Ashley Redmond: I'm Ashley Redmond for morningstar.ca, and I'm here with Bruce Campbell, Portfolio Manager at Redwood Asset Management.
Bruce, thanks so much for joining me.
Bruce Campbell: Glad to be here.
Redmond: So, Bruce you're bottom-up manager and your fund Redwood Equity Growth Class has returned over 35% this year, and since inception in 2009 it has returned around 10%. So take us through your process for stock picking and some of your holdings in this fund.
Campbell: So, we have a two-pronged approach, we look at top-down first. And what we like to know is whether or not we're on offense or defense at any given time. If we're on offense, we're fully invested; if we're on defense, we're not fully invested. Once we've determined that then we look at the bottom-up to actually pick individual stocks.
What we're looking for is accelerating earnings growth. So, we want companies that are growing at a really rapid rate, not linear, because we know that accelerated earnings growth will give us higher multiples as well. So, we do a multi-factor screen for a number of different variables. We basically rank our universe, and then once we know what we want to buy we start digging into the fundamentals and the technicals.
Redmond: Okay. What are your some of your holdings in this fund?
Campbell: One that a lot of people would be familiar with is Air Canada. It has had a fairly significant run over the last year, but it is one that we think still has a lot of room to grow. We’re seeing – the economy is starting to expand, as well they have been focusing on cost controls and getting more efficiency from their planes and from their whole system. And so their earnings just continue to ramp up and are growing at a fairly exponential rate right now.
Redmond: Any other companies that you could mention, any other niche stocks or anything that stands out in your mind?
Campbell: Well, a company that we've owned for quite a while, it's also done very well, but we think has a lot of runway to go is AutoCanada. And what AutoCanada does is they have basically gone out and started to consolidate auto dealerships. And what they found is that through their efficiencies, they'll buy a dealership. They'll bring it into their system. The efficiencies will be created, and they will take their EBITDA from say a 1 million to 1.5 million. They buy these dealerships for say 5 times EBITDA and they're trading at 10 times EBITDA. So there is an immediate bump there. The stocks pays a dividend, and it has been growing earnings at an exponential rate over the last three or four years.
Redmond: Okay, let's switch gears to another fund that you manage and that's Redwood Income Growth Class. So, it hasn't performed as well as the Equity Growth Class, but what are some of the challenges that you faced this year with that fund and some of its holdings?
Campbell: Well, we don't look at it so much from a challenge perspective. We look at it from [the perspective of] what investors were favouring, and what they were looking for. So, the first half of that year that fund performed really well in 2013 and that was a factor of what investors were looking for. They still wanted to be invested with only a toe in the water. So, they were looking for yield. That fund targets companies that have growing earnings and also has a yield. And so, it performed very well the first half of the year.
In the second half of the year, the markets were favouring growth and so we didn't see it perform quite as strong. It still finished up above its high watermark for the year. So we're very happy with that. We're looking for companies in that portfolio that have accelerated earnings growth, but also pay a dividend yield.
So, AutoCanada is a name that is also in this fund. Something like Crescent Point Energy is in this fund, a very large energy producer, [that has] a nice stable dividend and continuous oil production.
Redmond: That's great. And any other little niche stocks or anything that's worth mentioning in that fund?
Campbell: Well, as we see the recovery in the U.S. especially in the housing sector, a company called Western Forest Products. This is a company that we own. They pay a nice dividend. It's around 4%, 4.5%, and they basically produce logs and lumber, and a big part of their market is selling into the U.S., and of course, their earnings are starting to ramp us as the housing bloom is picking up again in the U.S.
Redmond: Thanks so much, Bruce.
Campbell: Thank you.
Redmond: To check out Redwood's funds, just use the fund/stock search tool at the top of the page.
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