Suzann Pennington discusses her successful value investing style and the newly launched Renaissance Canadian All-Cap Equity Fund
When CIBC Global Asset Management Inc. (CGAM) announced earlier this year it had hired Suzann Pennington, the Globe and Mail described it as a “coup.” An industry veteran with a proven track record of success spanning more than two decades, Pennington was excited to join forces with CGAM, ﬁrst and foremost, because of the ﬁrm’s robust independent research capabilities. Pennington’s Canadian Equity group includes a team of experienced portfolio managers and a Canadian Equity Research team, headed up by Marilyn Brophy. This team of research specialists follows a very disciplined long-term approach to develop proprietary, in-house research. The portfolio managers and career research analysts work together to integrate very strict discipline with an environment where critical thinking is required and the challenging of ideas and assumptions is encouraged. Depth and quality of research is more important than ever to successful active management. A well-deﬁned portfolio 8 renaissance investments
“I think the full life-cycle research we’re doing in the Canadian equities universe is groundbreaking...” construction process and stock selection discipline are critical to consistent investment results — that hasn’t changed. But Pennington believes it has become increasingly important for the portfolio management process to be supported by independent internal research. Explains Pennington, “Internal research capability has
become the key differentiating factor to drive superior performance going forward. We have developed a research modeling and analytics platform — what we call our Research ‘MAP’ — to put everything into a long-term context.” “We’re analyzing companies and industries through a full competitive lifecycle — not just a business cycle — but from growth stage to maturity to decline. The fast pace of information — and misinformation — that is the reality of our electronic world, requires that we have a long-term framework to evaluate those new pieces of information very quickly and determine whether they
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have a long-term impact on the value of a company, or are simply affecting a stock price in the short term. These long-term models and scenario analysis are instrumental to making good investment decisions.” Pennington believes research holds the key to investment success going forward. She says, “I think the full life-cycle research we’re doing in the Canadian equities universe is groundbreaking and will support our results over the next decade. A big part of successful long-term performance is avoiding minefields. At its most basic level our Research MAP goes a long way to reducing surprises.” The Renaissance Canadian All-Cap Equity Fund takes a long-term approach to stock selection, typically expecting to hold a position for at least four years. Pennington and the CGAM team put the Research MAP to constant use, seeking out stocks that trade at attractive valuations with enough “margin of safety” to warrant the risk. They run
“Internal research capability has become the key differentiating factor to drive superior performance going forward. We have developed a research modeling and analytics platform — what we call our Research ‘MAP’— to put everything into a long-term context.” sensitivity analysis, challenge and test assumptions, and evaluate potential downside risks. With its robust discounted cash flow (DCF) approach to evaluating companies, the Research MAP supports a range of valuation metrics including NAVs, EV/EBITDA, DCFbased intrinsic value and replacement value of assets. Pennington believes different tools are appropriate for different companies and has always considered the methods used by industry specialists.
While the research support is significantly enhanced, the criteria for making investment decisions remain pretty much the same for Pennington. “For 15 years,” she says, “I’ve been commenting to anyone who would listen that there are three key elements to successful investment management — portfolio construction, stock selection, and consistent adherence to discipline.” (For details, see page 10.) She is still using the same valuation tools and process that have served her well for the last couple of decades.
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“Flexibility within a framework” As the manager of the newly launched Renaissance Canadian All-Cap Equity Fund and the Canadian equity component of the Renaissance Canadian Balanced Fund, Suzann Pennington says there are three key elements to successful investment management: s Portfolio construction is simply the framework that gives a portfolio its
characteristics, its attributes, and more than anything else, it will deﬁne the risk level. s Stock selection describes the investment style — in this case value —
buy discipline and sell discipline. It’s what most people want to talk about. s Constant application of a discipline throughout the cycle means that
the discipline has to be well deﬁned and simple enough to be repeated. Organizational support ensures discipline is followed.
Pennington typically aims to have about 40 to 60 holdings in a portfolio to avoid overconcentration and single company risk. As part of its investment discipline, the team identiﬁes the risks associated with each company, including those arising from competitive threats, balance sheet issues, geographic location, commodity prices and economic conditions. “The point is that it is okay to take calculated risks within a portfolio,” she says. “But it is inexcusable to have unintended risks.” Given all this, how does Pennington assess the risks for Canadian equities after taking over management of the Canadian Equity component of the Renaissance Canadian Balanced Fund and launching the Renaissance Canadian All-Cap Equity Fund? In the short term, she sees opportunities provided by the third quarter’s “fear-driven” market. For the long term, she sees even more opportunities. According to Pennington, Canada’s advantages include: s political stability s a growing economy s a stable banking sector s the long-term potential for rising oil prices 10 renaissance investments
s exposure to the fast-growing BRIC (Brazil,
Russia, India, and China) economies through both exports and an environment in Canada of properly audited ﬁnancial statements and ready access to management With their long-term perspective, and a sophisticated and invaluable Research MAP in place, Suzann Pennington and her team have the resources, commitment and ﬂexible framework in place to help investors achieve long-term success. The beneﬁt of the team’s well-grounded process is that they are able to spend the bulk of their time analyzing and visiting the companies they think can bring the most value to investors. Current markets have been challenging but Pennington is not at all deterred by the recent market volatility. “I think this is a great time to be launching a Canadian all-cap fund,” she says. “With the exception of the credit crisis in 2008, Canadian market valuations are at the lowest levels we’ve seen in 10 years. Canada is a great mix of a strong domestic ﬁnancial system and exposure to the higher growth regions of the world.”
Find out more The Renaissance Canadian All-Cap Equity Fund offers: 1. A wider range of opportunities 2. Greater diversiﬁcation 3. Focus on value Included with your magazine, you’ll ﬁnd a copy of the fund’s Advisor Essentials. You can go online to access even more tools, including a video of Suzann Pennington, explaining her investment philosophy and process, and tools to introduce this new fund to investors. These include: s Investor Essentials s Manager Proﬁle of Suzann Pennington
Fund launch: Fund launch : Renaissance Renaissance Canadian Canadian All-Cap A ll-Cap Equity Equit y Fund Fund Su uzann zann Pennington Pennington answers answers qquestions uestions about about Renaissance Investments’ newly n ewly launched launched Canadian Canadian all-cap all-cap fund f u nd . What’s W hat ’s the the appeal appeal of of all-cap? all-cap? The opportunity to consider small- and mid-cap stocks provides a broader depth of business sectors and earning streams than the large-cap Canadian market which is concentrated in companies within the energy, financials and materials sectors. Access to small and mid caps increases diversification opportunities and mitigates sector concentration risk. Large-cap companies are widely covered by analysts and portfolio managers, but many mid- and small-cap companies fly under the radar and can often be purchased at a significant discount to fair value. The “small-cap effect” describes companies that are under-researched and subject to more market inefficiencies. We try to take ntage of the mispricing that frequently results. lll-cap universe is simply bigger with hundreds more stocks to choose from find good value even if one part of the market is temporarily expensive. e long term, small/mid cap stocks have outperformed the large caps ty that can be associated with small-cap investing often prevents participating in that segment of the market. By holding small caps tex ext of a diversified all-cap portfolio volatility is typically reduced. Can you describe i the e portfolio’ss cconstruction onstruction fframework? r a m ewor k ? ork simple. I don’t believe I can time the market with the consistency necessary to add value so I don’t try. This means that the portfolio alw ways includes both stocks that are economically sensitive and stocks that are s inimized recognizing that equities outperform cash term. rm. The fu fund will be deeply diversified with respect to macro risk factors and maintains exposure e to a minimum of six sectors at all times. Risk controls are re built into int the framework (see main article). This leads to a portfolio that is often significantly different from the index. signific What W hat ccharacteristics haracteristics will will tthe he pportfolio or t folio hhave? av e ? Market cap exposure is dictated by bottom-up valuations and portfolio n objectives. Typically one-quarter to one-third of the fund would be e in mid caps. We cannot completely eliminate volatility, but I will be disappointed if the fund doesn’t have lower volatility than the index over a cycle for two reasons: 1. I believe it will be better diversified than the benchmark. 2. Buying stocks at a discount to fair market value provides a margin of safety against unforeseen circumstances. What’s W at s tthe he ddifference if ference between bet ween this this and and other other funds funds you’ve you’ve managed? m an ag e d ? I’ve followed essentially the same portfolio construction and stock selection process for the last 20 years. The difference is that, with a team of 15 Canadian equity professionals, and an industry-leading Research MAP we’ve added the additional support that will be so important to positive returns and consistency in the years to come. renaissance investments 11
Published on Sep 11, 2012