (Galibier), Joe Sirdevan, CEO, Investor, and Andrew Wallman, Investor. Galibier is a flat organization focused entirely on generating returns for clients on behalf of institutions, such as Canada Life. It’s why at Galibier, partners are given the title “investor”. This alignment with clients – not shareholders – extends as far as possible since the team is personally invested in only Galibier’s strategies. “We eat our own cooking,” says Joe.
Galibier’s investment philosophy is rooted in an unwavering belief in valuation-driven, bottom-up stock selection. Like value investors, Galibier believes prices in equity markets don’t always reflect the real, or “intrinsic”, value of a company. The team’s strategy is to proactively search their investable universe for opportunities where a company is trading for less than its intrinsic value.But Joe is also quick to point out that his firm is not strictly a value-focused investment manager either, even though its philosophy aligns closely. As famed investor Warren Buffett put it, “the two approaches are joined at the hip: [g]rowth is always a component in the calculation of value ....”1
Galibier evaluates companies using five key criteria:
- Durable competitive advantages
- Strong management and environmental, social and governance (ESG) practices
- High free cash flow
- Above-average long-term growth prospects
- Appropriate level of debt
For Canada’s equity market, these criteria narrow the team’s watchlist of companies to about 125 names. They then value these companies by looking ahead 3 to 5 years, considering factors like earnings, cash flow, dividend yield, the outlook for capital expenditures and much more. Next, they construct the portfolio based on their bottom-up selection process. Finally, they manage the portfolio by monitoring market prices, diversification and aggregation risk.
Galibier views risk as the permanent loss of capital or when a strategy is performing below an acceptable rate of return – not just underperforming against the index. Since Galibier is an investment manager focused on valuation and company fundamentals, it’s no surprise that its two main sources of risk control are stock selection and the price paid for them.
They believe that companies that meet their 5 key investment criteria are high quality and more predictable. In their investment process, they build in a margin of safety by using a high discount rate. Money is expected to devalue with time, so investors discount the cash flows they expect a business to generate in the future. This discount rate helps them understand what those future cash flows – and the company – should be worth right now. Galibier uses a 12 to 15% discount rate, but expects a true discount of only 8 to 10% with their margin of safety applied. The team also looks to reduce risks at the portfolio and firm levels, using various analytical tools.
Galibier believes that a more concentrated portfolio of opportunities is needed to generate returns compared to the index. It’s why they created the strategy for the Canada Life Pathways Canadian Concentrated Equity fund. This fund is a purely Canadian equity strategy comprising 20 to 30 names and designed for long-term capital appreciation. Although Galibier aligns closely with the value investing philosophy, the fund sits between purely growth and value strategies.
Factors that pushed equity markets higher over the past few years have begun to fall away, with investors watching company valuations much more closely. We’ve seen historically low interest rates lift off, just as unprecedented fiscal and monetary stimulus winds down. Ultimately, inflation, slower growth and disruption of the world economy means a tougher time for companies and investors alike. "It's in down markets where one earns their pay. We're an absolute return investor, so we take no comfort in us being down and the markets being down alongside us," says Joe. Despite this challenging backdrop, Galibier has been able to protect capital.
Looking forward, Joe sees commodities continuing to buoy the performance of Canadian equities, which haven’t sold off as aggressively as elsewhere in the world. The Canadian market seems like a good place to be, thanks to exposure to energy and agriculture. Joe notes these two areas of the economy are pushing real inflation sky high. While he doesn’t believe we’ll see the kinds of interest rates used by Paul Volker’s U.S. Federal Reserve to curb inflation in the 1970s, he concludes that "we should take our medicine now."
Contact your Canada Life wealth wholesaling team today for more information on the Canada Life Pathways Canadian Concentrated Equity fund.
The views expressed in this commentary are those of this investment manager as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A description of the key features of the segregated fund policy is contained in the information folder. Any amount allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.
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