By Canada Life | July 22, 2022

What’s in this article:

• Value is more than a number
• Thinking long term
• Setanta’s investment process
• Global value strategies for today’s investment landscape
  

Setanta Asset Management Limited (“Setanta”) is a boutique investment house focused on value investing. It was established in 1998 by Canada Life as an active manager for Irish pension and investment clients. After more than 24 years of managing core investment strategies, Setanta has grown to manage $21.1 billion on behalf of both Irish and international clients across Europe and North America.

Setanta remains convinced that traditional fundamental research, when conducted to a high standard, continues to offer an attractive and differentiated proposition for patient investors. Setanta believes that despite elevated valuation levels across many companies, there are thousands of opportunities for value investors – they only need to find a small number of good ones. That’s why the team looks for quality businesses with strong balance sheets that are durable, financed conservatively and run by trustworthy management with a shareholder focus. Of these, they invest in companies that they consider to be under-appreciated by investors at large. The team at Setanta view themselves as part owners of a business rather than regular traders.

Setanta aims to protect investors with sensible diversification, a healthy dose of scepticism and a margin of safety embedded in their valuation work. Value investors can at times fall prey to “value traps.” With a “back of the napkin” analysis, a company might look undervalued when trading at a lower price relative to its earnings. This gap could signify an opportunity or it might be smoke coming from a fire started by new management. That’s why the Setanta team takes their time to thoroughly research potential opportunities, avoiding investments they don’t understand or that involve too much risk. Their research insights and industry experience help them invest even during times of market stress, which adds value during a recovery.

In an environment where interest rates are rising and cash is less accessible, it’s no surprise there’s a pull towards value investing for its resilience. The debate between growth and value that picked up last year is heating up as the market cools down. So far in 2022, the MSCI World Value Index has decreased 3.18%, compared to a 22% drop for the MSCI World Growth Index (gross returns in CAD as of May 31, 2022). While there isn’t enough data to end the debate, it’s clear that value picks can perform quite well in this environment.

Short-term performance comparisons aren’t what’s important, though. Value investors are in it for the long haul, and Setanta is no different. In a world where markets are buffeted by news – and a lot of noise – Setanta remains patient and focused on how companies have performed across a full market cycle. At times this approach means taking an opposing view – they believe bargains are more likely to be found in under-performing market segments. Although conservative in their analysis, they’re opportunists who don’t hug a benchmark index. This gives them the freedom to take advantage of unique opportunities, providing a source of returns that’s differentiated from strategies that more closely follow the index.

Getting this right means having the patience to apply a long-term analytical framework and, after purchase, having the patience to wait for the market to re-price value investments rather than selling to meet short-term performance goals. Other firms might self-brand as value investors but their decisions may not be in the long-term interest of clients, with behaviours such as hugging the benchmark, having excessive portfolio turnover or providing short-term incentives to portfolio managers.   

Fundamental research

At Setanta, research is an exercise in risk analysis. That’s why it’s critical that portfolio managers spend the majority of their time on fundamental research.

Each company is analyzed based on three main risks:

1. Financial risk: Balance sheet strength is one of the most important measures of analysis, with a focus on net debt-to-equity and free cash flow. They aim to avoid companies in a weakened financial state to minimize the likelihood of capital loss due to insolvency or a lack of liquidity.
2. Operational risk: They aim to invest in companies they believe can produce adequate profits and cash flows on a sustainable basis. It’s important to understand a variety of company and industry characteristics, such as supply/demand factors, relevant competitive advantages as well as company track record. Since companies that score highly on these factors often trade at high prices, they’ll also consider those with less predictable earnings – if they can buy at a price that offsets the added uncertainty. 
3. Valuation risk: They look to invest at a price that’s below the company’s intrinsic value that leaves a margin of safety if something goes wrong. Valuation is assessed relative to investment alternatives and the degree of financial and operational risk (higher risks require a lower valuation). 

Setanta uses this analysis alongside other quantitative screens to get a complete picture of the company, its competitive environment and how it maintains its customers through the industry cycle. They won’t consider an investment if they see too many red flags that harm competitiveness, such as new entrants, excessive price competition or new technologies.

Making the case

Each portfolio manager researches, selects and presents the investment case to the equity team, making the case for buying or selling a company from the global sector they manage. This clear responsibility builds ownership and deep sector knowledge. This can often be an ongoing process, involving a number of stages, to test assumptions and ensure the investment case is strong. This is helped by a consensus approach – the buy/sell decision rests with the portfolio manager, but the investment idea must have buy-in from all team members. 

Buy and sell discipline

The consensus approach applies to portfolio holdings, too. Only one member of the team needs to object to a holding for that holding to be considered for sale. When do they consider getting out of an investment?

• The value of the company exceeds a conservative estimate of its intrinsic value
• The investment case is no longer valid (e.g., company following a very different strategy)
• There are better companies at a lower price
• Large shifts in governance (e.g. acquired with new ownership, now private, etc.)  
  

Canada Life Pathways International Equity Fund

• The strategy continues to be managed on a long-term basis with investments in companies of all sizes across countries outside North America. Setanta can hold between 30 to 50 stocks in the portfolio, but gravitates towards what they believe to be sensible diversification – approximately 35 holdings.
• In line with their consensus approach, all stock weights (up to 10%), sector weights, country weights and cash weights are agreed on by the team.
• The fund’s active share, a measure of overlap versus the benchmark, is 91.6%, a level that is generally considered highly differentiated (as of March 31, 2022). 

Canada Life Global Dividend Fund

• This fund is an actively managed equity portfolio holding 30 to 50 high-yield stocks from around the world.
• Setanta manages the portfolio in line with its value investing philosophy, with the additional targeting of income-oriented dividend stocks. The team aims for stocks with a gross dividend yield of at least 2.5%, but will invest in lower-yielding stocks where that dividend is poised to grow.
• The fund is managed by three portfolio managers who choose stocks using a bottom-up analysis based on investment merit. The aim is to achieve a sensible level of diversification on a sector and geographic basis.
• The fund’s active share, a measure of overlap versus the benchmark, is 78.4%, a level that is generally considered fairly differentiated (as of March 31, 2022).

Talk to your Canada Life wealth wholesaling team for more information on Setanta or how these strategies could benefit your clients.