Adding value in global equities

The LF Canlife Global Equity Fund was launched in October 1982 and has been managed by Mike Willans, Head of International Equities, with the support of the Canada Life Investment’s international equities team since January 2004. Mike adopts a macro-driven process, keeping a close eye on economic indicators to analyse and forecast what particular sectors and stocks he believes will outperform in the upcoming months. He works very closely with the international equities team and their continuous discussion is key to the regional allocation and sector & stock selection process. This includes determining the relative cyclical, growth or defensive bias of the Fund within the regional matrix.

Under Mike’s tenure, the Fund has been a strong performer within the IA Global sector, which we believe is due to its robust and repeatable process that aims to add value via four levers. These are a macro influence, a preference for mid-cap stocks, taking a contrarian view and building high conviction positions. We place greater or lesser emphasis on each lever at different stages of the economic cycle, enabling a flexibility that we believe helps the Fund outperform across a variety of market conditions.

Source: Canada Life Investments, for illustrative purposes only.

Macro influence

Macro factors play a very important role in the funds’ sector allocation and stock selection process in a number of different ways. Firstly, we pay close attention to economic indicators such as the Citigroup Economic Surprise Index (CESI), to help us determine whether we believe consensus views are currently too bullish or bearish. Combined with other data-sets such as Purchasing Managers’ Indices (PMIs), bond yields and employment figures, we take a position on the short-term global economic outlook and position the Fund with a more defensive or cyclical bias accordingly.

Macro factors also inform the Fund’s regional allocation. The International Equity Team is comprised of highly experienced regional specialists, who cover the US, UK, Asia, Japan and Europe. Their views and solid working knowledge of each region therefore drives the portfolio’s construction from a regional standpoint. This is achieved via a quarterly process through which each major global equity region is ranked from 1-5 by each member of the team. When combined, the top-ranked region achieves a weighting of +5.0% against the benchmark, down to -5.0% for the 5th ranked region. The regional specialists are also integral to sector and stock selection within the Fund, which are both heavily influenced by the macroeconomic environment. This is because we always look at the macro sensitivity of stock, analysing how it performs in different stages of the economic cycle.

This is evidenced in the portfolio. For example, in the US, the industrials sector is well set to benefit from an increase in fiscal expenditure, a theme that has been evident for several years. At a sector level, we expect defence in particular will benefit. A company we hold in the Fund leveraged into this theme is Cubic, the global transportation and defence company. It posted revenues of $1.5 billion last year and we believe that higher spending on US infrastructure and defence will boost this further in 2018. For example, Cubic was behind the contactless ‘Oyster’ payment system that is used across the London transport network in the UK. They are now looking to roll out this technology across the New York metro. We first took a position in the stock in May 2015 at $47.56 per share and it is now trading at $59.95.*

Mid-cap preference

Historically, mid-cap stocks outperform their larger peers given their faster growth rates, more niche products and ability to move quickly to take advantage of changing market trends. The MSCI World Mid Cap Index has an average market capitalisation of $7 billion, whilst the large-cap MSCI World Index average stands at more than $40 billion. Looking at the long-term performance numbers highlights the greater potential of the mid-cap universe, with the MSCI World Mid Cap Index returning 385.9% over the last 20 years, compared to the 254.9% gain of the MSCI World Index.**

One of the many mid-cap stocks within the LF Canlife Global Equity Fund is Lionsgate Entertainment, domiciled in Vancouver but now based in California, which develops and distributes movies and TV shows. The stock has a market-cap of $6.5 billion and is supported by the macro theme of streaming content, which gives distributors more data about what consumers enjoy watching. This enables the handful of US content companies in existence to more easily produce popular content. Lionsgate have backed high grossing film series such as the Hunger Games and Divergent, as well as singular releases like La La Land. Furthermore, their acquisition of Starz – a subscription service – in December 2016 has provided a stable revenue base for the company. We first took a position at $29.22 per share in October 2015 and the stock is now trading at $34.50. We believe there is significant further upside.*

Contrarian view

Often, a fund manager’s biggest successes come from when they take a contrarian view compared to the market. This is an integral part of the Fund’s management process, with Mike and the team continually looking to positon the Fund in unloved, overlooked sectors and stocks that we believe retain their own idiosyncratic performance drivers. For example, in 2016, we rotated the LF Canlife Global Equity Fund into the more value areas of the market as economic indicators – such as the CESI – began to suggest that consensus views were too bearish. We were therefore well-positioned when the market realised that bond yields could not fall further, following decisions by the Bank of Japan and European Central Bank not to go further into negative interest rate territory. This was a significant benefit to the performance of the Fund, as higher yields saw sectors such as financials, materials and industrials outperform, with the more defensive sectors selling off until year-end.

One current example is Equifax, the consumer credit reporting agency. The company enjoys strong competitive positioning, with the US credit industry maintaining higher barriers to entry, which results in only a few viable alternatives. It is also a mid-cap stock, with a market-cap of $14.5 billion. However, on the 7 September last year, Equifax announced that it has been the target of a significant data breach and the stock fell more than 30% as a result. However, we believed the scale of the fall was unwarranted, given that the data breach did not impact its core commercial credit reporting databases as the attack came through its online dispute portal web application, a much smaller part of the business. Therefore, we believed the stock was attractively priced $92.49, allowing us to initiate a positon in mid-September last year. The shares now trade at $122.84.*

High conviction positions

We believe active managers typically outperform by taking high conviction positions and diverging from the market consensus. As a result, the LF Canlife Global Equity Fund looks very different to global equity indices. This can be highlighted by the fact that we have double the exposure to the communication services sector for example. This is because we believe the sector has a number of supportive macro themes.

For example we have a position in Nuance Communications, a mid-cap business that provides speech recognition and imaging applications. Voice activated hardware and applications are gaining in popularity globally and we believe Nuance have the technology and distribution capabilities to benefit from this growth, whilst also trading on an attractive forward price-to-earnings ratio of 14.6x. Another business we like is Iridium Communications, which is a satellite communications company. Iridium enables voice and data communications around the world for the US Department for Defense, amongst other customers, and is supported by demand for bandwidth capabilities continually rising. For example Iridium enables 4k content to be streamed, even on remote aircraft and shipping routes.

We first initiated a holding in Iridium when other investors were concerned over its balance sheet, which resulted in an attractive entry price. These fears proved unfounded as the company performed well in 2017. This performance has continued into 2018, with the share price hitting its all-time high. We believe the continued development of its satellite network can propel the shares further in 2018, following consensus beating earnings in the final quarter of last year.

*Source: Bloomberg, share prices as at 19/01/18.

**Source: Morningstar Direct, as at 31/12/17. Performance shown in US dollars. Past performance is not a guide to future performance.

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.

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CLI01080 Expiry 30 June 2018

Mike Willans

Mike Willans

Head of International Equities

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