Ryan Grant, comanager of RBC Vision Canadian Equity, is a bottom-up stock-picker who focuses on individual company attributes, but he’s also keeping a sharp eye on the Canadian job market right now.
Even as the Bank of Canada lowers interest rates, the economy is still feeling the impact of its big rate hikes. Recently released job numbers showed unemployment rising to 6.6% in August from 6.4% in July.
Grant, who manages the C$495 million fund along with senior portfolio manager Scott Lysakowski and a team of five analysts, says the nagging question is whether Canada is heading for a soft landing or a recession.
“Consumers have been through a period of high inflation and they’ve been feeling pressure,” Grant says. “They’ve been paying higher prices for goods and higher interest rates on loans.”
Grant says the slight rise in the August unemployment rate is not a serious concern, but the team is “monitoring” the Canadian job picture. Further declines in the job situation could be negative for corporate profits in some industries as consumers feel the hit on their incomes.
Bank and Financials Holdings
Banks tend to be sensitive to unemployment and the effects of interest rates on consumer and corporate borrowers. Although the fund has three major banks in its top 10 holdings—including the Royal Bank of Canada, the Toronto-Dominion Bank, and the Bank of Montreal—Grant says the fund is underweight in banks relative to the TSX Composite Index and is leaning toward other financial firms.
The fund has an overweight position relative to the TSX in insurance companies and diversified financial firms. Manulife Financial is a key holding, as are Brookfield and Brookfield Asset Management.
“Credit losses had been rising but we’re now at a point where they may be topping,” Grant says.
With interest rates dropping, Grant is comfortable with the fund’s overweight position in real estate firms relative to the TSX.
“One of our bigger overweights is residential REITs, a pocket that we like due to the strong supply/demand dynamic,” he says. “The lack of housing supply is a benefit for that space and it will take time to resolve.”
Canadian Apartment Properties REIT is a holding in this space. The firm is the largest publicly traded apartment landlord in Canada.
The focus of the fund is 100% on Canadian equities. It therefore hasn’t benefited from the sizzling gains offered by some of the US-based technology giants in the past couple of years.
Returns have been steady but average for RBC Vision Canadian Equity, which receives a Morningstar Medalist Rating of Gold.
As of Sept. 11, the fund showed a one-year gain of 18.7%, placing it in the second quartile of the Canadian equity Morningstar Category. It has a three-year average annual compounded gain of 7.5%, also in the second quartile, and a top-quartile five-year average gain of 10.5%.
Typically, the fund holds between 80 and 100 stocks, and it currently has around 90. Grant says there is no requirement to be invested in every TSX sector, but the team tries to find companies in each sector that meet its criteria for growth potential, strong management teams, and the ability to deploy capital at high rates of return.
When choosing stocks, the team takes a long-term perspective, examining prospects for the next two to five years. Fund turnover is relatively low at about 20% annually. Some stalwarts have been in the fund more than five years, with the team doing a bit of buying and selling around the edges of positions as prices have swung from overvalued to undervalued.
Benefiting From Small-Cap Stocks
Grant says exposure to the small-cap sector has added value over time, and the fund may hold 10% to 15% of assets in small caps, depending on the risk/reward outlook. Currently, it’s at the lower end of that range, he says.
“We went through a period when small caps were generating a bit more interest in the market, but that had waned in recent months due to questions around slower economic growth,” he says. “Large caps are more defensive.”
While the large number of stocks in the portfolio provides diversification, the fund’s choices are defined by environmental, social, and governance screens that prevent certain investments.
For example, the fund may not hold companies offering tobacco products, alcohol, cannabis, gambling services, or adult entertainment. It also avoids companies facing negative “controversies” such as chemical spills or a fatality in the plant, Grant says.
“We are relatively neutral on mining and oil and gas companies,” Grant says. “We tend not to take hard and fast views on where the underlying commodity prices are going.”
The only resource-related firm in the fund’s top 10 holdings is Enbridge Inc., a firm that doesn’t actually produce commodities but operates a giant network of pipelines for oil and gas transmission throughout North America. Grant says Enbridge benefits from strong barriers to entry or a “moat,” as it’s difficult for new and competing pipelines to get built.
Canada’s two major railways are also among the RBC Vision Canadian Equity’s top holdings: Canadian Pacific Kansas City Ltd. and Canadian National Railway Co. Grant says the railways have seen some softness, with a recession in the freight business recently. However, he says railways have the benefit of strong moats that make it difficult for competitors to enter the arena, as well as high-quality management teams with the ability to compound growth over time.
Another favorite is WSP Global Inc., one of the world’s leading engineering and consulting firms, with clients in sectors ranging from transportation to resource extraction. WSP is a beneficiary of strong infrastructure investment in North America and has shown an ability to make accretive acquisitions, Grant says. It recently bought US-based POWER Engineers, a firm with experience in projects related to the transition to cleaner forms of energy, for USD $1.78 billion.
