2017 Factor Alpha Newsletter

Categories Canada, Investing, OSAM Research

To be sure, things are a little bit hectic here in the U.S. — headlines, rants, and Tweets still manage to shock the markets and year-to-date has been rough. So why not avert our gaze North of the border for a change…

Any good news up there? Wrong question.Getting tips from a newsfeed is risky. When the time comes to select stocks and build portfolios, investors can avoid much angst by instead picking a disciplined and unemotional approach and sticking with it.1  After all, the Canadian market has “good corporate governance, low debt-to-GDP, and an attractive resource base with large reserves of oils and other minerals,”according to Fidelity’s Risteard Hogan. “It’s also performed relatively well over the long term,” he adds.2

This Canadian edition of the Factor Alpha Newsletter shows proprietary, customized multi-factor themes3 compared to the single-factor S&P/TSX Composite Index.4 Using our Factor Attribution Tool, we’ll take a closer look at the Canadian market’s behavior so far this year.

The factors that we choose for our themes are driven by strong fundamentals that work effectively over a full market cycle. Importantly, because in any given year an individual factor can do well or poorly — creating noise in the long-term process — investors should avoid using any of these factors and/or themes in isolation. Instead, we suggest using various hybrids of several multi-factor themes to help build conviction-weighted high Active Share portfolios.5

Below are basically live-time YTD factor snapshots, excerpted from one of our standard Client Reports.6

First, to contextualize the performance of the themes, we split out the difference in performance between a market cap-weighted methodology (the S&P/TSX) and an equal-weighted selection universe:

Size: “Market Cap-Weighted” less “Equal-Weighted”
(Cumulative excess returns, 1/1/17–4/30/17)

Next up, YTD7 cumulative excess returns for each theme’s top decile8 versus the entire universe of stocks in the benchmark:

OSAM Value
Stocks trading at large discounts to current sales, earnings, EBITDA, and Free Cash Flow.

OSAM Momentum
Stocks with impressive and stable recent total returns.

OSAM Financial Strength
Stocks that use debt responsibly, and aren’t overly reliant on outside financing.

OSAM Earnings Quality
Stocks with strong cash flows and conservative accounting.

OSAM Earnings Growth
Stocks whose profitability is high and trending up.

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  1. By detaching our decisions from the noise and just sticking with the basics, we can all keep out of our own way.
  2. Cited Feb. 3, 2017 in “How Trump Could Upend the Billion-Dollar Move to Canadian Stocks” (cnbc.com).
  3. We blend factors together to build proprietary multi-factor themes to help reduce the noise of any one factor.
  4. The S&P/TSX is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The TSX-listed companies in this index comprises about 71% of market capitalization for all Canadian-based companies listed on the TSX.
  5. As an example, our strategy (see allcanadianequity.com for results) focuses in on stocks that we believe have better quality, value, and momentum across market cap ranges. Stocks are selected and weighted based on conviction and are broadly constrained by sector and industry.
  6. The multi-factor portfolios (themes) are calculated using a compositing methodology: Monthly portfolios are created with a 12-month holding period, then the 12 monthly portfolios are combined to create the composite portfolio.
  7. 1/1/17–4/30/17
  8. For example, Value’s top decile is “the cheapest 10% of stocks” within the universe.