Pathfinder Investment Outlook
Since the end of January, we have written about the increase in market volatility (see Figure 1 which we have updated from our last Outlook). As an investment team, we focus on data (rational analysis) rather than the published headlines in the financial press (fear and greed). We have consciously digressed away from the market commentary for a few issues of the Outlook to write about our investment process. It is our process and the work we do each day that provides the “keystone” for our portfolios. We rely on our process during market volatility to provide rational decision making. Part 2 of our discussion is “Valuation”. Pathfinder comes to a regularly-reviewed opinion of fair value for all assets that we own in the portfolios and all assets that we consider for inclusion in the portfolios.
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 value. If the price of an asset is lower than our opinion of its value, then it becomes a potential investment. Each person on our investment committee contributes to the management of a particular investment mandate. The person presents and defends his opinion of asset valuation during our committee meetings. Our approach to valuation focuses on the magnitude, quality and timing of cash flow that is generated from the asset (a company or security). With respect to companies, as a broad generalization, the organizations that we own generate sales and after paying for the cost of product production, labour, taxes and general corporate expenses, the cash that is left over belongs to investors and creditors. With that cash, management has a number of decisions to make. They can reinvest the cash in the maintenance of the current business, invest it in a new growth area(s), and/or return the capital to investors/creditors by buying back stock, paying down debt, paying a dividend or a combination of all three. The big question for Pathfinder portfolio managers is how much should we pay for that cash flow. Generally, the lower the better. Our focus on this part of the investment management process is critical. We need to buy assets at a good price that will generate cash into the future for the long-term.
“This means that” we continue stay the course with our investment process. Combining our valuation opinion with our knowledge of the business and management teams allows us to take advantage of mispricing in the market. Please check the 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.