First came ETFs. Now there are Active ETFs. Active ETFs essentially combine the benefits of active management with the traditional structural advantages of ETFs: lower fees and greater flexibility. We at Investing Thesis are favorably disposed to Active ETF’s as a product, so much so that we even highlighted the Horizons AlphaPro North American Value ETF (HAV:TSX) in our article 4 Investment Ideas That Provide Income and are Non-Correlated To Equity Markets For Canadians. However, not many have heard of or even know about Active ETFs given their relative newness in Canada and thus we are extremely excited to present the following interview with Steve Rogers, portfolio manager of the Horizons AlphaPro North American Growth ETF (HAW:TSX).
Biography: Steve Rogers joined JovInvestment Management Inc. in January 2010 and leads the team responsible for managing the Horizons AlphaPro North American Growth ETF (HAW:TSX). Steve has over 25 years experience in the investment funds industry, most recently guiding the Mavrix North American Growth Fund to first quartile performance among its U.S. equity peers. As Senior Vice-President at AGF Management Ltd. Steve won numerous accolades including “Best U.S. Equity Fund” at the 1998 Canadian Mutual Fund Awards, and was named “U.S. Equity Manager of the Decade” by Gordon Pape in his Year 2000 “Guide to Mutual Funds”. Steve was also the founder and President of Albireo Asset Management Corp., specializing in sector specific hedge fund strategies. He is a Chartered Financial Analyst and has an MBA + B.Comm. from the University of Toronto.
Q: Mr. Rogers, why don’t we start off with your view on the global (and Canadian) economy right now? Are you in the ‘double dip’ camp or do you think that we are in the beginning stages of a slow recovery?
A: Although the first half of 2010 saw growing uncertainty, I believe the global economy will not fall back into recession. There have been many things contributing to investors’ anxiety including the “flash crash”, tensions on the Korean peninsula, Goldman Sachs’ legal troubles, financial regulatory reform, an attempted Times Square terrorist attack and most significantly the Euro zone debt crisis and Chinese monetary tightening. None-the-less, industrial production, both in the U.S. and abroad, remains strong, monetary policy is still extremely stimulative, corporate profits continue to surprise positively, consumer sentiment is still in a rising trend and employment is slowly showing signs of improving. Corporate profit growth of 30%+ for four quarters in a row now should lead to further increases in both capital expenditures and employment. Global growth may slow but the recovery will not be derailed.
Q: Turning our attention to the capital markets, equity markets seem to be bouncing off an oversold state after being clobbered over the last few weeks. As expectations of lower economic growth in China and even the United States seem to be on everyone’s mind, Mr. Rogers, what are your thoughts on the equity markets right now with regards to valuations, earnings and growth projections going forward (and what is already priced in)?
A: If the recent pullback proves to indeed be more of a stock market event than an economic one, equities will look increasingly attractive on a valuation basis. The market has pulled back to the extent that it seems to be pricing in a high probability of recession and a decline in S&P earnings in 2011. As I’ve said, I think that’s unlikely. If economic growth over the next 6-12 months surprises to the upside, then earnings likely will too.
Q: Mr. Rogers, if we were to drill down a bit further, are there any sectors in particular that look attractive to you from a growth perspective? Dare I mention the energy sector?
A: As a long-term growth investor, I’m looking for companies with sustainable growth characteristics that transcend cyclical influences. From that perspective I tend to like certain areas of Technology, Industrials, Healthcare and Consumer Discretionary. Considering where we are in the cycle, one would expect Materials and Energy to continue to do well in the short term. However, my fund is focused on the U.S. market and is targeted at Canadian investors wanting some geographic diversification value. So I don’t tend to spend much time on resources and energy where Canadians are arguably already chronically over-exposed. By focusing where I do in more secular high-growth areas, I also provide Canadians with exposure to sectors they don’t really have access to in our home market.
Q: Given you growth mandate, Mr. Rogers, first off how have growth stocks in general performed this year relative to the market and value stocks?
A: The almost uninterrupted rally of close to 70% by North American equity markets off the lows of March 2009 was led by typical early cycle sectors such as financials and consumer discretionary. As we headed into early 2010 these were joined by more traditional growth and mid-cycle sectors such as technology and industrials, so growth had a good start to the year. But typical of so-called “risky” assets, growth-oriented equities struggled when markets experienced panicked sell-offs related to sovereign debt in Europe. I think as risk-appetite creeps back into the market, growth will once again lead the way. However there also seems to be growing divergences in relative strength between stocks and sectors. Inter-stock correlations have been declining as the market moves past the macro concerns of the past two years. I think that means it will become much more of a stock-pickers’ market favouring reliable growers.
Q: How do you find companies to invest in, is it through screens, your own research team, institutional sales? As a follow-up, what are some of the characteristics (in terms of ratios, valuations etc.) that you look for in the companies that you choose to invest in?
A: I look for my own ideas from various sources (industry conferences, trade magazines, technology blogs, etc). But once I find those ideas, I rely a great deal on the sell-side institutions to provide me with ongoing company updates, financial models, etc. I don’t do any regular screening per se, but there are definitely certain key criteria I’m looking for in a potential candidate. First and foremost is expected growth in sales, cash flows and earnings sustainably above-average for the foreseeable future. In terms of supporting that sustainability, I want to see significant R&D as a commitment by the company to investing in its future growth. I look for very strong balance sheets, the financial ability to execute the growth strategies without regard to the vagaries of the capital markets. And I want to see expanding margins, as evidence of earnings leverage, effective cost controls and economies of scale.
Q: Mr. Rogers, I would be remiss if I didn’t ask you about your style/approach in managing the Horizons AlphaPro North American Growth ETF. Can you please also summarize the most salient points investors should know when considering HAW as an investment relative to any comparables? As a side note, do you utilize leverage or options at all in the portfolio, if so – how (to hedge, for income etc.)?
A: The Horizons AlphaPro North American Growth ETF, as my previous comments indicate, is focused on companies expected to experience long term above average growth and is focused on U.S. opportunities. It is a concentrated portfolio of 20-25 names so that every position has the potential ability to contribute meaningfully to portfolio performance. It is an all-cap fund, holding companies with market capitalizations ranging from one billion to $250 billion. It has the ability to take some short positions (max 20%) but is typically long only and fully invested. Our aim is also to fully hedge the currency exposure.
Q: Now on to the interesting stuff, Mr. Rogers, given your growth investment style, why don’t you let us in on one of your top holdings in the Horizons AlphaPro North American Growth ETF? If you can start off by telling us a little bit about what the company does, then highlight the outlook for the sector/vertical the company operates in and it’s relative competitive position within that sector/vertical, it’s valuation and how that compares with its peers, any catalysts or propellants of the stock price in the future and lastly, some of the risks associated with the company.
A: My single largest holding is likely very familiar to most of your readers already – Apple Inc. (AAPL, Mkt Cap $225B). Consensus expectations on the street are for annual earnings growth of at least 18%. I think it will be measurably greater than that. They continue to gain share in large addressable markets (PCs, smart phones), they are seeing strong international demand, and new products (e.g. iPad) continue to exceed expectations. Trading at only about 18x forward earnings, versus about 14x for the market as a whole, but with much higher and much more reliable growth, it is an incredible bargain. And if you strip out the $40 billion or so in cash, that P/E is barely at a premium to the market.
For an example of something perhaps a little less well-known, I could mention United Natural Foods Inc. (UNFI, Mkt Cap $1.3B). UNFI is the largest distributor of natural and organic foods, and just recently renewed it partnership with Whole Foods, a key customer and growth driver. Growth is expected to register north of 16% for the next few years and the stock trades at 16x forward earnings.
Thank You, Mr. Rogers!
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