Asia Series: Japan & Macro
As mentioned at the end of March, we took a trip to Asia and wanted to discuss our experience. Since then, we have been continually side tracked by various geopolitical headlines in the financial and regular press. We now continue with the series and will try to stay focused! We have a significant allocation to Japan in our International Fund (25.6%) and have been purposeful about this investment. Generally low valuations, improving corporate governance and the emergence from a decades long deflationary environment have provided great investment opportunities. Japan also blends nicely with our technology theme, given the many advanced (and cheap!) companies that sell semi-conductor equipment to markets outside of its domestic economy.
In our opinion, many Canadian portfolios have too much capital allocated to Canada. This is not optimal. Canada’s percentage of Global GDP is 2.0% according to the World Bank (Figure 1). It is well documented that most Canadian investors have a high allocation to Canada in their portfolio. This could be by design. Canada could be a great place to invest. Canadian investors also spend in Canadian dollars, so allocating locally is a good way to immunize this liability. However, in most cases, we do not think it is by design. It is just simple investor home country bias. We suspect we would see similar behaviour with investors in France or Italy (similar GDP). At Pathfinder, we invest where we think the best opportunity is. We allocate to all parts of the world, multiple assets classes, and sizes & types of companies.
Inherent in country allocation is the potential pitfall of making “macro” calls based on what a particular central bank or government may or may not do. In our process, we actively limit this. We feel that we have very little edge when it comes to macro. A good example of this happened last night. The US Administration has been actively trying to negotiate a nuclear arms deal with Iran. The US President had publicly asked the Israeli Government to avoid attacking Iran while they attempted a diplomatic solution. Last night, the Israeli Government attacked Iran. While the US Administration was forewarned (at the last minute), so it could move its people out. Clearly, even the most powerful country on earth cannot always influence geopolitical events the way that it would like.
“This means that” after the attack was announced, Oil, Gold, and the US$ raced higher, while risk assets dropped. As you can see, even with perfect information, it is nearly impossible to trade for this over the very short-term. The best option, in our opinion, is to invest in great companies for the long-term and avoid short-term distractions.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
For more information, please follow the links above to review the fund term sheets.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
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