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Transcript:
John: Hello, I’m with Danesh Rohinton from IIA Clarington. How are you Dan?
Danesh: Hey John, how’s it going?
John: Very good, thank you. Let’s talk a little bit about how long you’ve been with IA Clarington and your history and bio and all of that stuff. Tell me a little bit about you.
Danesh: So, I’ve been with IA Clarington for about two and a half years now, and we’ve known each other actually well before then. It was actually during the CI Cambridge days where yes I was a portfolio manager and analyst on the team. So I’ve been working in the industry for over 10 years in different capacities covering financial services Canada US global equities and the more recent times in the call the last seven years or so I’ve been spending a lot more time on the global end.
So really building out a core philosophy where you can stay invested across different market paradigms and regimes and that’s I think it’s the most important part of the conversation because staying invested in the market during what are normally noisy times for different reasons, is really the key to success. It’s not about the factor exposure. It’s not about any of that. It’s about that time investment. So our job is to make it as easy as possible to make that possible.
John: Exactly. So tell me what funds do you manage at Clarington?
Danesh: So we manage about $6 billion across our entire suite of dividend strategies. We manage a Canadian dividend growth fund which I think of it more as a – it’s you know most and we can maybe get into this a little bit later. It’s sort of the starting point for many but I think it’s the satellite strategy in my mind as part of a core portfolio.
So we run a Canadian dividend fund, a global dividend fund which I think is the anchor tenant in anyone’s core portfolio and then a US dividend fund which is on the other end of the spectrum, which is a bit more growth oriented because of the nature of the US market. So six billion across our full suite.
John: And managing those types of funds, how do you stay up to date with market developments and the trends that are going on or developing?
Danesh: So it’s a bit of a job. It’s a job that is all-encompassing in your day-to-day life. So, you really got to love it to really stay involved in it over time. And the reason I say that is the market’s 24/7. We live in a world with a lot of information coming our way, whether it’s 2 a.m. in the morning or two 2 p.m. in the afternoon. The market doesn’t care about holidays, weekends, or anything like that. Canada Day was great, but the US market was open.
At the end of the day, you have to love what you do. So it becomes really a rewiring of your brain. So you become aware that you’re passionate about this industry and learning is I think the key tenant of it. So you really take in information from all kinds of sources. We have proprietary research. We have third party research. We use expert networks. We rely on our connections and our and our networks as well. So it really comes at us from many different dimensions.
But the core tenant in all of this is processing it, understanding when it applies, understanding when it’s just noise, and that I think is the fundamental lynch pin in today’s markets.
John: Tell me about this investment philosophy and the strategy that you use in general.
Danesh: And I think it’s really all-encompassing, but I’ll narrow my comments to global because I think it really speaks to the best of what we bring to the conversation. So when we think about what we do, we really are organizing the world in what we think are coherent value chains and profit pool chains. So when you take a simple example like let’s take Apple because it’s in the news more often than not. Apple is part of a deeper value chain across the mobile and semiconductor landscape and Apple in their little corner which is a multi- trillion dollar corner, they dominate. So they dominate the profit pool there. So, when we’re looking at companies that supply to Apple, say the Skyworks and and what have you, that sell a certain router, a certain modem, a certain part of the bill of materials of an iPhone, over time, Apple takes more of that.
That’s true for other industries that operate as well. So when you own a – when you look at a value chain, our job is to find that pinch point and that company has the right and the capability to win by winning more customers in a growing market but also taking more of the pie from their suppliers and our customers. So to keep the Apple analogy going, Apple charges us more or takes a toll road on all the apps we use. So more time spent on the phone is more revenue for Apple because they get a 30% cut of that.
The other end of the book is that they take in more of the semiconductor design for themselves. So that’s more of the suppliers that feel the pressure there. So Apple wins in this type of environment. But I think it’s important to say this is not just an Apple story. This is just a very basic thought process with one stock that we can take across countries, geographies and sectors all across the world.
John: Interesting. Now when looking at that, how do you apply risk management to the overall approach?
Danesh: I think the best way to think about it is that you know we’ve talked about I’ve said core a few times, staying invested a few times. Our job especially and once again I’ll stick with global dividend as the anchor in this conversation our job is to participate in growth markets participate in value markets and what that means is we avoid some of the peaks that may come in the market but we’re our hope is to also, as part of that bargain with you, to avoid some of the valleys as well. So we’re trying to keep as smooth of a return stream as possible while acknowledging that certain markets will be the last few years.
It’s interesting how much technology has really driven the bus. The year before that and the year before that was a lot more value. So being not too focused in one specific area and being overly concentrated in one area allows us to have diversification such that we have equal participation in different opportunities that come our way.
John: So, how do you manage risk and what are your risk tolerance levels as it pertains either to all of the funds or the global dividend in particular?
Danesh: Maybe that to take that core philosophy and drill it down into some numbers that you can chew on and your clients can chew on is really around the idea of we want to be a little bit lower beta than the rest of the market. So, our US dividend fund is lower beta than the S&P 500. Our global dividend fund is a little bit lower beta than the MCI world and our Canadian dividend fund is lower beta than the TSX as well. And what tends to happen by risk management is the way you participate in different value growth factor rallies. As an example you tend to be more spread out than the rest of the market is. So right now it’s a very very tech-centric market and this is nothing against technology, I’m all for it. It’s more just in a core portfolio.
The debate shouldn’t be whether you’re underweight, overweight, when the market is 35%-40% technology. It’s what is the right percentage of technology as part of a core diversified allocation. So we really focus on the quantitative metrics like sharp ratio, shortino, downside capture, maximum draw down and also the betas but and along with an IPS that basically gives us the flexibility to say we can invest with some conviction but we’re not going to become a specialty fund before your very eyes, we’re not going to become a money market fund on the other side of the conversation either. So we stay invested, stay diversified but follow some of those more empirical metrics like sharp, shortino, draw down and what have you.
But really it just comes down to that same promise of risk management to us is risk managing to our promise to you which is diversification and a smoother ride and a smoother journey towards wealth creation.
John: Now of course we have to keep something in mind here and that’s we are managing dividend funds. So how do you have the dividends drive some of your decision making?
Danesh: I think the answer is that a lot of dividend fund managers would say the dividend yield. I think dividends are a source of discipline. And maybe if you’ll allow me to explore that conversation a little bit. What I mean by that, John, is when you think about what a dividend means when a company initiates one or has a payout ratio that’s say 30, 40, 50% of their free cash flow, which we think is a good healthy balance. When you get up to 80%, you have to start worrying. When it’s at 10%. Okay, it’s a good start, but what’s the journey from there? So I think 30% to 50% is a good ratio for a core dividend payer and a dividend grower. That discipline is I think completely underrated in the conversation.
So when you look at companies as they go through their life cycle when they’re early, they act a little bit more like: we were just talking about kids earlier. So they act like they’re teenagers, you know, go having strong opinions, moving in one direction, going into the other. You can do that as a younger company because you don’t have commitments. As you get older, as you get more mature, commitments begin. And that dividend is that commitment to discipline. Because if you’re paying out 30 cents of every dollar you earn, you’re going to think twice before you look at that acquisition that you were hoping that you were dying to buy one day because you’ll be disciplined on the price. It has to make sense from a cash flow basis.
The second point is in terms of management, thought process on a day-to-day budgeting basis, same thing. That shiny new factory you were thinking of building just because you wanted to build it. No, it has to make sense as part of the plan. So dividends offer income support. I fully appreciate that. I think the market does too. That’s why dividend growth companies tend to outperform over time. But I think the discipline part is where I especially focus because it’s management discipline, corporate discipline, and we tend to self-select ourselves into companies that have the right mix between cash flow growth which funds these growing dividends and also the discipline to make sure that they don’t screw it up.
John: So that discipline that you’re talking about also applies to when you pull the plug on a company and you want to jump out. What are some of the key factors in making decisions like that?
Danesh: I think there’s called the run-of-the-mill discussion, which is, you know, if this company is no longer offering any margin of safety relative to what we think its fair value is, then that’s a classic case of, well, what are the other ideas that we have around the world? And to give you a live example of just something we were talking about yesterday during our team meeting was we own, we’ve been selling down our waste exposures. So waste management specifically. We’ve been selling that down not because we don’t like the company. It’s just that it’s basically fully valued. It’s pricing in future acquisition growth inline and congruent with their history. So for there to be a greater margin of safety than there is today, they need to do big step function transformational deals. So we’re basically taking our profits there and then moving it into other areas where there’s a little bit more opportunity because not as much is priced into the stock fit because investing in stock markets is an expectations conversation along with the fundamentals conversation. So that’s one type John.
The second point, and this is where mistakes happen, and which is we all make mistakes, and we’ll fully own all of ours. When we have what we call a man overboard moment, there are times when that is the right decision to actually hold on and average down. I think United Health more recently has been one of those examples where we think over time we’ll be rewarded for that. Although it’s something where we have to fully rewrite the entire position that we have, there’s other times where the facts on the ground have changed and this is no longer the business that we thought it was and that’s when we actually exit the position irrespective of the stock being up 20% or down 20%. And so on and so forth. So structural thesis change we want to really rewrite there and then the day-to-day of it, doing our day job if you will. So special dynamics versus run-of-the-mill.
John: Now you said you went into a team meeting. How many people are on the team to manage this money?
Danesh: So across IGM there’s about 250 of us across different asset classes all the way from the private equity private credit side to where I am which is on the liquid public equity side. Our team directly calls it our direct dividend research group. There’s four of us together, actually many of us who came from CI, we all came as one group. But we have the rest of the organization, the other $125 billion of the organization to really tap into. So we really leverage them and they leverage us whenever the private equity team wants to use us and get what we know about the public markets and vice versa.
So we share ideas but our direct research team is about four.
John: And that I’m sure can also help with costs because piggybacking off of each other can lower the cost of buying shares or other actions that need to be done in the fund. Is that correct?
Danesh: Scale does help and there’s a good amount where you know scale can go to bureaucracy and SCA and you can also be subscale. So I think we’re in a decent sweet spot where we can get the best vendor contracts, we can get access to the resources we need without having to go to 10 investment committees before we can buy a position. So we’re trying to maintain that entrepreneurial boutique element while having the scale and infrastructure that comes with a large organization.
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