Recap & Macro Outlook: Building Mandate Portfolios
Similar to prior weeks, we have digressed from market commentary to write about our investment process. Part 4 of our discussion is “Building Mandate Portfolios”. How a portfolio manager constructs a portfolio to meet a specific mandate is one of the most important parts of our investment process.
For large-cap equities, we include 30 companies in the portfolio and weight those companies between 1% and 5% depending on the company type and return potential. Initial positions or equities that are close to our target are weighted lower (i.e. 1%) while flag ship positions or those that are cheapest are weighted higher (i.e. 5%). We pay little attention to broadly published indices and instead focus the portfolio where we see the most value.
The Real Return Fund groups assets into four categories: businesses, hard assets, fixed income and currencies. Within each category there are specific criteria we are looking for. For example, the business category looks for 1) a business that has protective long-term qualities; 2) a management team that is capable, honest, and ethical; and 3) a management/board with superior insight into capital deployment. If a company meets these criteria, its weight in the portfolio will be determined by valuation and the company’s correlation to other assets in the portfolio.
The Partners’ Fund generally separates investments into three types of positions: ‘Starter’, ‘Core’ and ‘Flagship’. A Starter position is less than 2% of the portfolio at cost; a Core position is 3-8% of the portfolio at cost; and a Flagship position is greater than 8% of the portfolio at cost. A starter position allows us to initiate a regular dialogue with management and gain a deeper understanding of the company and its drivers over time. As our confidence increases, we continue to buy more, upgrading the company to a Core holding and eventually, a Flagship position.
“This means that” we continue to stay the course with our investment process. Combining our valuation opinion with our knowledge of management teams allows us to take advantage of mispricing in the market. Please check the weekly email for spotlights over the coming weeks for focus pieces on the companies we own.
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.
*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).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.