Focusing on identifying company specific catalysts such the addition or deletion of a stock from an index, the start-up of a new mine or a merger arbitrage opportunity provides a great way to maximize non-correlated long term investment returns while minimizing risk. Our next interviewee believes that simple buy and hold strategies can lead to extended losses in bear markets or to little progress in range-bound markets, a scenario symptomatic of current market machinations one might argue. As a consequence, this portfolio manager‘s fund, established under the laws of British Columbia as a trust and sold by offering memorandum employs a flexible, active and opportunistic investment strategy, focusing on event driven situations, undervalued securities and unique or special situations. With the sole objective of generating long-term positive returns for clients across a variety of market environments, this portfolio manager invests in predominantly small, mid and large-capitalization companies trading on North American exchanges that are expected to benefit from a transformational event or catalyst, misunderstood or contain hidden assets, undervalued relative to the portfolio manager’s assessment of their prospects for growth, exhibiting, or capable of strong earnings growth and run by high quality management teams. If you stick around and read the entire interview, you will find an example of once such Canadian company that is positioned to become a part of the global solution to the increasing problem of food crop scarcity.
Biography: Travis Dowle is the President and Fund Manager of Lions Investment Management Ltd. Prior to Lions Mr. Dowle was the Vice President, Portfolio Investments with Gibralt Capital Corporation and Second City Capital Partners, and was Portfolio Manager with HSBC Global Asset Management. Mr. Dowle began his career in the investment industry in 1996 with M.K. Wong & Associates (acquired by HSBC) where he held investment management and research positions. Mr. Dowle is a graduate of the University of Western Ontario and holds the professional designation of Chartered Financial Analyst (CFA). Mr. Dowle is also a past guest instructor for Stalla’s CFA exam preparation program covering equity valuation techniques and capital markets theory.
Q: Mr. Dowle it appears as though the swings back and forth in the markets are making not only investing but even trading (from the results of the bank earnings just released) a very hard endeavor these days? What is it like running a long/short fund focused on event-driven opportunities and special situations these days? What strategies are you finding profitable right now?
A: Volatility is certainly making for a very interesting investment climate. My view is that volatility creates opportunities if you have a nimble enough investment strategy, which we do – and accordingly we are finding plenty of things to look into in this environment. I enjoy the challenge of managing a very active investment mandate and I believe an event-driven strategy is a great place for investors to allocate capital right now.
My investment style is based on the idea that, no matter what direction the overall stock market may be headed in, company specific events are always occurring. If I can successfully target these events or catalysts, then I can deliver strong investment returns to clients and offer a strategy which has meaningful diversification benefits relative to traditional equity funds.
Merger-arbitrage has been a profitable strategy for the fund and we’ve been doing a lot more of it of late. I expect to be able to take advantage of more M&A activity going forward as flush-with-cash corporations continue acquiring peers and competitors.
Q: A number of prominent market commentators in Canada (David Rosenberg of Gluskin Sheff and Eric Sprott being 2 of them) and the United States are calling for a double dip. Given that the U.S. is our largest trading partner, what are your thoughts on the risks of the U.S. double dipping and how do you think this might affect the Canadian capital markets?
A: Rosenberg and Sprott both put forward rational arguments to support their views, as do other economists who argue that we’ll avoid a double-dip. I don’t have a double-dip recession as my base case scenario. I see the economy muddling along a path of slower than normal growth, which may come as a disappointment to those hoping for a fast return to historical GDP growth rates, but it’s probably a necessary, and ultimately good, scenario as the Western world continues to work through a de-levering process.
Since North American markets hit recovery highs in late April this year, “double-dip” has been a commonly discussed scenario, and when such a scenario becomes so widely anticipated I think it can become somewhat reflected in market prices. If a double-dip scenario is priced-in and we now manage to avoid one, then I think it’s possible we see an upside surprise for market performance. However, it is difficult to gauge how much of a double-dip scenario has been priced in, especially in a market like this one that is very sentiment driven.
Slower U.S. growth, or even a second U.S. recession, would of course have an impact on Canada – however, energy and materials demand is being driven increasingly by developing nations and I’d expect Canada’s trade activity will continue to diversify away from the U.S. in these, and probably other, important sectors of our economy. I keep a very watchful eye on macroeconomic developments and trends, but, as I’ve already stated, I’m not trying to guess which way the economy or the markets are headed, I’m looking to target specific events in order to generate returns – and events are always occurring, regardless which way the economy is headed.
Q: As a follow-up, what do you make of the recent plunge in US bond yields? Also, what do you think is needed to quell the outflow of funds from domestic equity mutual funds (at least in the U.S.) into fixed income and when do you think that will happen?
A: Yield investors have done very well over the past few years, initially aided by declining rates as the U.S. Federal reserve and other central banks reduced interest rates in order to spur their economies. Looking back longer term, bonds have actually been a great place to be since the early 1980’s. Despite interest rates that have essentially no room to go lower from these levels, treasuries in the U.S. have continued to see huge fund flows. I think this is more reflective of investors being uncertain about which way the markets are headed and therefore being more focused on return of capital rather than return on capital. We’re at a level now where equity yields are higher than fixed income yields, and historically when that has happened it’s been a good time to buy equities. I think we’ll start to see funds flow from fixed income back into equities once investors are comfortable that we are on the path of economic recovery – unfortunately, once that picture is clear for most to see, markets will likely be higher than they are today.
Q: In terms of Canadian economic data, Mr. Dowle, the retail sales price deflator declined 0.8% in June on top of a 0.7% falloff in May and now down in five of the past six months. Furthermore, if we were to strip out the effects of the HST, consumer prices fell 0.1% in July. Not only that, but the CPI excluding indirect taxes has been flat or down now for six months in a row, during which it has deflated at a 1.2% annual rate. It I could extrapolate the significance of these numbers, it would appear, that deflation is what we are currently facing in Canada. Given this backdrop, what are your thoughts on the Bank of Canada’s options going forward with regards to raising interest rates? What are your own thoughts on the direction of interest rates in Canada going forward?
A: Well, for starters, it’s certainly a tough environment in which to be a central banker. I think it’s plain to see that Canada, and the U.S., would like to see some inflation in the system and that they will risk an inflation issue rather than a deflation scenario. The Bank of Canada has led the way with three rate increases over the past three months on the back of one of the strongest economies in the G-7. However, Bank of Canada Governor Mark Carney acknowledged that the recovery is decelerating and that the outlook remains unusually uncertain. So, I would say that rates will likely stay lower for longer unless a much stronger recovery comes through faster than anticipated.
Q: In terms of exogenous shocks or black swans, what worries you most about the current global economic/investing environment?
A: A black swan, by definition, would be an unforeseen or rare event that is outside the realm of normal expectations, so let me answer while acknowledging that I think the things I worry about are generally within the realm of normal. In the current environment I worry about government debt levels in Europe and the U.S., about a stubbornly high level of unemployment and the danger that the impact that another crisis-of-confidence, so shortly after the 2008 crisis, would have on investor psyche and world financial markets. Having said that, I think that it can be healthy to have a wall of worry in front of us that the markets can climb to higher levels. And who says a black swan event has to be a negative one? Nicholas Taleb’s famous Black Swan book identifies both the rise of the personal computer and the internet as black swan events.
Q: How do you recommend investors mitigate risks against a ‘double dip’ or significant equity market decline? What if anything are (or have) you done with Lions Diversified Strategies OM Fund to mitigate risk of a ‘double dip’ or significant equity market decline?
A: Preservation of capital is certainly a key consideration for investors, and myself, these days. Because my bias is to be positioned net long I have to be concerned with the possibility, remote or not, for significant market declines. In the past, to protect against possible market declines, I have opportunistically sold calls against long positions, bought puts on broad indices and have purchased an exchange traded note which rises in value as volatility, as measured by the VIX index, increases. I also utilize a strict stop-loss target discipline which forces me to re-analyze each security I own if its price declines below a certain level.
Let me again emphasize that my style is to target company specific events in order to generate returns, and given that events are always occurring, I’ll have a good opportunity set to analyze for investment, regardless of market direction. If we spend all of our time trying to avoid market volatility, we won’t allow ourselves the opportunity to experience gains.
Q: In terms of secular themes (positive or negative), Mr. Dowle, what if any, are you seeing in the investment universe that you monitor?
A: One theme that the fund is invested in is the need for mobile phone carriers and internet service providers to manage, and monetize, the explosive growth of data traffic on their networks. One merely needs to look around to see people texting, emailing, downloading videos and surfing the internet on their smartphones to understand the strength of this trend and the size of the opportunity. The fund is invested in a couple of companies which help carriers deal with, and profit from, this trend. We are also invested in some opportunities in the agricultural space where we see the underpinnings of strong long-term demand driven by rising emerging-economy per capita incomes and a resultant shift towards more protein-based diets.
Q: What is your highest conviction investment idea right now? Can you please elaborate in detail on the valuation metrics, the caliber and performance of management and the relative position/standing of this investment idea with regards to its peers, potential catalysts in the future and any risks that investors should take note of?
A: One holding that we are quite excited about and believe has both near-term, and longer-term, catalysts is BioExx Specialty Proteins Ltd. (BXI: TSX-V). BioExx is an agricultural technology company focused on the extraction of protein from oilseeds. The company’s patented technology allows it to extract high quality proteins that can be sold to the global food market. Having recently completed the commissioning of their first plant in Saskatoon, Saskatchewan, BioExx is targeting first commercial sales in Q4 this year. Once they have demonstrated initial commercial sales, we believe that investors will more confidently look forward to the earnings potential of BioExx’s five plant growth plan over the next few years. Some estimates we’ve analyzed place this earnings potential above $2.00 per share which is quite meaningful for a company currently trading just above that level on a per share basis now. I’ve met with the management team of BioExx and have been impressed; and I am also encouraged that the President & CEO is materially invested in the company’s common shares, as are the company’s directors. An investment in BioExx is certainly not without risk, but we believe there is material upside from these levels as the company transitions from a proof of concept stage towards a phase better characterized by more traditional operational risks.
Thank You, Mr. Dowle!
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