Cameron Hurst, chief investment officer at Equium Capital Management

Focus: U.S. equities
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MARKET OUTLOOK

• Active management is really taking a lot of heat these days
  • Barclays released research suggesting hedge funds have struggled to add value since 2011
  • Merrill Lynch also published data showing the significant outflows from active funds over the last two years in favour of passive index or benchmark-type strategies
• The problem with this idea of passive management being the way, truth and life is that it presumes everyone knows how to rotate between asset classes or countries or currencies
• Even if you take single stock selection or even sector rotation out of the equation and just look at broad indexes in different countries, you can’t argue there’s no merit to moving between them at different points in your investing life
• 2015 was a tough year for Canada and anyone exposed to commodities, but other markets fared better and were preferable investing environments than our local market
  • Canada’s S&P/TSX Composite Index -8% in 2015
  • U.S. S&P 500 Index +1%
  • German DAX Index +10%
  • Japanese Nikkei 225 Index +10%
• 2016 was much better for Canada and less attractive for Japan, but our process flagged the shift, enabling the tactical reallocation to stronger markets
  • Canada’s S&P/TSX Composite Index +20% in 2016
  • U.S. S&P 500 Index +11%
  • German DAX Index +7%
  • Japanese Nikkei 225 Index +2%
• We wouldn’t disagree that many hedge fund strategies are struggling; their game has become very challenging with technology, access to information and more austere regulation levelling the field
• That said, there’s clearly still room for a tactical allocation strategy that rotates exposures away from weaker sectors and countries and into stronger ones
   

• International (local) returns can differentiate a portfolio
  • France CAC 40 Index (EUR): +5.6%
  • German DAX Index (EUR): +7.3%
  • Japan Nikkei 225 Index (hedged to USD): +4.4%
• Equium Global Tactical Allocation Fund is overweight Germany, France, U.S. and Japan while being less exposed to Canada and energy in particular

TOP PICKS

FACEBOOK (FB.O)

• Sector: Technology
• Market cap: $410 billion
• Performance
  • 1 year: +26%
  • 1 year vs sector: +1%
  • 1 year vs S&P 500: +9%
• Valuation:
  • Top-line growth: +37% (CY’17), +27% (CY’18)
  • Bottom-line growth: +28% (CY’17), +24% (CY’18)
  • P/E multiple: 26.1x (CY’17), 21.0x (CY’18)
• By far and away the largest the social platform. User growth (1.2B DAU) and engagement remains strong driven by Instagram (stories up to 150 million daily actives) as core remains stable
• Advertising revenue growth should additionally benefit from high single-digit pricing gains along with ad load growth (though at slower rates), which nets to approximately 30 per cent revenue growth rate. Still only represents 15 per cent of online advertising and five per cent of total advertising, so compelling long-term opportunity still ahead
• Very strong free cash flow generation ($10 billion in FY16). Sitting on $29 billion of cash, which could be repatriated for share repurchases over and above $6 billion program recently announced.
• Earnings revisions remain positive, valuation very reasonable given growth rate and economic moats
• However, spending remains high (+47 to 57 per cent opex growth and $7 billion of CAPEX in 2017) and success in efforts such as virtual reality (Occulus) remains to be seen

CBS CORP. (CBS.N)

• Sector: Consumer discretionary
• Market cap: $28 billion
• Performance:
  • 1 year: +30%
  • 1 year vs sector: +16%
  • 1 year vs S&P 500: +12%
• Valuation:
  • Top-line growth: +2% (CY’17), +4% (CY’18)
  • Bottom-line growth: +16% (CY’17), +19% (CY’18)
  • P/E multiple: 16.2x (CY’17), 13.7x (CY’18)
• Advertising at 45 per cent of sales highly correlated with GDP growth. TV ad outlook is strong as some digital spend comes back and efficacy remains relatively high easing structural concerns.
• Best-in-class management team returning significant cash to shareholders and spinning non-core assets (disposing radio business in 2017)
• Benefitting from structural growth of retransmission and reverse compensation (i.e. having cable companies pay for their content where previously it was free as contracts come up for renewal)
• CBS well positioned in new media order as owns +70 per cent of their own content including Showtime
• Pacing ahead of plan on OTT subscriptions and should see significant lift from release of new Star Trek series only on CBS All Access in 2H17
• Below market multiple for above-average return and growth

INGERSOLL-RAND PLC (IR.N)

• Sector: Industrials
• Market cap: $21 billion
• Performance:
  • 1 year: +39%
  • 1 year vs sector: +19%
  • 1 year vs S&P 500: +21%
• Valuation:
  • Top-line growth: +2% (CY’17), +3% (CY’18)
  • Bottom-line growth: +8% (CY’17), +11% (CY’18)
  • P/E multiple: 18.4% (CY’17), 16.5% (CY’18)
• Focus in HVAC makes it a central component to both resi and non-resi investment, meaning it’s levered to broad economic expansion
• A boost to infrastructure would also benefit their industrial businesses (air, power tools, fluid mgmt. and material handling)
• With improving end markets, both in North America (2/3 of revenue) and abroad (1/3), and increasing market share, the company has significant opportunities to increase top-line growth
• We like the continual focus on efficiency and note ongoing restructuring efforts to streamline ops
• Modest top-line growth and cost management result in significant FCF generation, 120 per cent of NI in 2016
• Main drivers we are monitoring are BAT (net exporter, so positive impact), accelerating global growth, infrastructure spending and follow through on the improvement in bookings
• Valuation also attractive — trades in-line with broader sector, 20 per cent discount to peers on P/E
• Few companies touch as many major global secular themes, e.g. energy consumption, urbanization, food and water management, climate change, etc.
   

PAST PICKS: MARCH 2, 2016 

UNITED HEALTH GROUP (UNH.N)

• Sector: Health care
• Market cap: $160 billion
• Performance:
  • 1 year: +39%
  • 1 year vs sector: +27%
  • 1 year vs S&P 500: +18%
• Valuation:
  • Top-line growth: +10% (CY’17), +10% (CY’18)
  • Bottom-line growth: +18% (CY’17), +12% (CY’18)
  • P/E multiple: 17.5x (CY’17), 15.7x (CY’18)
• UNH is the largest Medicare contractor in the U.S., as well as a top pharmacy benefits manager and Medicaid provider. Supported by secular trends in Medicare and Medicaid, i.e. aging population and lifestyle diseases, the company has significant demographic tailwinds for years to come
• Changes in health-care delivery and payment models (fee for services to balue-based) favours entities positioned to reduce per capita health-care spending — puts managed care in good position
• Little impact to managed care from the repeal/replace policy, but reduced noise in health-care policy generally should buoy entire space and return focus to strong fundamentals
• Best-in-class management has an established track record of beating earnings estimates and raising guidance, while delivering consistent mid-teen EPS growth and returning about 50 per cent of annual cash flow to shareholders as dividends and share buybacks
• A risk to the company is the Department of Justice looking into a case alleging that UNH made efforts to identify sicker members in its Medicare Advantage plans in order to code for their health status and receive commensurate higher-risk payments from the government
  • Little evidence to substantiate fraud claims and DOJ intervention in past has not guaranteed material finding
• UNH trades at a premium to peers, but PEG ratio of 1x to 1.25x compared to other “stable” companies, e.g. staples trading around 2x PEG for half the growth
   
• Then: $121.27
• Now: $165.46
• Return: +36.43%
• TR: +39.32%

TJX COMPANIES INC. (TJX.N)

• Sector: Consumer Discretionary
• Market cap: $49 billion
• Performance:
  • 1 year: +2%
  • 1 year vs sector: -15%
  • 1 year vs S&P 500: -19%
• Valuation:
  • Top-line growth: +7% (CY’17), +7% (CY’18)
  • Bottom-line growth: +10% (CY’17), +10% (CY’18)
  • P/E multiple: 19.1x (CY’17), 16.4x (CY’18)
• TJX is the largest global off-price retailer with over 3,400 stores in the U.S., Canada, U.K. and Europe. They drive traffic to stores by selling brand-name apparel at a 20 to 60 per cent discount to department stores. Off-price has benefited from market share donation by JCP, Sears, Kohl’s and other department stores.
• High-quality operator with a durable business model that works throughout the business cycle. The company can increase prices when consumer spending accelerates and decrease prices when it slows. TJX has had only one year of negative same-store sales growth in 1996 following the acquisition of Marshalls.
• The company’s scale allows it to buy direct from apparel manufacturers rather than the common misconception that TJX buys merchandise that is defective or has fallen off a truck
• Stock is more or less flat from a year ago, but has significantly outpaced retail (negative six per cent in same period)
• Basically, the best house in a neighbourhood you wouldn’t want to spend a lot of time in
   
• Then: $75.44
• Now: $77.02
• Return: +2.10%
• TR: +3.49%

FACEBOOK (FB.O)

(See Top Picks write-up)

• Then: $109.95
• Now: $141.72
• Return: +28.89%
• TR: +28.89%

TOTAL RETURN AVERAGE: +23.9%

FUND PROFILE: EQUIUM GLOBAL TACTICAL ALLOCATION FUND

Regulations prohibit publishing returns until after 1 full year of track record has been established

Benchmark is comprised of 60 per cent equity (15 per cent S&P/TSX Composite Index, 45 per cent MSCI World Index) and 40 per cent bonds (20 per cent Bloomberg Barclays Canadian Aggregate Bond Index and 20 per cent Bloomberg Barclays U.S. Aggregate Bond Index). Returns are based on reinvested dividends. 

TOP HOLDINGS AND WEIGHTINGS

1. iShares MSCI World Index ETF: 25.0%
2. Vanguard Canadian Aggregate Bond Index ETF: 12.5%
3. iShares Core U.S. Aggregate Bond Index ETF: 12.5%
4. iShares Core S&P/TSX Capped Composite Index ETF: 10.0%
5. Technology Select Sector SPDR ETF: 6.0%

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WEBSITE: equiumcapital.com