Sionna team stays patient amid short-term struggles

A repeatable investment process executed by an experienced team earns Sionna Canadian Small Cap Equity an Analyst Rating of Silver.

Jeffrey Bunce, CFA 6 December, 2016 | 6:00PM
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Sionna Canadian Small Cap Equity is run using a firmwide value investing philosophy that targets underpriced companies, with the expectation that stock prices will return to their intrinsic fair value over the long term. Over the long term, this approach has generated benchmark and category-beating results. The past couple of years ending October 2016 have been a challenge, though, as the fund returned negative 2.5%, trailing both the index and the category average by more than 5 percentage points. In the wake of these shorter-term return woes, the team has remained patient and steadfast, adding to names that have sold off but where they believe long term value exists.

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/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. The team eschews high levels of financial risk though and will avoid companies with too much debt, resulting in a portfolio with a quality bent. This is particularly true in the smaller-cap space where the manager thinks it is easier to find high-quality names trading at attractive valuations.

Stocks that screen well are examined under a fundamental lens to develop a robust understanding of a company’s prospects and risks. Importantly, 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. Further, the team meets regularly to deconstruct the portfolio and examine it under many different lenses to ensure exposures and position sizes are justified by their views.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Akita Drilling Ltd A1.40 CAD6.06
AutoCanada Inc48.16 CAD4.81
Calfrac Well Services Ltd5.59 CAD0.90
McCoy Global Inc0.78 CAD0.00
Pulse Seismic Inc1.78 CAD2.30
Wajax Corp24.85 CAD-0.76

About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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