Extra-long stock holds turn gold

Canoe’s Nadim Rizk picks names that remain relevant and retain enduring talent – for up to 25 years

Diana Cawfield 5 September, 2019 | 1:59AM

Gold

Warnings of a global recession, the end of a bull market, the aftermath of the 2020 U.S. presidential election, ongoing tensions in China, and multiple other woes, are of no concern for Nadim Rizk, lead manager of the gold-rated Canoe Global Equity mandate.   

That’s because Rizk, senior vice president and lead portfolio manager, global equities, for Montreal-based Fiera Capital Corp., a subadvisor for Calgary-based Canoe Financial LP, is a highly long-term stock picker with a holding period of 10 to 25 years. 

“When you own a company for 10 to 20-years plus,” says Rizk, “the macro doesn’t really matter. We are positioned for whatever is going to transpire. It doesn’t mean the business can’t be affected; it doesn’t mean business can’t slow down or decline or suffer. But at the end of the day, as long as the business is relevant, as long as it’s strong and run by talented, smart and honest people, we will own it.”

Cast a wide net to find the winners

Also characteristic of the mandate is a concentration of stock holdings from a universe of more than 7,000 choices. “Because the universe is so large,” says Rizk, “it almost doesn’t matter what we miss out on. As long as we own 20 to 30 phenomenal companies, we just don’t really care what else is out there.”

Rizk doesn’t consider the team of nine, including himself, as growth investors, but says there is some bias towards growth and larger capitalization companies.

The in-house research process blends quantitative and qualitative discipline to source high-quality businesses. The number one variable is finding a business that can generate a high return on capital.

“Mathematically,” says Rizk, “if your return on investment capital is high, you are generating a significantly high amount of free cash, which means automatically your cash is high and your balance sheet is pristine. Everything else falls into place.”   

Culture and governance is key

Also important, given the long perspective, is research into both culture and corporate governance. According to Rizk, if a company’s corporate culture is clean, there’s a significantly higher chance that the financials are also clean.

Risk management includes diversification across businesses and sectors. The portfolio aims for businesses that have different drivers, markets and different clients.

The top holding in the fund, U.S.-based Moody’s Corp. (MCO), captures the criteria for a favoured stock. Moody’s is well known for its credit-rating business, along with a significant analytic business for financial-services companies. According to Rizk, only three companies globally control the credit-rating business. “It’s hard to get in,” says Rizk, “and once you get in,  a high barrier to entry. So you essentially have a business that’s very dominant, generates significant margins in cash, with very strong pricing.” In addition, the business requires limited capital, is very well run, very ethical, with a great track record of rewarding shareholders.  

Among the top-10 holdings, U.K.-based Diageo PLC (DEO), the leading producer of branded spirits, beer and wine, has been held in the mandate for over 20 years. A sample of the well-recognized names includes Smirnoff vodka, Crown Royal Canadian whiskey, and Bailey’s Irish Cream. “So a lot of brand equity,” says Rizk, “limited competition, very profitable, and it throws up a lot of cash.” However, it is not the fastest-growing business. “That’s one example that we’re not just a growth investor,” says Rizk. “This business grows nicely but it isn’t growing as fast as some other businesses. But slow and steady wins the race kind of thing.”   

Another holding, held since 2003, is Switzerland-based, Schindler Holding AG (SCHN), the second largest elevator and escalator company globally. “Now what’s so special about that business,” says Rizk, “is once you’ve installed an elevator or escalator, you have to service it for safety reasons every year.” In addition, these services are usually 10 to 15-year contracts, “so extremely sticky.” As with steady-holding Diageo PLC, “it’s not a business that can blow your mind on a yearly basis,” says Rizk, “nothing too exciting, but very dominant, very profitable, very consistent.” 

With such a long tenure for holdings, few ideas are added to the fund each year. According to Rizk, the last holding that was introduced was in 2017. Over a longer timeframe, the fund changes names approximately two to three times a year.

The portfolio’s weighting of approximately 64% in the U.S. is a result of the bottom-up stock process, not from a country preference. “The geographical mix really doesn’t matter,” says Rizk. “Most companies we own tend to be multi-national in nature anyways. We don’t spend time analyzing currency exposure either.” 

When it comes to pending markets and positioning the portfolio, “we tell our clients not to check the fund more than once a year,” says Rizk. “To us, this is investing; everything else is really speculating, as long as you own these best-of-the-best companies and they’re performing. We try to minimize losing significant capital, which is, in my opinion, a huge part of success.”

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Diageo PLC ADR160.13 USD-0.49
Moody's Corporation220.15 USD0.59
Schindler Holding AG190.00 CHF0.00

About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.