Biography: Andrew Parkinson is the Managing Director at Van Arbor Asset Management. He is responsible for the investment portfolios and the operations of the company. Prior to joining Van Arbor, Andrew was the president of Cundill Investment Research Ltd. Andrew has provided expertise to securities commissions, brokerage houses, custodians, transfer agents and mutual fund firms and has worked with a financial futures exchange and a merchant bank.
Andrew is a Fellow of the Canadian Securities Institute (FCSI), and holds an MBA (Finance) from Cass Business School, City University in London, England and a Bachelor of Education from the University of Calgary.
Q: Can you describe your investment approach (philosophy/principles) in detail?
A: Our investment approach is based on value investing concepts to build a portfolio of firms that are trading at a comparative discount to their peers. The information used is publicly available and most is freely available. The exception is the analysts’ rankings. A company might have upwards of 20 analysts that report on a company based on their review of the financial statements and operations of a company.
We have developed internally a process to review financial information available on publicly traded equity securities. We initially screen out companies with a short trading history and that do not exceed a minimum capitalization. The second screening process is to determine which firms meet our value criteria. The screening processes brings the number of companies eligible for inclusion into the portfolio to approximately 125 equity securities in Canada and 300 in the developed world. From this point we use a top down analysis to determine which sectors, and countries, are trading cheaply.
Our portfolios are concentrated and each portfolio holding is approximately equally weighted. We use this principle as we feel each holding should be large enough to make an impression on the portfolio.
We believe that selling is as important as buying. By limiting the number of securities in a portfolio, our portfolio managers are required to monitor each portfolio holding to ensure it is stronger than a security that is not currently held. If a security is considered for the portfolio then one of the current holdings has to be considered for exiting the portfolio.
This dynamic of holding the best securities in a portfolio is a process of constantly monitoring the securities currently being held against what securities could be in the portfolio.
To summarize, we build a concentrated portfolio of larger capitalization equity securities around the value investing concept .
Q: To follow-up, can you describe your investment strategy – in what way do you convert your philosophy/principles into an actionable strategy to run your fund? Do you use a systematic model or discretionary?
A: The model is very systematic to determine what stocks are eligible for inclusion into the portfolio. The discretionary aspect lies in the top down overview. To hone the list of listed securities into a list of eligible securities, we use an internally developed process to take information electronically from internet sources such as Bloomberg and then screen the securities based on the information available such as book to price, sales growth, dividend growth, price volatility, etc. We review over 50 data points in various comparisons.
The top down process is more subjective and is based on the interpretation of macro economic data.
Q: On your website, it says that you employ a ‘unique value investment strategy that successfully blends a disciplined bottom up equity selection process with a top down risk management strategy.’ Can you explain how this process works – perhaps with a recent example?
A: In 2008, we noted that the price of oil was rising at a rapid rate. When the price rose above $120.00 we exited from the oil sector by selling all energy related holdings. By late 2008, the price of oil has dropped to below $35.00. The oil sector was again of interest and we found oil companies at valuations that we were able to profit from both the equity price moving from being undervalued to fairly valued in comparison to its peers and with revaluation of the price of oil.
Q: What Funds are managed at Van Arbor?
A: Van Arbor has 2 funds: The Van Arbor Canadian Advantage Fund and the Van Arbor World Advantage Fund.
The Portfolio Team is made up of Youssef Zohny and myself, with Youssef taking on a larger part of the portfolio management each year. I think his macro analysis has been the driver behind the funds over the past few years.
Q: The Van Arbor Canadian Advantage Fund is one of best performing equity funds in Canada over the last five years. What do you attribute this performance to (in other words, what sets you apart from the plethora of other funds and investment managers in Canada)?
A: In an earlier question I highlighted the investment approach taken with a value basis and a consolidated larger capitalization equity portfolio. By having the flexibility to avoid sectors that are over-priced, we avoid sector related problems such as when the price of oil falls from $150.00 to $35.00. So by being value investors, using top down and having a concentrated portfolio are all key components in the management of the portfolio.
Q: How do you approach and control risk/volatility?
A: Volatility can be broken into upside and downside. Investors are concerned about downside volatility and the preservation of capital. Holding securities that are cheap in relation to their peers helps to reduce the potential for downside volatility, just as avoiding securities in sectors that are over heated will reduce the downside volatility. In times of high market uncertainty, the portfolio can hold cash.
As important is to take a long view. This may cause some short term issues as you watch a sector continue to rise after you have exited the sector, both the preservation of capital is a key component of the risk reward overview.
Q: Outside of equity analysis, you also employ rigorous economic analysis. Given this, what is your current economic analysis for Canada in general (or a particular sector, if sectors is what you focus on)?
A: Canada is in a very strong position; it is a technologically advanced nation with an abundance of natural resources. Therefore it can, within limitations, weather storms as it can export its natural resources and manufactured goods. Many nations have one but not both strengths. In the last cycle we saw that the commodities prices of both the energy and materials sectors decline and then rebound. The manufacturing exports declined and have remained at lower levels.
Throughout this period of index value deflation and rebound, several sectors remained dipped and have largely remained at their lower levels. These sectors are generally found in the consumer sectors and include telecommunications, utilities and grocers. During period of weakened economic growth, consumers will still want to heat their homes, watch television on cable or internet and will still go to the grocer for domestic needs. We believe that these securities have a lower risk of capital loss, but still have potential for price appreciation.
The Canadian Advantage Fund has been focused on looking for value opportunities in companies that have not yet participated in the market rally, like Shaw Communications (SJR.B:TSX) and TransAlta (TA:TSX). We also established a new position in Blackberry maker Research in Motion (RIM:TSX) last month, a leader in the smartphone market and now a good value proposition.
Q: Since you also manage the Van Arbor World Advantage Fund, can you talk to us about which countries or sectors on global scale you are finding the most value in? Can you elaborate on the fundamental reasons for your findings?
A: The World Fund invests in the developed world which includes European Union countries, USA and Canada and Australasian countries such as Japan, Korea, Singapore, Australia and New Zealand. Notable exceptions where we do not directly invest would be Brazil, Russia, India and China. We find we can invest in securities that are domiciled in a country of the developed world but have exposure to these countries. For example, Sino Forest (TRE:TSX) is a Canadian company that is in the TSX Forestry Index but its holdings are largely represented by its operations in China.
In the past economic cycle, the infrastructure stimulus boom helped to drive the global energy and resource firm securities to rebound from their lows. But this cycle did not move the utility companies and these companies are of interest to us for the same reason as discussed above for the Canadian Fund.
In the short term, the market seems excited about prospects for more monetary stimulus in the form of lower long term interest rates and has been showing a preference towards commodity and gold stocks. We believe that trend is temporary in nature and as the quantitative easing hype dies down we look to a return in leadership from non-cyclical dividend companies as we move into the New Year.
Thank You, Mr. Parkinson!
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