Q: In the face of the recent volatility in the stock market, and gold hitting new all time highs – what would be you’re view of gold moving forward (is this the end of the bull run or does gold have a ways to go)?
A: We don’t have a strong view of gold prices or any other commodity price for that matter. The reason is that commodity prices are largely driven by macro-economic events, which we believe are impossible to predict with any consistent accuracy. Capital markets are considered to be what’s known in the scientific world as “complex adaptive systems” which means there are too many moving parts and their linkages can never be determined because they are in constant flux (see Mawer Insight #11:Lookout for Outlooks for a full description of these concepts). So, armed with the knowledge that making macro bets is likely to have a low probability of success, we don’t spend our time and energy here. What we do spend our time on is finding companies that have a proven business model with strong, enduring competitive advantages, great management teams, improving business fundamentals, and then try to buy these companies at a discount to intrinsic value.
Q: On a related note, what is your call on valuations on the TSX and the S&P 500 going into next year - is there room for further multiple expansion as quantitative easing continues and interest rates appear to not be going anywhere soon? How have you geared your funds to reflect this view?
A: Valuation appears to be fair at this point, considering the level of interest rates. However, interest rates have nowhere to go but up from here so there is likely going to be pressure on multiples at some point soon. If corporate earnings can pose a strong rebound at the same time as the rising interest rates then this will not be a problem, but if corporate earnings do not come through then we will see pressure on equity prices.
Q: Given the glut of inventory in natural gas and crude sitting at approximately $75, what are your thoughts and predictions regarding the energy sector going forward? Do you prefer oil over gas stocks or vice versa - why?
A: The answer to question number one applies, but generally speaking we are more comfortable with the energy sector than most commodities because there is a scarcity issue with energy that doesn’t exist with most other commodities, such as base metals (there’s hundreds of years of supply of most base metals so the long-term price will always return to its cost of production when new supply is brought on, which will cause miners to become unprofitable for a period of time). With respect to oil vs. gas, natural gas appears to be in ample supply for the near-term, so we think the focus here should be only on those companies that are the low-cost producers of natural gas, like Encana (NYSE:ECA). We are more inclined to favour the oil sector at present, but hold this lightly.
Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overvalued and due for a correction and one sector that you believe to be undervalued and due for a bounce and why?
A: We really don’t think this way. We are a bottom-up manager and find both under and overvalued companies in most sectors. Furthermore, we don’t think in terms of short time frames and therefore don’t put any emphasis on catching “bounces”. We are not active traders – our annual turnover is very low, often in the 10%-30% range. The companies we own are ones that we expect to own for the long-term because they have a track record of creating wealth over long time frames and we expect them to do so in the future, regardless of short-term stock price fluctuations. We also believe short-term trading can be costly in terms of commissions and capital gains taxes.
Q: Lastly, can you please highlight 1-2 stocks/themes that you think offer the best value moving forward and your reasons for liking them?
A: Yes, security selection is the thing we strongly emphasize. We believe it is possible to separate good companies from bad with a fairly high level of probability. In Canadian equities we have recently been adding to our positions in Rogers (NYSE:RCI) and the TMX Group (TMXGF.PK). Both companies have strong business models, very capable management, improving fundamentals and trade at attractive valuations (we think the attractive valuation exists because the market has incorrectly built in assumption about potential competition that we think will not materialize in any significant way (new wireless entrants in the case of Rogers and new alternative trading systems in the case of TMX).
Thank You Mr. Hyndman!
Bio: Jamie Hyndman is Director of Marketing at Mawer Investment Management Ltd. which he joined in 2005.
He is responsible for marketing, product development, and asset growth. He coordinates the continued expansion of the Firm's assets under management for the Firm's target markets with a focus on institutional management including pension funds, foundations and not-for-profit organizations, and strategic alliances with other financial service companies that wish to market our products and services. Mr. Hyndman is on the Board of Directors and a member of the asset allocation team. He also serves on the Firm's Management Committee which is responsible for the development and execution of the Firm's strategic plan.
Mr. Hyndman has 15 years of investment experience. Prior to joining Mawer, he was a Vice President and Portfolio Manager for Franklin Templeton Investment Corporation from 1998 to 2004. Previously, he was an Investment Representative for TD Waterhouse Investor Services, which he joined in 1996. Before moving to Calgary and joining TD Waterhouse, Mr. Hyndman was a Commercial Real Estate Investment Analyst for Prudential Portfolio Managers in Toronto from 1994 to 1996.
Mr. Hyndman earned his Bachelor of Arts degree with Honours from the University of Western Ontario and is a Chartered Financial Analyst charterholder.
Disclosure: I do not hold any positions in the stocks mentioned in this article.