Canadian Buyside Stays Flexible08.15.2011
Canadian equity managers stay flexible in their portfolios to battle the whimsical U.S. market.
Canadian investors can be known for being Canadian-centric. The recent volatility seen in the U.S. equities market may push Canada’s inkling to distance their investments from the U.S., with the exception of well-known, large cap companies.
“The main message that we would convey is to remain flexible in these markets,” said John Tsagarelis, equity portfolio manager at Hillsdale Investment Management, a Toronto based firm with roughly north of $500 million of assets under management.
Being “flexible” is Tsagarelis’s message that Canadian equity should not get stuck in illiquid companies, such as social media ventures.
“There are buying opportunities in this down market, but overvalued securities need to be avoided. We’re weary of the social media and other new tech companies; they’re expensive. The strategy is to remain flexible and not get stuck in one frequency of companies,” said Tsagarelis.
Companies that do pose opportunities provide safety, such as large cap name brands: Johnson & Johnson, Coca Cola, McDonalds and Intel. “They’re cheap,” Tsagarelis noted.
“There is a rotation in the U.S. equities market currently to the quality names that can withstand uncertainty because no one is confident about what will happen,” Tsagarelis told Markets Media. “Opportunities in Canada need to be high quality.”
Canada, which some investors criticize for an undiversified domestic market consisting of energy, financials and material companies, may actually provide benefits during times of shaky markets, notably because of opportunities to invest in oil and gas, stated Tsagarelis.
The recent steady performances of commodities have helped Canadian withstand the pressure to sell-off.
“Canada has exposure to natural resources, such as gold and silver—markets that have not come down as much,” Tsagarelis said.
Despite U.S. market turmoil, Tsagarelis has not had to make any immediate changes to his portfolio.
“We made some changes two months ago, emphasizing companies with free cash flow. Cash rich companies do well over a recession, but that was according to our model, but according to what’s happened over the past two weeks.”
Cash rich companies include healthcare, medical equipment and private education companies, a according to Tsagarelis. Hillsdale uses a combination of fundamental analysis and a quantitative top-down approach to their investment process.
“When people use quant models alone, they don’t understand the companies they’re investing in, so we need the combination,” he said.