Global Equity Portfolio Manager: What Canadian Investors Are Missing

Transcript

MATCO GLOBAL EQUITY INTERVIEW

Trevor: How's it going, James?

James: Oh, I'm doing well. How about yourself?

Trevor: Good. Thanks for joining us.

James: Of course. No problem. Thanks for having me.

Trevor: Yeah, always fun. What's the day, Wednesday?

James: Thursday.

Trevor: Yeah, Thursday. So everybody's kind of gotten used to myself providing some monthly updates. My condolences to them for having to see my mug every single month. But one of the biggest questions that I often get from those who are watching the segment is, "Great updates. I'd like to hear about the markets, but what do you guys manage again?" And so we thought over the next number of months we would reintroduce Matco's investment platform. As an asset management and wealth management firm, we manage five core strategies internally, and then obviously we also assist clients with the wealth management aspect. So thanks for joining us. Appreciate you coming today. Maybe for starters, when did you join Matco?

James: I joined Matco in 2022. Before that, I was working at a commodity and oil brokerage firm. I started off in a couple of different finance jobs with one of the banks here in town and worked on one of their investment management platforms.

Trevor: Yeah. So from an industry perspective, what's kind of the full time frame that you've been in the finance, investment and trading-related industry as a whole? Not to age ourselves, but...

James: Thirteen years.

Trevor: Thirteen years, yeah. And even thinking back, I mean, time flies. It's been four years. At times, I think it feels like it was last year that you joined us, but then at times it feels like you've always been a part of the team. I think that's because you've always fit in with the team so well.

James: It's a pretty good group.

Trevor: Yeah, it's a pretty good group. We have fun. Maybe to stay a little bit more on the personal side, what originally drew you to finance and the investment industry that's landed you here at the end of the day?

James: You know, I don't know. One of the things that I really like about this job is that you get to be really curious. That curiosity can be expressed as you're going through and selecting investments, and you can express it through your interest and passion with clients. So I just really enjoy it because I like being curious. I like asking better questions. I think the best part about it is that you learn to ask better and better questions as you go along.

Trevor: Yeah. I think curiosity is actually a perfect segue into our discussion about global equity because everybody who's been watching is curious about, again, what it is that you guys manage. So, in the form of an introduction, you're the lead portfolio manager of the Global Equity mandate. Maybe give us a bit of a 101, an introduction or a refresher on what exactly the Global Equity Fund is.

James: Yeah, sure. Maybe I'll start with the asset class. We invest primarily in publicly traded stocks, so we buy company shares in the public market. We would typically be more large-capitalization, or larger-company, biased. If you're a Canadian investor, think of something like RBC. If we're in the U.S., we're looking at something like Alphabet, Lowe's or Home Depot. These are larger companies that typically have a relatively high-quality balance sheet and business model.

James: We don't allocate a lot of capital to things that would be more speculative. We typically don't participate in a lot of IPOs, and we typically don't look at anything that isn't publicly traded. We like liquidity. The ultimate goal for the strategy is to be a core portfolio holding. What that means to us is that you want to have the ability to make money, obviously, and you want to be able to generate capital returns over time that are competitive and attractive. But you don't want to do that by taking on too much risk, whether that's risk in terms of volatility, the deviation of your returns over time, or company-specific risks such as, "We're going to do something really cool, but we're going to do it five years from now. I need your money today so that I can build it out and do something cool five years from now." We typically stay away from something like that. We prefer an out-of-favour business or company that we think has good potential and is perhaps just mispriced, as opposed to a "coming soon" story.

Trevor: One of the things that often comes up is, "What should be in my portfolio? Which investment strategies should I use?" Who is the Global Equity Fund and investment strategy built for? Who should invest in it, do you think?

James: This is a bit of a cheesy answer, and I'm going to come off like I'm just talking my own book, but basically everybody. It's really more a question of what size of allocation you're thinking about. If you're someone who's in an accumulation phase, kind of pre-retirement, you're probably more equity biased. That doesn't mean you're 100% equity, but you're more equity biased. That's a pretty good opportunity for some global equity to anchor that portfolio. Then you might go after something that's a little more growth-oriented or has some more unique exposure, but global equity is a pretty good anchor to that portfolio.

James: For the retirees out there, one of the challenges when you're retired is that you need income. We don't have a big dividend yield or distribution from the fund, but a retiree still has to contend with inflation.

Trevor: And even preserving your capital base over time, you need some growth over and above inflation, even if your reliance is on income, for obvious reasons.

James: Yeah, exactly. You might not have 75% in global equity if you're in the midst of your golden years, but some allocation helps with inflation protection and capital appreciation. Then there's the transfer mindset. You might say, "I'm going to outlive my money, and I'm thinking about giving it to the next generation or a nonprofit," or what have you. Because that time frame changes quite a bit, that equity allocation makes a lot of sense.

Trevor: Yeah. You touched on something when you said we don't have a large yield, dividend or distribution within global equity. As another segue, what is the primary objective of global equity?

James: I think there are three different things that, as an investor, you're thinking about when you look at corporate earnings. You can benefit as an investor from corporate earnings if they get reinvested in the business. On the other extreme, you can benefit from corporate earnings if they get paid out as a dividend. Then there's everything in the middle.

James: One of the things we want to be is tax aware. If I generate a really big dividend yield from foreign companies, it's taxed a lot more aggressively than if you buy higher-dividend stocks in Canada. We're not really doing you a favour by going out and getting a 4.5% yield in Europe or somewhere like that.

Trevor: Not to mention you can do that in Canada.

James: Exactly. You can do that in Canada more easily than in a lot of other regions, and then you're not dealing with currency and all that good stuff. So we're thinking more about how we can benefit from the reinvestment of corporate earnings back into a business and whether we can complement what we would typically see in a Canadian investor's portfolio.

James: In Canada, we've got this great sector called financials. They've been doing pretty well lately. You've got a really good sector in energy and a really good sector in mining and materials. What can we do to help from a diversification standpoint? Technology is a pretty good fit. Obviously, Shopify in Canada does well, but that's tongue in cheek as the only technology name.

Trevor: Yeah, I know it's not. I often joke myself that we have two. We have more technology companies than that, but when you look at the scale of our technology companies for international investors investing in Canada, it's Constellation Software and Shopify, and then the odd one kind of bubbles up or disappears over time.

James: Yeah. In the U.S., I don't know what the number is, but it would be in the hundreds or probably even the thousands.

Trevor: For sure.

James: So when we come to global equity, it's about trying to deliver sector diversification or exposure that you can't otherwise easily get in Canada. What does the technology exposure look like? What do the industrials look like? What does some of the manufacturing look like? What are some of the high-quality consumer discretionary names? Obviously, you've got a company like Aritzia in Canada, which is a fantastic company.

Trevor: Consumers are almost similar in that we have a few flagship brands that have been born in Canada. But if you looked at the balance of where the brands we know as consumables or wearables have come from, there are Lululemon, Aritzia, and I'm sure there are others.

James: Gildan.

Trevor: Gildan, which is a company but not even necessarily a brand that we would know to wear. But in the U.S., the number is kind of endless in terms of how many brands we've adopted as Canadians in the consumer industry.

James: Yeah, 100%. Then I guess the other part with global equity, and I don't want to put people to sleep too much, is that each region has pros and cons. You can go to the U.S., and if you try to run a really deep-value mandate there, you're going to have a hard time. It's a growthier market, so it's a lot more challenging to find that attribute. The same thing applies if you go to Europe and say, "I want to run a tech fund in Europe." I'm going to get a lot of hate for this, but you've got SAP and another handful of really good companies, but not nearly the same kind of stack that you can find in the U.S. or Silicon Valley. So play to the strengths of that market.

Trevor: Yeah. You've nailed something I talk about a lot with investors. Each region, and therefore its economy and investment markets, has been dealt a hand. As an asset manager or asset allocator, go to that market for what's been dealt into its hand. Don't try to find things outside of it because you're kind of leaning into its weaknesses as opposed to its strengths, which I think is what you're touching on there.

James: For sure.

Trevor: Now, just to make sure we touch on this at a high level, what's in the Global Equity Fund?

James: We would typically be in the 60% to 70% range for U.S. equity exposure. Canada, for the most part, will be, call it, 3% to 5%. Then the rest of the world effectively makes up the balance. Japan, for example, is about a 7% weight in the fund right now. Emerging markets are about 9% today. There are a whole bunch of other pieces there, but effectively you're getting fairly well-diversified global exposure outside of Canada.

Trevor: Yeah, so that's the takeaway. We've touched on a couple of things. One, it's not distribution or yield heavy. It's more growth oriented because that's what the rest of the world really has to offer, more so than Canada. In terms of what's in it, 60% to 70% is in the U.S., then there's a little bit of Canada, with the rest outside of those markets.

Trevor: We're always a bit hesitant to get too technical when we're communicating, but I think it's worthwhile for those who are a bit more sophisticated. When it comes to selecting individual companies, are there any specific investment metrics or characteristics of a company you're looking for? What makes you say, "Yes, that's a fit for the U.S. allocation," and so on?

James: Maybe the best way to describe this is that there are certain qualities, at a fundamental level, that we want the company to check off. We kind of touched on that. We don't want to deal with things that have a pile of debt or that might have some liquidity issues, for example. There are a whole bunch of things we do to try to narrow that universe down into what we would call investable.

James: Then, from that investable universe, we say, "What characteristics are we really looking for?" Reasonable growth at a reasonable price is the underlying philosophy. What does that growth look like? It might be sales or bookings for future revenues. There are a whole bunch of things we're going to look at. Then we also want to look at how reasonable that valuation is relative to what we're going to get, or what we think we're going to get, from a growth perspective. You're trying to balance those two competing forces when you're picking those stocks, and that can be a lot trickier to do than it is to talk about.

James: Oftentimes, what you find is that if something has really good growth, the valuation is going to be really high too. Then it's a question of whether you can understand the growth, where that growth is going and whether you can get your head around that valuation without overexposing yourself to the risk that the growth doesn't show up. Then you might be in a bad spot.

Trevor: Making sure you don't get too far over your skis looking for opportunity. Opportunity at the right entry point. Inevitably, a question comes up. I don't know if it's ever tailored to global equity specifically, but it's perhaps worth asking: cryptocurrency. Is there any relation to the portfolio?

James: Not direct crypto. We own a company called Interactive Brokers, which has some indirect exposure to crypto. The same thing applies to Visa and Mastercard. We don't own it directly. If somebody came to me and said, "James, I want you to build me a public equity portfolio," and I turned around and gave them Bitcoin, I'm not really doing what they've asked me to do. Obviously, you can access that asset class. Fantastic. We do tap into it a little bit indirectly, but we're more concerned about public stocks in the public market.

Trevor: Part of what I was actually getting at, because the answer to that was pretty simple, is that you have minimal indirect exposure through companies that are somewhat being infringed upon by it. But currency in general is another consideration. Obviously, you've got allocations in the U.S., the rest of the world and a little bit in Canada. How is currency impacting performance or returns? Then, from a philosophical or management perspective, how do you go about managing those impacts, if at all?

James: At any given time, probably the easiest way to think about it is that if the Canadian dollar is going lower relative to the U.S. dollar, that's a positive impact on performance. If the Canadian dollar is strengthening against the U.S. dollar, it's kind of a negative performance impact. We have some currency exposure. We tend to hedge things outside of our U.S. dollar exposure, but we tend to leave that U.S. dollar exposure to float.

James: In the short run, currency fluctuation can be fairly volatile, but the spread is relatively tight. In the long term, there are typically reasons why that currency is either appreciating or depreciating against the base currency. We're not as concerned about what's happening to the dollar because, realistically, if we're buying a really solid U.S. company and the U.S. dollar is appreciating, they're doing a pretty good job either domestically or internationally. If the U.S. dollar is going down and they've got pretty good international sales, then guess what? They're making a fair amount of money, and you can typically counteract whatever negative is happening with the currency through your underlying investment.

Trevor: So I think what I'm hearing is that the asset allocation or investment selection, over a longer period of time, will far outweigh any kind of currency impact.

James: That would be our view, yeah.

Trevor: Maybe let's talk a little bit about this year. How has performance been this year and last year? What does that look like?

James: Obviously, it's been an interesting year. We've had another major conflict and got to see some volatility through March. We were able to weather that volatility fairly easily, so we've been in a pretty strong spot. I believe we finished June at 16.3% year to date for Series O. July was a little bit of a softer month, and I think we're in the 12% range, give or take.

Trevor: Gotcha. Maybe let's take a second to touch on AI because it's obviously been huge and represents the beginning of a technology innovation. It's a global topic because a lot of regions around the world are building out infrastructure and technology related to it. Has global equity been participating in AI? What does that look like, and through what types of companies?

James: Maybe if we take a step back, you've got a whole value chain behind AI. You've got your large language models, such as ChatGPT, Claude and Copilot. Then you've got your infrastructure that sits behind the model. That's the data centre. Inside the data centre, you've got your chips, and there's a whole discussion about who's providing the chips, such as NVIDIA and AMD. You've got chip designers like Broadcom, then you've got chip manufacturing and all the equipment that goes into providing the facility to actually manufacture those chips.

James: We've spent more time and allocated more capital in the manufacturing value chain than we have at the model level to date. Our view is that we're effectively short compute if the growth in the models shows up the way we think it will. From when the first ChatGPT model went mainstream in 2022 to today, we've effectively been short compute. Rather than trying to compete over who's going to have the best model, let's try to address the shortage of computing power first.

James: Longer term, you'll remember, and I'm sure some people in the audience will remember, the battle for internet search. You had Yahoo, Google, Microsoft Bing and AOL all competing over who was going to be the best search engine and get everyone to use it. Google ended up winning that battle, and a whole bunch of consolidation resulted. On the LLM front, I think there are 18 or 20 different models. Some are paid and some are open source. That likely turns into some degree of commoditization or consolidation. If you were to pick the one or two companies that end up with the best models, then sure, you're going to make a lot of money. But there's a whole other piece where, if the world is short compute, I don't really care what model you use. I just need you to use a model. Our view has been that this is probably a better risk-adjusted way to gain exposure to AI.

Trevor: The buildout needs to happen. The hardware, infrastructure and chips all need to be part of it.

James: Yes.

Trevor: I think we would all agree that the development of AI provides significant utility, whether you're talking about using it within a company, within a specific role at a company, or as a consumer or individual. That debate has probably been settled. But to your point, trying to pick what the large language models are going to look like and who's going to be the one to build them is difficult. Is there going to be one that really emerges, or are all of them going to be constantly competing? That buildout has to happen regardless.

James: For sure.

Trevor: As it relates to this year, what are you most proud of within Global Equity as a fund or investment strategy?

James: I think one of the things we've done a really good job with is staying quite disciplined, and that can be really hard to do when there's all this noise going on in the marketplace. When the opportunity has presented itself, we've gotten fairly aggressive. When the opportunity has not looked as attractive, we have not been as aggressive.

James: I don't want that to be taken as James just sitting there trying to mark time. To give you a good example, with Trump's Liberation Day in April of 2025, all of the different valuation metrics we were looking at came into our strike zone. It was like, "Okay, here's what we've been waiting for through 2024, an opportunity to get a little bit more aggressive." We were able to execute on that.

James: We've subsequently been moving the portfolio back from being aggressive for us, as we tend to be fairly conservative, to neutral. Neutral doesn't mean you're running away from the market, but you're recognizing that earnings growth has been really strong, valuations have gotten a little bit stretched, and there are some pockets of unease out there about monetary policy. Do I want to own something that's at 60 times earnings? Probably not. We've taken some of that at-risk exposure out of the portfolio and added to things that have a little more reasonable valuations, with the thought that they'll hold up pretty well if we get some more volatility. If the valuation and the metrics we're looking for fall back into the strike zone, we will get more aggressive again.

Trevor: Yeah. I love your answer because you jumped right into the management of the fund and why it's done well over time, but also the nitty-gritty of it. You're the lead portfolio manager, so that makes a ton of sense. When I take a step back, and maybe some of it is humility because I know you're a pretty humble guy as well, the Global Equity mandate wasn't one of our original three mandates when we started as a firm in 2006. We were always managing global equity assets within the Balanced solution, but 2017 was when we actually created a standalone investment strategy for it. At that point, obviously, it wouldn't have been the size that it is now.

Trevor: When I take a step back, it's that full evolution over time where it was part of something, now it's standing on its own, and it's grown substantially since it stood on its own because there's been interest in it, but also because it's done well. It's been managed with discipline and with that growth objective in mind, while being able to navigate through different market conditions. Even since 2017, which is only about nine years, we've been through a lot. We've been through COVID, the inflation and interest rate bout of 2022, and now we've embarked on geopolitical disruption or a war. It's been through a lot, but it's been able to stand the test of time. So I'm going to throw that little pat on the back in there for you because I don't know if you were ever going to go there, but I think it is something that should at least be thought about.

James: For sure, and I appreciate it. Any time you get a challenge in the marketplace, opportunities show up. So it's a question of whether you know what you're looking for and whether you're willing to pull the trigger. That's really why we do what we do and why we are kind of boring, for lack of a better term, when we sit down and have some of these conversations. It's because, well, I haven't really seen what I want yet, so I'm waiting.

Trevor: Yeah. How big is the fund now?

James: We're up to a little over $200 million now, about $210 million or $212 million.

Trevor: And we won't get too technical, but there are two series available.

James: Yeah, Series F and Series O, with Series F available on a variety of platforms.

Trevor: Yeah. Then I guess, kind of as a bolt-on to that, there is a U.S. Equity sub-strategy, but it's not the core part of the Global Equity mandate itself. Now, shifting gears a little bit, what does James' life look like outside of the office? Are you wearing a suit and a button-down on Saturdays and Sundays, or are you a weekend warrior? What does that look like?

James: My wife and I have a one-year-old at home, so if I were to wear a suit, it would probably have a bit of a mess on it. Needless to say, hobbies have changed quite a bit in the last year. It's a little more family time and that sort of thing. When I do get some spare time, I really like to cycle and go biking. In the wintertime, I get out to the mountains, go skiing and snowboarding, and just try to get out and get some fresh air.

Trevor: Where do you hail from? One of the original...

James: Oh, it's so unoriginal, but it kind of is original. I was born and raised here in Calgary.

Trevor: Yeah, so there aren't too many of us, I guess.

James: Born and raised here in Calgary.

Trevor: Perfect. Well, thanks for taking the time. I really enjoyed this. I think we should probably do it again because it's good to remind everybody what we do, but also to get a little bit more in depth about what it is exactly that we manage for our investors.

James: For sure. Thanks. I appreciate it.

Trevor: Thank you.

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