Sionna Canadian Equity offers a smoother ride

A sector-neutral approach to value investing ensures the fund's holdings are never wildly out of favour.

Shehryar Khan, CFA 28 August, 2018 | 5:00PM

Sionna Canadian Equity's solid, consistent and repeatable investment process and deep, experienced team are its keys to success, making it a strong choice for investors who are looking for a core domestic holding and can look past its price tag. The team's sector-neutral approach to value investing ensures they are never wildly out of favour, resulting in a smoother ride for their investors who are in turn less likely to sell the fund at inopportune times.

While the firm's founder, president and co-chief investment officer Kim Shannon has been the face of the firm, Marianne Hoffman became co-lead on the Canadian equity fund in 2014 and has been sole lead since 2016, a credit to the development of the team under Shannon. Teresa Lee serves as the firm's co-CIO and leads its small cap strategies. On the large cap strategy, Hoffman is supported by a deep team of portfolio managers and analysts, who place a strong emphasis on their culture and steeping newer analysts in their approach to investing. It has paid off with strong retention. The team has had success hiring younger analysts, even ones fresh out of school or with only a few years of experience to be groomed in the Sionna discipline. With the exception of Shannon, all investment team members conduct research. Analysts start off as generalist before settling on specific sector coverage.

The firm targets underpriced companies with the expectation that stock prices will return to their intrinsic fair value over the long term. Stocks that screen well are examined under a fundamental lens to allow the managers to develop a more robust understanding of a company's prospects and risks. The team leverages a singular research questionnaire and seeks to answer the same questions about each company, providing consistency and comparability. The questions range from ones on company management's background and capital allocation history to questions geared to understanding the business' cyclicality. The whole team then debates potential buys in a group setting and strives for consensus before making a decision. Success is not always immediate: A name that the fund holds but that has not performed well in terms of share price is  CI Financial (CIX). Hoffman and the team believe that the firm's asset management business is attractive, and its track record of disciplined acquisitions and owner-operator mentality have paid off in the past. At its current valuation levels, despite the weak share price performance, the team feels CI's stable cash flows, healthy dividend yield and attractive valuation make it a worthwhile long-term investment.

Sionna is different from most value managers, choosing to build its Canadian equity portfolio with the benchmark in mind. The result is a portfolio with a relative-value flavour; stock valuations are consistently cheaper than the market, but sector exposures are similar to the benchmark, ensuring that stock picking will drive performance. The team employs an intrinsic value model which screens and ranks the Canadian universe on the basis of book value, historical return on equity and relative price-to-earnings ratios. The team then focuses its attention on those stocks trading 30% below their intrinsic value. Despite the model being fairly basic, it is effective at focusing the team's attention on the most attractive opportunities. Sionna typically embraces companies experiencing cyclical or operational troubles as they claim these firms are often misunderstood by the broader market.  Alimentation Couche-Tard (ATD.B) is an example of this, as lower earnings due to higher gas prices caused the company's share price to tumble in May 2018, offering Sionna a chance to buy a stock that had been previously too expensive. Hoffman and the team believe it is an incredibly well-managed and defensive business and that the threat of electric vehicles is further from becoming a reality than most people would believe.

Sionna builds a concentrated portfolio of 30 to 45 stocks with the benchmark in mind, typically keeping sector weights on the Canadian equity portion within 5% of the S&P/TSX Composite Index weights. This is only a guide though, and the team will move outside this bound as portfolio ideas and market conditions dictate. While generally avoiding big sector bets, the team shows conviction in its stock picks. For instance, the top-10 holdings account for 43% of the total fund.

Bridgehouse Asset Managers, which distributes this fund, incorporates global equity picks by Brandes Investment Partners (another manager on the Bridgehouse platform) into the Sionna portfolio to add a 10% foreign equity exposure. The Brandes team also follows a value approach, but its focus on the cheapest stocks means it often holds highly unpopular stocks with poor short-term fundamentals. The foreign allocation isn't ideal as it doesn't mesh with Sionna's quality bent but does offer diversification benefits. Investors need to be patient with the global portfolio, as it can experience prolonged periods of underperformance.

Over its full history, from January 2007 through July 2018, the fund has a 4.8% annualized return that is slightly less than the S&P/TSX Composite's 5.1%, but the fund has delivered those returns with significantly less volatility. On a risk-adjusted basis, the fund lands just outside the top quartile in the Canadian Equity category. The fund typically lags its more aggressive peers in rising markets but earns its keep in falling markets. Its 24.1% loss in 2008 was less severe than what the vast majority of its peers suffered, and it stacks up well against the S&P/TSX Composite's 33% decline. Although the performance in 2008 was achieved with the help of an atypical cash balance north of 10%, Sionna's focus on quality companies exhibiting high return on equity and low debt levels has led to a downside capture of 84% against the index since the fund's inception.

Despite an attractive return profile, this fund's fees rank higher than average. The picture improved on this front in September 2016 though, with a 30-basis-point reduction in the management fee for the fund's major share classes. The fund's commission-based and fee-based series now rank in the third quartile of funds in the Canadian Equity category, but the D-series for do-it-yourself investors still ranks in the bottom quartile.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alimentation Couche-Tard Inc Class B39.02 CAD-0.38
CI Financial Corp19.09 CAD0.95

About Author

Shehryar Khan, CFA

Shehryar Khan, CFA  Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group.