Visio Video Transcript

Lou (00:00):

Welcome to IPC Portfolio Services Masterminds GoVirtual. This week, Sam Febbraro welcomes Rana Chauhan and special guests, Kim Shannon and Stephen Jenkins of Sionna Investment Managers, as they discuss why now is the best opportunity in 80 years to buy value. It is now my pleasure to introduce your host, Sam Febbraro.

Sam Febbraro (00:22):

Well, thank you very much, Lou, and hello everyone. Welcome to the IPC Portfolio Services mastermind session. As you are aware, our goal is to host regular mastermind workshops on a regular basis during these uncertain times so that we can have a forum to share ideas, to challenge each other, to gain some insights and to help each other build a better business as we move forward. As a portfolio service, as I've been sharing with many of you over the past several weeks, and as we go into the temporary post COVID-19 not sure where we're going kind of thing, the goal is that the Portfolio Service will try and help you on three fronts. The first being helping you try to embrace technology, especially during these times. The second is to figure out ways to simplify your portfolio offering. And the third of course, is to help you upgrade your total client experience.

Sam Febbraro (01:21):

So the question might be, well, why these three areas? Well, let's think about this. First of all, by embracing technology, one of the things that we can appreciate is that your backyard, your client arena now changes from a one hour radius from your office to pretty much anywhere where an individual or families have connections to wifi. Let's think about this. You can have now intergenerational financial planning with multi-generations. You could have grandparents, parents, and children all on the line at one time using applications such as MS Teams or Zoom or other applications that you might want to consider. The second area is simplifying your offering. Well, it's already difficult to not. Portfolio management is something that we have to keep finding ways to simplify the offering so that we meet client's needs. What problem are we trying to solve? So the goal here is that you have an ability to streamline the offering, think about things like, know your client and know your product.

Sam Febbraro (02:22):

Let's try and figure out ways now to do some of that housekeeping and some of that spring cleaning to make sure that our portfolio offering is sound and making sure that it's built properly for the next three to five years. In addition, this is a great time where you can start introducing the virtual family office. You can now bring in subject matter experts, such as portfolio managers, such as what we have today. You can bring in legal, tax and estate planning solutions, and you can do this so that the clients can be right at home and making sure that they get that level of advice that you want to try and provide. Then the third area of course, is how do we upgrade our client experience? Well, think about this now. Advice could be brought to you any way the client wants.

Sam Febbraro (03:07):

Think about of campaigning, it's something that Chris may have shared with a number of you over the past several days. Advice the way you want it. Could you imagine sharing that with family and prospects and clients and centers of influence? Because now all of a sudden, you have technology based capabilities in the past three or four weeks, maybe even six weeks, we have accomplished more than what we have done in the last six years in regards to leveraging technology where we can. Clients may prefer to have face to face, or they may prefer to have a hybrid. All of a sudden now, you can provide advice the way the client and the prospect wants it. So why are we here today? Well, quite frankly, we appreciate the fact that there's still a lot of unknown variables. We understand that there could be a new threat of an outbreak.

Sam Febbraro (03:55):

We're not done yet, folks. There is a slowing economy and economic recovery. We have seen this already, and yet we are seeing a rapid V-shape recovery in equity markets. So does that mean we will continue to see this? Does that mean we're going to see maybe a W, a U, an L-shape recovery? All of these things are things that we need to better understand because our clients may be asking us these questions. In our last mastermind session, we had David Picton from Picton Mahoney Asset Management, and he's also the Canadian growth manager for Counsel Portfolio Services. And we thought, you know what? Let's keep making sure that we capture all of the perspectives, make sure that we capture more clarity, more transparency in what's going on. What are some of the judgments that have failed in the past just because we see trends? Who can we bring to make sure that we capture this side of the viewpoint?

Sam Febbraro (04:50):

Momentarily, we're going to hear from Kim Shannon, of course, and we're going to hear from Stephen Jenkins, and they are coast CIOs of the Sionna Asset Management or investment managers. They are also the Counsel Portfolio Services, Canadian Valley, managers. But first, please welcome our chief investment strategist, Mr. Rana Chauhan. How are you Rana?

Rana Chauhan (05:12):

I'm doing very well, Sam? [inaudible 00:05:14].

Sam Febbraro (05:14):

That's good. I know you've done a lot of client webinars. You've probably done, I don't know, on average three or four every day for the last six or seven weeks. You've probably done more client webinars in the last six or seven weeks than you've done in the last six to eight years. Isn't that true?

Rana Chauhan (05:29):

Yeah. Sam, my overtime hours are way beyond overtime now.

Sam Febbraro (05:33):

Well, that's something we'll have to [crosstalk 00:05:36].

Rana Chauhan (05:36):

[crosstalk 00:05:36] extra overtime. I'm an extra innings.

Sam Febbraro (05:37):

All right. Take it away, my friend.

Rana Chauhan (05:41):

Yeah. I think this is going to be really, really good. First of all, I'm very excited about this one. And part of the reason is because of this book, all right. It's The Value Proposition and that's Kim on it, and I've got a signed copy. But like I told Kim before on it, that I want it to be worth something, but not for a long time. [inaudible 00:06:06]. Now, I think May West, who's probably one of the worst investors said it this way, "Too much of a good thing is wonderful." And that's the problem with what's happening now. We've turned into a one decision kind of a market. I think the Coca Cola logo back in 1929 was the pause that refreshes.

Rana Chauhan (06:32):

That's the kind of thinking that we need to realize. Yesterday I played chess with my son. And it's about understanding strategy, knowing when to sacrifice some things, when to put positions in a play and also the value side of it and the growth side of it, when to attack, when to defend. So this is really, really opportune. The thing about Kim is that she's got a tremendous track record. She was manager of the decade, strong value, hereditary inside of her DNA. Her DNA and the DNA of the whole firm is to look for those discounted one. One of the quotes that she makes in her book there is there's nothing more deceptive than an obvious fact, and that was done by Sherlock Holmes. We're going to hear some of those distractions that are going on and also some [inaudible 00:07:33]. So I think it's a great time to welcome, not only Kim Shannon, but also Stephen Jenkins, another one who's died in the world of value investing. Kim.

Kim Shannon (07:45):

Terrific. Thank you so much, Rana. I loved your story about my book. I can only hope that for you. I bought Margin of Safety at $30 when it was issued and because it's no longer published, it sells for $2,000 today. That was a phenomenal return. So I wish the same to you, Rana. Highly unlikely, but it is possible what Rana has pointed out. What Steve and I are going to do today is I'm going to lead off by talking about the current environment and what it means to investors and where I think, I'm going to hint and suggest where I think the market may well be going and turn it back to Rana. Then we'll start talking in deep dive on some of the things that we're doing within the portfolio with Stephen before it gets opened up to Q&A.

Kim Shannon (08:38):

Overall, I think this is one of the best opportunities to buy value in over 80 years. I will get to that in my slide deck, but let's start with the big overview chart on where we are in the marketplace overall today. We're playing with the fact that we're in the year 2020, but it also means we have governments around the world dealing with approximately or greater than a 20% deficit and perhaps as high as a 20% unemployment rate and not seen since the Great Depression. Basically what happened to our markets was that a health concern, the COVID crisis, put the market into an uncertain tailspin, and it has caused a lot of shocks overall to the market, not unlike the shock of the beginning of the World War II, Pearl Harbor attack in 1941. I do see a lot of analogies to that time period to today. We had tremendous supply and demand shocks, and it's really caused us to question supply chains overall.

Kim Shannon (09:53):

In the future, everyone is going to bring a bit more manufacturing back home, which is going to increase cost and will draw profit margins. That will have a bit of a drag on equity multiples overall going forward into the future. The other phenomena that we just saw recently was the worst quarter for value. I will get into further how historically value has done very well for investors and was very defensive in all of our investment careers when there was a decline of 20% to 30%, and that didn't happen this time. I want to explore why that extraordinarily did not occur this time and what it means for value, because we understand because we're hearing it quite a lot. People are really questioning the value approach overall. Then Stephen will talk more about the energy sector, which is significant in Canada, much less significant today, that had a perfect storm of three major factors beating it down, and we have seen a fairly good recovery. And we'll give you our perspective on that.

Kim Shannon (11:05):

But overall, the actions in the marketplaces, we think it's important to stay patient overall and defensively positioned, particularly avoidance of excessive levels of financial risk in portfolios overall. Let's move on to the next slide and tape it deeper look at, and what we believe is going on in the market. You can see today that there's a narrowing of leadership in the market. Where the market returns this year are being dominated largely by a single stock Shopify, which is now the second largest stock on the TSX and represents a little over 5%. It did crest, the all important Royal Bank wait, although Royal Bank had a huge recovery recently and is back to number one position. But when you look back in history, and this chart is giving you that image, you can see that we have had in the past the market narrowing, which means there's just a handful of stocks, really leading market returns.

Kim Shannon (12:17):

What you can see is after that happens, you generally see a market correction. You saw into the famous 2000 period, the combination of Nortel and BCE represented 75% of the index returns when that speculative enthusiasm debated the market came down very, very dramatically. Same with Blackberry back in '07, leading into the correction of '08. It was a combination of Blackberry and Potash representing 40% of the index return. Real struggle for value. Valiant became the largest stock in Canada and then quickly corrected. And now we have Shopify shooting to the moon. Shopify is a phenomenal stock. It's trying to rival Amazon. It's had very good growth, but keep in mind, this is now $122 billion stock in Canada, and it has no income. And like its rival Amazon, Amazon has very little income forwards BMF size, and it doesn't make money on eCommerce. It makes its money on web services so far.

Kim Shannon (13:33):

It's a big question mark whether winner takes all business models that are expected to lead to monopoly power, and then ultimately monopoly sized profits. Well, monopolies have been known not to be social goods since 1625. We think that you've looked back in history, and Shopify doesn't have a PE multiple. And if you had the most optimistic scenario for it today, it wouldn't have a PE multiple of 1,500. That's outrageous in our marketplace. It implies an earnings growth that has never been seen before in financial market history. So we think the enthusiasm, the speculation is ahead of itself, and that this stock will have a hard time delivering decent returns to investors going forward in the future, and may well offer lower than market returns and switch gears for the market overall.

Kim Shannon (14:34):

Just turning on to the next point I wanted to make in the marketplace, is that we're seeing that growth has outperformed for a very long period of time. Since the 2009 recovery after the 2008 financial crisis, growth shockingly has led the market for a very historically extended period of time, more than any other time in financial market history. Shockingly with this big correction, it actually gained relative to the market. You have to go all the way back to 1941 to see a similar experience of when value has suffered at the hands of growth for as long a period of time, or as deeply. Turning to the next chart, then that period in 1941 was also through the 1930s, a deflationary period. There was no inflation in sight and the world was shrinking.

Kim Shannon (15:49):

You can see on the far left hand side of this chart, that 1930s value below that zero line underperforming. This is showing you tenure average returns. That 1936 number is showing you the average return for the prior 10 years. This is based on that Shiller PE multiple that says, instead of getting all the noise of individual year returns, let's just move modify that a bit by looking at rolling ten-year numbers. What happened is rates hit an all time record low in 1941 at the same time as the shock of Pearl Harbor. The next day, the US entered the war effort and at war time is inflationary. So the market set the low for rates in December of 1941, and started to rise off that all time record low back then.

Kim Shannon (16:50):

Today in a similar period, we have been in a deflationary cycle. Interest rates have been falling steadily for 39 years since 1981. So the only two deflationary periods you can see in this chart is the period leading up to 1941 and 1981 to today. And you can see value being pulled down relative to growth in deflationary periods. But we are getting closer and closer to a paradigm pricing shift of rates starting to rise. Rates tend to be symmetrical in their price movements. Typically, they're 20 years or longer. We had from 1941 to 1981, an extraordinarily long period of rising rates. Now we've had 39 years of declining rates. So we're almost into that symmetry period, which history suggests around this time rates should bottom and begin to rise.

Kim Shannon (18:00):

We've just had a major shock in the market. We had numerous countries around the world in March, including the US, hit all new record low interest rates. In the US we got all the way down to 0.34 and we haven't retested that yet. We won't know for a while what the bottom is on rates, but we have had a long period of under-performance for value. We think that the tide may be changing somewhere around here, generally after rates hit their bottom. Within three, six, nine months afterwards, equities tend to bottom and then begin to go into a bull phase. We have been in a sideways market. I've talked about this many times since 2000.

Kim Shannon (18:47):

So moving on to our next chart, I just want to end with this comment about, we're now in a period where people really want to forecast. People are really like, this is a new world, a new environment. We've had a major shock. People are adopting new practices. There must be a lot of change going on in the future. We've learned all these new habits. So people are forecasting, very dramatic, aggressive forecast for the future. I just want to highlight that yes, some forecasts are true, but it's only a small subset of them that actually unfold exactly as forecasted. One of the biggest challenges with forecasting is people can rather enthusiastic about their forecast, and they think that that new envision world is going to come sooner rather than later and they're really pushing for it to come very quickly.

Kim Shannon (19:48):

Probably my favorite forecast on this chart, and they're all excellent forecasts, is the 1975 forecast that we would live in paperless offices within 20 years. That's over almost 50 years ago today that that was put into place. We're still seeing tremendous use of paper in offices overall. Now it may diminish, but it's been a long slow change and decline of behavior. So why don't I end here, and I'll turn it over to Rana before we move on in the presentation. Thank you for listening.

Rana Chauhan (20:28):

Thank you, Kim. I have a question that in your process, one of the things that we're hearing a lot about now is that dividend yields are high.

Kim Shannon (20:39):

Yes.

Rana Chauhan (20:42):

That's an opportunity for income investors. Now, how do you, in your process, apply the dividend yield side, especially with all the macro events that are going on now?

Kim Shannon (20:55):

Well, to us dividend yield is always an important value feature. And our preference is to own stocks with a better than market dividend yield. Because historically, dividend yields have been about two thirds of total returns, but within sideways markets, dividend yields are even more critical. They typically represent upwards of 90% of the total returns. That is why we have seen such great enthusiasm for dividends this last 15 or so years. Our concern was that dividend yields had gotten too rich for a while and became hot potatoes. You had to be very careful what dividend yields you were chasing. So we were really struggling to keep value components alive, plus a decent dividend yield. But fortunately with this market correction, we've gotten better dividend yields. As a Canadian investor, we're getting much juicier dividend yields than our US brethren are getting. That I think bodes very well for future returns to Canadian investors, especially given that Canadian valuations overall have been weak and the Canadian dollar is weak. So we have a lot of tailwinds that if they all line up well, we should have great access returns for Canada at some point in the future.

Rana Chauhan (22:25):

The current situation is, we've had this virus and then right off of that, we've had riots.

Kim Shannon (22:34):

Yes.

Rana Chauhan (22:35):

How in your analysis of macro events, has that impacted the selection of companies and valuations and your process?

Kim Shannon (22:44):

Yes. Well, as you know, we often look back in history for impacts on markets of events, and it's actually quite surprising to us that in the past, it really hasn't affected markets. You can go back to Rodney King, no notable impact on markets. You go back to the summers of late 1960s, significant activity in the US even an impact on a presidential convention and the markets were actually up. That doesn't mean that the world isn't changing, that social norms are changing. Obviously we have an issue whose time has come and we will see change, positive change I believe, from a social perspective and markets, there's a wisdom of crowds. I think that the wisdom of crowds realize that there is likely to be a fabulous social change here and is maybe their pricing that in.

Rana Chauhan (23:49):

Great. I want to introduce Stephen Jenkins as well. Because we want to get into how active you've been in the portfolio during these times. Now, before we go there though with Steven, I want to highlight that a lot of people, when they're thinking about investments, they don't understand that what they have is actually a collection of businesses. You're not buying the market. With Kim, you're not buying the TSX. You're buying carefully selected businesses and you're a part owner in those businesses. The role of the owner is to select those businesses in your collection, very, very carefully. Stephen is part of Kim's team that actually gets into the nitty gritty of it and finds out what's the actual thing going on in this business. What is the sustainability of this business and what is the opportunity for that? So hopefully, Stephen, if you can come on and tell us, what are you doing right now and how are you taking advantage of these opportunities?

Stephen Jenkins (25:05):

Absolutely. Thank you, Rana. And you phrased it very well. We don't view it as a stock market. We always have viewed it as a market of stocks. I think that's very important. Now, in terms of what we've been doing lately, as you can imagine, there's been some active periods, not so active in the recent weeks, but certainly during the downdraft in March, we are quite active, as you can imagine. We were doing what you would expect a fundamentally focused, bottom up, value-driven team to be doing. That was taking advantage of short term mispricings of stocks which tend to occur during periods of market dislocation and investor panic. And there was certainly a lot of that during the month of March. So we were selectively and opportunistically buying, again, what you'd expect a value team to be doing.

Stephen Jenkins (26:01):

I'd say we added a couple of new holdings, but largely we were adding to a lot of our existing holdings and concentrating our positions. That often is some of the best areas to be putting money to work. These are companies where we know them well, we held them for a period on this high conviction levels, they're easier decisions to make, and they often over time can be very good decisions for a portfolio. I've been in the game for quite some time, and [inaudible 00:26:34] periods like that have proven to be great opportunities to add to existing holdings where you have that conviction and it pays off generally quite well over time. So again, we were quite active and I'd say we feel very good about the moves we made. I think the portfolio has been set up very well for perhaps a continued period of volatility, but also more importantly set up very well for the periods ahead.

Stephen Jenkins (27:00):

Let me perhaps give you some flavor for what we've been doing in the portfolio themselves. One area where we've been working on is adding to our banks. Now, that's obviously a very prominent sector in Canada, a sector that gets a lot of press and a lot of folks like to talk about the banks. We've been finding a lot of opportunities in the banks recently, and many may say, well, why the banks? They're going to be challenged for the next two or three years, and we're going to see rising provisions and increasing loan losses and we're going to see margins pressure to continue.

Stephen Jenkins (27:41):

We're probably not going to get back to profit levels that we saw pre-crisis for perhaps two, maybe three years. I'd say, we agree with all those concerns. Those are absolutely concerns we thought about, and we weigh those against the valuation. Here's the opportunistic side, back in March, shares of Royal Bank, TD, Bank in Nova Scotia, those are the three banks we own within the Sionna Canadian portfolio we've invested in. Those banks fell near 3% or more during March. So from a valuation perspective, we felt that those concerns were largely priced in. Again, looking out over the long term, knowing that these banks are at some point going to get back to the profitability levels we've seen in the past, given the durability of the companies, buying them at multiples that were around eight times earnings or less was quite attractive.

Stephen Jenkins (28:40):

Dividend yields also had moved higher to a historically high level. So it's valuations that are driving us to make these moves in the portfolio, knowing there's near term concerns, but we're making these decisions for the longer term. As you can see from the slide, the evaluations we reached in March, we're very close on a number of metrics to levels we saw in the great financial crisis, and also back to the early nineties, which was a very difficult period for the banks. I'd point out the banks were quite different beasts back then. I was very early in my career then, but we were dealing with higher interest, the credit situation was much more dire back then in terms of their own books. Importantly, the capital positions were not as strong as they are today.

Stephen Jenkins (29:27):

We have situation with institutions today are much stronger from a capital perspective. We think the dividends are going to remain safe. We may not see an increase for a while yet, but the current dividend yields we believe are safe. From a return perspective, ROEs and the Canadian banks are amongst the best in the global industry. So we're certainly the pride of the global banking industry. I think that's going to remain the case. So we certainly have found some opportunities in the banking sector and we've moved our position up just slightly, just slightly above market weight in the banks, which we feel comfortable today and leaves us a little bit of room if we do see a retesting at some point to continue to add.

Stephen Jenkins (30:16):

Another sector where we made some moves, a fairly controversial sector these days is the energy space. Now, what we've done here, again, alluding to what I mentioned earlier, consolidating some positions. So we sold some positions where we felt the futures might be a little challenged or compromised, and we bolstered positions in companies where a very sound financial position coupled with an industry leading cost structure will allow these companies to not only survive this period, but come through the other end in a much stronger position. We've added two positions in CNQ or Canadian Natural Resources and Suncor as well. If you look at the chart we have up on the screen, from an industry perspective, we feel this industry was challenged before coming into this COVID crisis in terms of concerns on an environmental basis. An industry that's been starved with capital for some time, investors were really shunning this industry to a large extent. Now enter COVID-19, and then we had a botch supply response from Russia and Saudi Arabia, and now some serious demand destruction.

Stephen Jenkins (31:40):

The industry has been hit hard, but we believe going forward, we're going to see demand return at some point clearly, and there's going to be a serious supply response. Not just from OPEC, OPEC Plus, but many players in the industry will be shutting in production that's unproductive. Some will take many years to come back on the stream, certainly off shore production, which takes quite some time. We'll also see some businesses going bankrupt, the ones that aren't financially strong. So there's going to be a serious supply response here. We think that the industry emerge with a better footing than we've seen in recent years in terms of a better supply demand balance. In not too distant future, we'll see price of oil back up around that $50 range.

Stephen Jenkins (32:29):

If you look at the chart, this chart here shows the marginal cost of production, but more importantly, the cash cost to production, which has often provided a floor over time. And we see no reason why that won't be the case again, this time around, which is in that mid $30 range. I would point out also that those two companies that I mentioned CNQ and Suncor, would have industry leading cost structures in and around that range. That gives us a lot of confidence. We've been doing some things in that sector. And if we move the slide forward again, one other really good opportunity in the space is a company called Pembina Pipeline, a company we had a small stake in and we increased it during the downdraft as it got caught up in this whole tarred with the same brush, if I could say. It's a business that's operating in the pipeline and transmission business.

Stephen Jenkins (33:30):

Only about five to 10% of this business is actually correlated to the movement and commodity prices. So the stock fell hard when the oil price fell, but unduly punished in our opinion. It was a great opportunity to put some more money to work in a very solid, well-managed company, that's financially sound and has a great suite of long-term assets. It's generally a very stable business over time, but it's multiple got down to decade low levels. We took advantage, we boasted our position. We think it's very cheap. So we were comfortable with that one as well. We were active again, consolidating our holdings in the energy space and feeling we have a better group of companies with a better future than we had coming into this downturn. We feel a new cycle is going to emerge at some point in the energy space.

Stephen Jenkins (34:23):

I'd say many of these stocks are already anticipating that brighter environment in the days ahead. Our CNQ has moved up over 130% from its lows recently, staggering moves. Pembina as well, pipeline company, its stock is up over a hundred percent from its lows. So there's been some explosive moves here, and we were fortunate enough to dip our toe in and buy some at the lows. So we're quite pleased with that. Then perhaps, maybe I'll just move the slide ahead again, I'll touch on a new company, something we've done outside of Canada in the North American strategy.

Stephen Jenkins (35:05):

That's a company called Perkin Elmer. It's a US based company, dominant leader in a lot of niche areas of diagnostic testings and screenings. Its products and tools, they're used to make better decisions and have better outcomes in the life sciences field. A good example for Perkin would be their global leadership position in the prenatal and newborn screening areas. They have all of these little niche areas, which are dominant in globally. It's a good example in my mind of a company where we did the homework a number of months prior to actually getting the opportunity to enter into the stock. We were patiently waiting for the price to come our way. It did in February and March, we had the chance to build a position. Then also, it's a good example of the diversity within our value style we've been seeing. We're not averse to buying a healthcare company, we're not averse to buying a technology company.

Stephen Jenkins (36:11):

These are businesses that often get lumped into that growth bucket, but for us it comes down to valuations and we're not averse to buying these companies as long as the valuations make sense and we're not overpaying for growth. Certainly was not the situation with Perkin here. It's a midsize company, it's a company I like to fish around in the midsize space once in a while, because they're often companies that are somewhat overlooked and they don't have the evaluations perhaps according to them yet that the wider market may put on it at some point. We found there's a good opportunity with Perkin. We bought in at around 16 times multiple on earnings, which was quite low relative to its past and relative to its peers.

Stephen Jenkins (36:59):

The way we look at the business, it was about a 30% discount to where we feel its long-term fair value is. That's a good example of another company who we added to the portfolio and again, a company outside of Canada. In a nutshell, that gives you a sense and a flavor for some of the bigger things we've been doing in the portfolio. Perhaps we can just advance the slide and I just would say that again, we made a lot of high conviction moves over that period during March when the market was giving us a lot of opportunities. We feel very good about the way the portfolios are positioned today. That confidence would be grounded in in the quality of the businesses that we own.

Stephen Jenkins (37:51):

We're going to select group of companies, as Rana had pointed out at the start.Those businesses are growing, in our mind, at above average rates over time, they're financially sound, they're well managed, but most importantly, they're being valued today at a large discount to what we feel their fair value is. That is a really good combination for a portfolio when looking out over the next two to three years. So perhaps I'll stop there. Thank you. I'll pass it back to you, Rana, and see if there's any questions.

Rana Chauhan (38:24):

Great. Thank you very much, Stephen. It's very important to understand the commonality between the managers that we brought to you. I'm going to reiterate things that both David picked and then Kim. As Stephen has said, one is high conviction. They're all very, very high convicted in this side. The other one is that they both believe that the industry is moving into a better place. The other key thing is that both teams are actually taking advantage of this process. That's a key thing that's been going on right now. Stephen, Kim, the question that we often get is that value seems a little bit slow. It's not as exciting. It's not as sexy as a new widget or a new app that's being prepared. How do you take that on, that, Hey, it's not exciting? It's like paint drying actually.

Kim Shannon (39:30):

That's part of its charm and t's beauty historically, because from time to time, it gets overlooked and under followed, particularly in hot frothy, narrow markets like we're seeing today. People are wanting to go chase the fun, exciting, top of mind securities. Yet this is often the best time to be reshifting into value. I think it's very prudent for investors to have a mix between growth and value, but that this is now the time. As I highlighted in my charts, it's been 80 years since you've seen value this cheap relative to growth. The rules of financial gravity have very unlikely been changed. So that you as an investor can relatively help yourself by taking on relatively more value. It's funny how in life that to do the right thing is often challenging at the moment that you make those kinds of decisions, but is often the most rewarding. You've heard numerous smart people like Warren Buffett and Charlie Munger talk about, once in a while the market hands you a unique opportunity to create excess returns. It often isn't tied in a nice big bow.

Kim Shannon (41:00):

I think it behooves investors to cautiously consider that perhaps it is time for value come back, that it's unlikely that the norms have changed so dramatically, that value will never ever come back. I certainly don't believe it. I think it's created an enormous opportunity here. It's just that none of us can know when the tide will turn. We've certainly seen a lot more productive days, the last three weeks for value than we've seen in a very long time. So is the turn in now? Maybe, it's unknown, we'll only know after the fact. But those early access returns, even if you look back in 1941, look at how dramatically after it was so washed out, it was so beaten up and yet it had a very jaunty recovery for investors even after a period like that. History shows value works some 80 plus percent of the time. It's these moments in time that investors want to throw in the towel, and this is not the time to throw in the towel. At least at the minimum, stay the course and be patient.

Rana Chauhan (42:17):

Great, Sam, I want to make sure that we answer all the questions that are coming from advisors and out there.

Sam Febbraro (42:27):

Okay, great. Well, thank you very much, Kim. Thank you very much, Stephen. Rana, of course we thank you. We do have a series of questions and I want to make sure that to your point, Rana, we get as many questions as we can answer over the next several minutes. Obviously we want to respect your time, but we have a good window here to make sure that we do that. If you do have a question, remember, you go to the question field on your screen and you start typing away. We'll try and get through to as many as we can. So we're going to do a couple of rapid fire ones, obviously, as we start here. Some of the questions are actually responding back to some of the things, Kim and Stephen, that you were saying. Question, is now the time to buy value? What does this mean for investors who bought value in the past three to five years? When did those past purchases start providing the return on investment? So I'll pass it back to you.

Kim Shannon (43:25):

I think it's impossible to know. I suspect it's in this next window of time and yes, value has always required patience.

Stephen Jenkins (43:42):

Perhaps if I can just chime in, value's been underperforming for a bit here, but certainly during this period, some extraordinary opportunities have been presented. And if you look, as I mentioned, how we look at our portfolios and the discounts we're seeing relative to how these companies are, if they're underlying value, we're seeing historically wide discounts. And that point to a much better future over the next two to three years, because obviously the price you pay for an asset is directly related to its future returns. So we feel very confident that the discounts we were paying point to a good future over the next two to three years better than it was in the last couple of years.

Sam Febbraro (44:28):

Yeah. Well said, well said. Stephen, I'm going to pick up to one of the points that you mentioned before you said, yes, there is a stock market, but we also look at a market of stocks and fundamentally focused bottom up. The question here is an interesting one. It says the growth guys claim they have done best overall, value guys say they have done best overall. So who is right? Instead of having a battle over value and growth, is it better to select companies which are attractively priced with long-term good prospects to make an investor's money grow? I think that's what you said, right Stephen?

Stephen Jenkins (45:04):

Absolutely. Kim can certainly chime in on this as well, but we do have these buckets that get formed and there's often many companies that will span both buckets. It's all about valuation and that value sometimes gets a bad rap for some people perceive it as buying washed out, poor asset for 50 cents on the dollar and industries that have very suspect futures. That's certainly not how we go about things at Sionna. If you look at our portfolio, we have some many fine businesses that have very bright futures. They might not be growing at explosive rates that we're seeing with Shopify, our businesses tend to be growing at more modest rates, which tend to be a little bit more sustainable over the long-term, but we're trying to buy them cheaply.

Stephen Jenkins (46:01):

We get the opportunity to buy them cheaply when there's perhaps a short-term dislocation or a company is experiencing a quarter or two of a sales mishap, or some margin pressure. The market is so myopic, that gives us long-term investors, the opportunity to take advantage of those short-term pressures and build positions in these companies. We all want our businesses to be growing over time, that's a [inaudible 00:46:31] and I've often felt growth in value are somewhat joined at the hip. But it's more important for us that we have very strong pricing disciplines. So evaluation perhaps plays a bigger role than it might do for others.

Sam Febbraro (46:47):

Okay. Excellent, Stephen. Okay. I'm going to move the questions now forward to, I guess, the energy sector, and I'm going to bring a couple of questions together. Rana, there's a comment about a position that you've shared in the past, and I'll add another comment. It says, "Rana often says that the Saudis need about an $80 per barrel to balance their budget." In addition to that, there's a perception or a reality, depending on how you look at it, oil is a future coal, then how would Canadian stock market succeed to generate seven to nine percent average return when our economy is oil dependent? I guess we'll pass it over to either you Stephen or Kim, how would you respond to those comments?

Kim Shannon (47:34):

Do you want to lead off, Stephen?

Stephen Jenkins (47:36):

Sure, absolutely. The $80 price for the Saudi budget, that's a number I've heard as well, and it gets thrown around. I don't think it's too dissimilar for [inaudible 00:47:50]. I've heard maybe numbers a little bit lower, but those are important figures. Over a short period of time, they can get by, I believe with lower prices, but those are important figures longer term. I think importantly, as I pointed out earlier, this industry, I don't disagree with the long long-term forecast of a demise in oil. It's certainly, I think, growth when we look many decades ahead, globally is going to be quite different than we've probably seen in the last couple of decades. But we have to get to that point and the world is still going to require fossil fuels, oil in particular. We're going to see a lot of supply coming out of the equation.

Stephen Jenkins (48:39):

You take the offshore oil industry for instance, which supplies one in four barrels globally. It had already been starved of capital for a number of years and was set to plateau this year in terms of production. This has just been an added blow. So we're going to see a serious supply response, and that's going to be favorable for the oil price at some point as we move out of this period. And will as I mentioned earlier, likely set up a new cycle with stronger underpinnings. We hit $140 a while back and a decade ago, and you see it on that chart I had up. There was no right for it to be at that level, but that created a lot of accesses in the industry, which has taken quite some time to unwind. I think we're unwinding fully at this point and we're going to set up for a new cycle, which will be good for the Canadian industry also, and the global industry.

Kim Shannon (49:37):

And what we've seen at the lows there was that the oil producers fell to just 4% of our benchmark, very low levels compared to where they've been historically. So going forward from here, they don't have as significant an impact on the market as they did in the past. Now, in terms of the new view on energy, we believe that because of the environmental issues, that the highs on valuation multiples that we've seen historically will not be reached again as in the past. So we've already gone into our models and taken the average normalized returns down to reflect this new future. But the world will be dependent on energy for quite some time because the alternatives are still extremely expensive and are not rapidly enough coming into the marketplace to replace it.

Kim Shannon (50:42):

We had energy get to ridiculously low prices, including negative for two days. As Steve already mentioned, the price you pay when you enter an investment has a significant impact on your long-term returns. The revalued energy prices suggest that you can make decent returns as you get a recovery in the price. We've always found that the price reverts and has a normal, there's the reversion to mean in all financial more data series and for commodities, it's the marginal cost of supply. Most people agree that somewhere between $40 and $50, a barrel earlier this year in January oil was trading at $60 a barrel. It's almost 40 today. We think that at $40 a barrel, the stocks that we're exposed to can make returns for investors, and there can still be a recovery from where they are right now.

Sam Febbraro (51:45):

Yeah, very supply and demand dependent for sure. There was a point in time, Kim, when toilet paper actually out priced a barrel of oil. Okay. Couple more questions. I'll package a few more. Rana, if there's anything you would like to add, please feel free to jump in next set of questions. Kim, I believe you referenced this and you've been saying this for a while now in referencing the sideways market, I'm assuming you are referencing the TSX and not the US market? Second question is, what are the catalysts for unlocking the value stocks that you own?

Kim Shannon (52:25):

Well, the market in Canada peaked at 11,388 back in 2000. And a sideways market is about how a market goes sideways, it take all the access out. So the market moves sideways and from being a very high PE multiple at the beginning in 2000, that same level now virtually 20 years later, earnings have grown overall within the economy. There's been GDP growth, there's been technological advancement. To be at that same level, the market will now be reasonable. The sideways market theory suggests that you do take out all the speculative excess of the market, and then the market can take off again. In the lows in March, we got all the way below 11,388 again, which suggested that the market was a buy. To me, what ends a sideways market is that interest rates change direction. And in this environment, interest rates changing direction is that they form a bottom and start to rise and have at least another 20 year movement in rates.

Kim Shannon (53:43):

That is joined at the same time, that stocks trade at a single digit PE multiple. It usually happens twice. It happened very briefly, in '08 and it didn't happen in March. I suspect that we may have one more drop down in the market. Also, history suggests when you go back in time, bear markets, sideways markets tend to be extremely volatile and that after a major dip, you get a recovery like we are already in right now. Then often you have another touchdown, not necessarily as low as we had seen, that brings the market to, as there's some rotation within the names that correct, that could take us down to the level that could set up for both a new bull market run and a value run.

Kim Shannon (54:43):

Now, we don't put all our eggs in that basket because we are fundamentally bottom up investors, but we're always very curious about where the market overall is going as is most investors. That theory has played out, and I've written about it in the past. We suggested that the low end rates could be anywhere between 2018 and 2023. With this very tight window, our best guess was 2020, '21. So we're keeping an eye out for the low end rates for the sideways markets and see if it, it'll be fun to see if it unfolds as history has suggested it tends to.

Sam Febbraro (55:32):

Excellent. Okay, very good. I think, guys, we're at the bottom of the hour, and obviously we want to be respectful of everyone's time. I obviously want to thank Kim and Stephen and Rana for obviously providing excellent information. For more information of course, everyone, we do recommend that you please visit our hub, the IPC hub to gain any access in regards to infographics or any tools. There are two tools that I would like you to consider. The first is the webinars in the box. In this perspective, what we have is bare market perspectives. This is what your clients can consider or see for their own investments. In May, we just launched another called the emotional curve. Where are your clients, obviously in regards to their head space? It includes things like [inaudible 00:56:26] templates, it includes a LinkedIn post, the PowerPoint template with the scripting.

Sam Febbraro (56:31):

Over the next session, as we move forward based on your votes from our previous session, we do have a speaker that will be joining us. Her name is Dr. Moira Somers, and the focus here is Advisers At Risk, and we want to make sure that you're not going to be one of them. Please join us on June 18th. With that being said, everyone, thank you very much for joining us. Be safe and stay connected. Thank you.

Lou (56:59):

This concludes today's session. Thanks for attending, and have a great day.