Purpose Special Opportunities Fund came into the year looking for a new direction. Historically, it’s been a resource focused fund. However, junior resource stocks have been under pressure amid the growing importance of ESG. On this track, the light at the end of the tunnel is a long way away. We needed to change course.
Since taking over the Fund from Norm Lamarche, CIO Greg Taylor and portfolio manager Nick Mersch have expanded its scope into other market segments which are fundamentally undervalued and opportunistically dislocated. To put it in simple terms, we’re now considering all special opportunities, not just the ones in energy and materials.
We continue to hold resource stocks in the Fund at lower weights. Over time, depending on market conditions, the resource sectors could make up a large portion of the fund once again. However, we feel it’s crucial to cast a wider net for opportunities at this time, especially given the recent changes in markets.
We knew the effect of ESG on the resource industries. What we couldn’t predict was the coronavirus and the subsequent fallout from it. There has been an aggressive shift in the tide, fueled by the pandemic and the response of central banks and government stimulus, which has created large pockets of dislocation in asset prices.
The dislocation is apparent not only across sectors, but within them as well. This opens up a lane for active management to extract some alpha. The Fund now aggregates the top ideas from our sub-sector specialists, with a combined 100+ years investing experience, in order to achieve superior risk-adjusted returns.
The Fund breaks down its allocations into two defined segments: core and tactical positions.
Core: these “all-weather” positions focus on companies with solid balance sheets and reasonable leverage in industries with strong, long-term growth prospects. Risk will typically be added when we believe these securities are unfairly punished by the market, creating attractive entry points for long-term holds.
Tactical: tactical short-term trades in companies that are overbought or oversold on both technical and fundamental basis.
The aggressive nature of the recent market moves has created opportunity for both core and tactical positions.
Fund themes in a post-COVID world
- Consumer staples: This sector has held in fairly well as consumers’ disposable income drops and price sensitivity kicks in. Here, we’re looking for lasting ripple effects of the downturn to drive relative outperformance.
- Manufacturing: Capacity will come back online once workers return to factories. We view the recession as steep and fast with lingering effects. In the area of manufacturing, we are focusing on companies with diversified supply chains, exposure to long-term secular trends such as healthcare and workplace automation, and flexible balance sheets that can capitalize on lower costs of capital.
- Semiconductors: These are cyclical indicators that will need to form a bottom and will likely lead a recovery. Semis are at the crossroads of major issues surrounding supply chain capacity and changing demand. Within this sector, we favor names exposed to 5G and datacenter build-outs while waiting for more clarity in those related to the auto industry.
- REITS: The sector is trading at steep discounts to NAV; there is plenty of dislocation in this market. Dividends will need to readjust, but our approach here is value-selective and “getting paid to wait.”
- Technology: Long-term secular growers will emerge from a slowdown as strong drivers of growth. Secular tailwinds include the growing importance enterprise software and cloud computing. We are investing in companies that are benefitting from an acceleration of the digital transformation that has been brought about by the work-from-home movement.
- Homebuilders: Household incomes have dropped temporarily, which likely will be a headwind for demand. However, we are in an historically low interest-rate environment which should see a cyclical recovery on the other end. The home-owning dream is not dead. We are investing in various aspects of the homebuilding supply chain that provide a buffer with long-term contracts, as well as potential to increase on the upside.
- Private-equity proxies: These sold off with the rest of the market, but certain asset managers have been prudent with their capital and now have sufficient cash buffers to be selective. We plan to stick with best-in-breed management that has superior deal flow and size of capital as a moat.
- Gold: With historic fiscal stimulus being injected into the system, gold is a low-correlation diversifier. More political turmoil and more uncertainty to come isn’t a bad thing for gold.
Following March, parts of the market were oversold, pricing long-term impacts in industries that will likely follow a short term “V” shaped recovery. The all-weather core holdings have been focused on companies with strong balance sheets, operations that do not require government intervention to survive through the next 3-6 months and those that can benefit from long-term secular trends in a post-COVID era. Companies that are in our core holdings include ATS Automation, Stantec, Well Health Technologies, JP Morgan, Alexion Pharmaceuticals and CGI Inc.
The tactical positions focus more on the journey than the destination. There has been lengthy discussion of which letter of the alphabet the recovery will look like (U, V, W, L, Z). We believe that looking at early-stage recovery data combined with having long-term conviction in a thesis will lead to alpha-generating opportunities. In order to do this, it needs to be recognized that no two geographies will have identical recoveries and there will be structural nuances between industries. Boyd Group Services, Linamar, Champion Iron, Parex Resources, Lundin Mining and ERO Copper are examples of companies we’re holding on a tactical basis.
In order to endure and excel in periods of uncertainty, we believe sound fundamental research paired with a macro view can lead to outperformance. We will come out on the other side of this pandemic eventually, but when and how are the questions we aim to answer with our positions in this Fund.
— Josh Bubar is Vice President of Product at Purpose Investments
All data sourced to Bloomberg unless otherwise noted.
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