Brett Girard, chief financial officer and portfolio manager at Liberty International Investment Management
Focus: Global equities

MARKET OUTLOOK

While the VIX remains just off 2019 lows, investors must remain vigilant and focus on portfolio management. The average retirement account holds three asset classes: equities, fixed income and cash. On the equity side, we recommend a portfolio of 30 stocks diversified by geography, industry and size of company. For fixed income, a laddered corporate bond portfolio and inflation linked bonds are critical. Lastly, we recommend holding cash in varying percentages to dampen the volatility of the market. An investor’s asset class allocations and the constituents within each asset class should be reflective of their time horizon and risk profile.

Taking this approach means investors can have comfort knowing their portfolio does not need to be adjusted for every news headline. For example, the bond market is pricing in a 0.25 or 0.5 per cent cut in interest rates by the Federal Reserve on Wednesday. Whether the cut happens, the magnitude of the cut is larger or smaller than expected and/or the language around the cut is dovish or hawkish, if an investor’s portfolio reflects their time horizon and risk profile, it’s unlikely any changes are required. 

It would behoove investors to focus on the bigger picture. If your time horizon is longer than a decade, be in equities and be patient. The S&P 500 hit new highs 219 times this decade and can continue doing so over the long term.

TOP PICKS

ROPER TECHNOLOGIES (ROP.N)

Roper is a little-known S&P 500 component. Since 2001, they have taken a portfolio approach to managing over 45 different software and engineering businesses.

 In Q2, they executed a "Textbook Roper" acquisition which is telling of how they operate. Foundry, a U.K.-based company in the CGI space which has helped produce such films as Blade Runner 2049, Star Wars and Spiderman. Foundry has a 70 per cent recurring revenue, 40 per cent EBITDA, and net-negative working capital which was immediately accretive to earnings. This is a well-run company to own for the long term.

ATRION (ATRI.O)

This Texas-based small-cap medical device company offers niche products in the fluid delivery, cardiac and ophthalmic categories. Management is keenly focused on free cash flow, with a healthy allocation to both R&D and dividends (it has a five-year dividend growth of 80 per cent and a 10-year dividend growth of 300 per cent). Relative to pharma patents on products don’t expire, making R&D and the reinvestment cycle more predictable and steadier. In 2018, when the small-cap Russell 2000 Index declined 12 per cent, Atrion was up 18 per cent. It’s traded lower in 2019 as investors take profits, but with no sell-side analyst coverage, this is an under-the-radar cash flow machine for years to come.

MONEYSUPERMARKET.COM (MONY LON)

The U.K.'s leading comparison website for financial products and travel. This is an asset-light business with no long-term debt that operates with gross margins in the 70 per cent level and EBITDA margins around 30 per cent. In Q2, they finished a capital-intensive overhaul of their operating platform and going forward 10 per cent more profits should fall to the bottom line. Expect them to leverage their 2018 acquisition of Decision Tech, a business-to-business provider of comparison technology.

PAST PICKS: MAY 27, 2019

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)

• Then: $63.56
• Now: $65.07
• Return: 2%
• Total return: 3%

HEICO CORP (HEI.N)

• Then: $104.11
• Now: $137.63
• Return: 32%
• Total return: 32%

HDFC BANK (HDB.N)

• Then: $122.72
• Now: $115
• Return: -6%
• Total return: -6%

Return average: 10%