Taking the emotion out of portfolio management

In turbulent markets, the best investment strategies temper human emotion, says Vim Thasan, portfolio manager, North American equity strategy, with Beutel Goodman Investment Counsel.

Speaking on the Soundbites podcast, Thasan said constantly changing macro environments and opportunity sets can be stressful for investors. Navigating them demands an unemotional approach.

“Changes are driven by market movements and dislocations, which are very different every year,” he said. “This year, the focus is on a global trade war. And chaos can bring new opportunities.”

Inevitable market swings are exploitable only if sentiment is kept in check, he said. Human emotions can become very pronounced, and that can lead investors to make costly mistakes.

A successful strategy “has triggers to act to counter these emotions — specifically fear and greed,” he said, and works through different market cycles.

But while investing styles may need to be tweaked from time to time to meet market conditions, Thasan said the underlying principle of seeking fundamental value does not change and is “anchored to rules that work through cycles.”

“It is one stock at a time, focused on the quality of the franchise, free cash flow and discounted valuation,” he said. “This investment process has acted well during periods of drawdown. We believe this can provide capital preservation through the cycle and through different economic environments, different shocks to the system.”

Thasan noted that there are some corporate traits that are particularly valuable in the current moment — notably pricing power and resilient competitive moats.

“Companies with a defensive business model, a strong balance sheet and an astute management team are well positioned to take advantage of global market volatility,” he said.

“Next year’s earnings may be peak, it may be a trough. It does not really reflect the true earnings potential of a company when you go through shocks in some way or form. So in every company that we look at, we’re looking to model it out three to five years to get a sense of what normalized earnings will be.”

Themes he’s observed in Q1 of this year include a flight to safety and growing dislocations stemming from the fact that anything unrelated to U.S. growth has been discounted or ignored. Seen in that light, Canadian companies are attractive alternatives, he said.

“Canada is a phenomenal market, with some global champions, domestic leaders, and a very stable economy,” he said.

Although it can be a somewhat concentrated market — with about 30% of its traded equities in commodities, energy and materials, and another 30% in financial services — there are “very interesting opportunities” that offer diversification benefits.

Right now he likes the consumer, health care and industrial sectors, and has a lower weight to energy and technology out of concerns about the sustainability of free cash flow and overvaluation.

Through market volatility, he disregards emotion and focuses instead on uncovering strong equities that are trading at a discount,

“We believe this will lead to resiliency during periods of market weakness,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.