Canada is definitely in the global spotlight these days. Our financial system is envied by most, our currency is strong, and our natural resources are in demand. It should be no surprise then to find energy, financial, and material companies making up almost 80% of the TSX index. This kind of market concentration means that most Canadians portfolios are influenced by those three sectors. Much of last year’s market rebound was focused on these very sectors; however, in the process the other side of the market received little attention and has yet to fully participate in the market recovery. Fortunately, that is good news as it means that there is still value in the market if you look hard enough.
While most Canadian’s investment exposure is in the big three sectors, attention should be paid to the other 20% of the index which offers potentially better opportunities for relative and absolute growth. Which sectors make up the other smaller half of the market? They are mostly less cyclical sectors like utilities, consumer staples, telecommunications, and health care. It is these sectors that were ignored last year and potentially offer better value going forward. Often in investing, the best opportunities are where no one is looking.
In today’s market, great companies that were overlooked for not being “sexy enough” are very attractive and are increasingly making up a larger part of our two equity funds. They have common characteristics that are undervalued in today’s market, namely stable cash flows, nice dividend yields, visible earnings, and good sales growth. These characteristics sometimes get forgotten when everyone is paying more attention to growth companies that benefit from China, commodities, or other cyclical growth factors. But at the end of the day, the characteristics noted above will offer investors a better stable return with less risk. On top of that, those “less risky” companies mentioned above are still bargains in today’s market and thus potentially offer better returns as well.
As we move into the more mature phase of the economic/market recovery, stock selection becomes much more important. In the current environment, some sectors will do better than others, thus taking a non-index approach to the market in order to diversify away from the heavily concentrated TSX index may be of benefit to most investors. Like most recoveries, the “boring” companies perform better after the initial rebound as attention shifts more to fundamentals and valuations. In this case, it is likely the other 20% of the TSX index that takes the leadership baton.
Vancouver based, Van Arbor Asset Management Ltd. is a division of ZLC Private Investment Management and ZLC Financial Group. Van Arbor’s core philosophy is to hold a focused portfolio of the best value based opportunities in the market, rather than mirroring the respective indices. This includes staying away from weaker sectors, while focusing on the few selective opportunities that have excellent growth potential and are trading at bargain prices. A focus on capital preservation alongside capital appreciation is a cornerstone of their strategy.
Van Arbor Asset Management Ltd. offers investors two unique non-passive/non-index equity Funds. The Van Arbor Canadian Advantage Fund, the number one Canadian equity fund in Canada over the last 5 year period; and the Van Arbor World Advantage Fund, one of the top ranked global equity funds in Canada over the last 1 year period. (Source: Globefund, as at March 1st, 2010)
Note: Van Arbor funds are offered through ZLC Private Investment Management only
