Recap & Macro Outlook: Finding Our Investments
Since the end of January, we wrote about market volatility. As an investment team, we focus on data (rational analysis) rather than the published headlines in the financial press (fear and greed). We wrote about our investment process for a few issues of The Outlook rather than market commentary. Our process provides the “keystone” for our portfolios and we rely on our process to provide rational decision making vs. emotional decision making. Part 3 of our discussion is “Finding our Investments”.
We have distinct investment mandates at Pathfinder. One focuses on large companies, one focuses on small companies and one focuses on inflation management. However, the way we approach analyzing the assets that make up those mandates is the same: we focus on fundamental intrinsic value. We have written about how we find value in the last 2 issues of The Outlook. However, a big part of the investment process is how we systematically identify companies that might be a potential investment. Companies, much like any other organization develop, grow and evolve over time. A robust investment process that identifies new companies for evaluation is a critical part of the investment cycle. Because we have different mandates, we approach the task of searching for new opportunities from different perspectives. For large companies, we focus on an investible set of 100 high quality companies that, by definition, at a certain price, would qualify in the portfolios. We think these companies are the best companies in the world. That list of 100 companies changes over time as we find new great firms and as our investment thesis evolves. However, it is primarily based on our years of experience (qualitative) and a daily screen (quantitative) for firms that fit our ideal profile for quality cash flow generation. For small companies, the process is somewhat different. Data is not as readily available, so our small companies team makes every effort to meet with every company in the market below a certain size. We also use the network of people that we developed over 30+ years to identify new companies before they are listed on the Canadian stock markets. Both “searching processes” are distinctly different but systematic nonetheless. The large company team identifies companies based on daily screens of stability of cash flow, credit quality and return of capital metrics as identified from public record filings. The small company team identifies investible companies by meeting directly with companies from our network.
“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. Continually searching for new opportunities allows our portfolios to remain relevant and broadens our knowledge about our current investments. 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.