Leanne Scott doesn’t like to see people panic in a market downturn – such as the pullback in late 2018. It’s why the portfolio manager at Vancouver-based Leith Wheeler Investment Counsel Ltd. urges investors to stay the course, even when their portfolio values have dropped.
“It’s really important to keep your investment goals and time horizon in mind, particularly during a negative return year. If you can do this, it will be easier not to overreact by selling out of fear. Then your losses will be paper ones as your portfolio recovers when the market does,” says Ms. Scott, whose private clients and foundations group manages about $5-billion of the firm’s $20-billion in assets under management.
“During volatile times we strive to do what we always do, which is to remain focused on companies that we know very well and have thoroughly researched," Ms. Scott says. "These companies have been in business long enough to have a track record of surviving and maybe even prospering through many different types of economic and political turmoil.”
The firm’s balanced accounts, which includes about 60 per cent Canadian and global equities, were down about 4 per cent in 2018, compared with a decline of 8.9 per cent for the S&P/TSX Composite Index over the same period. Last year was the second in 20 years that her firm has had negative returns. The other year was 2008, amid the financial crisis. The firm’s balanced accounts (a mix of equities and fixed-income) had an average annual return of 8 per cent over the past 10 years.
The Globe and Mail recently spoke to Ms. Scott about what she’s buying and selling, and one stock she wishes she brought on board years ago.
What's your take on where the markets are heading in the short term?
Short-term – and long-term for that matter – forecasts are difficult. While there are always clouds to be found on the horizon, we believe economic concerns have likely swung too far to the pessimistic side. While growth is slowing and, therefore, the odds of a recession have increased, we don’t believe a recession is imminent. Corporate earnings grew significantly in 2018, yet the market fell at the end of the year on concerns about 2019. When this happened in the past, the worries usually prove to be overdone and the markets recover fairly well. The U.S. economy remains strong. High employment, rising wages are supporting consumption and that will benefit the global economy.
What have you been buying lately?
We raised some cash in our portfolios in early 2018, which was probably a little bit too early, but when the market declined in the fourth quarter [of 2018] we added to many of our positions. This is typical of our strategy. When there are sharp downturns in the market, our inclination is to add to some of our core positions. We added to 10 of our names throughout the last quarter. The sectors where we are seeing good value are financials and energy. One company we have been adding to is Saputo Inc. It’s one of our long-term holdings. Two factors that weighed on the stock through 2018 were the renegotiation of NAFTA and an excessive amount of global milk production. But in reality, neither of these two factors are paramount long-term concerns to Saputo. The new trade agreement isn’t as bad as the market thought it would be. Also, given that they produce cheese, a decrease in the price of milk will actually help them long term. They’ve been a great company to own. Management owns 33 per cent of the company and they’re currently looking for acquisitions with about $3-billion to spend.
What have you been selling?
Whenever markets decline, we are more likely to be buying than selling. There’s nothing we’ve been selling outright recently. One stock we sold earlier last year, not recently, was BRP Inc. We sold it solely based on price appreciation, which is in line with our investment philosophy. We only sell if the stock hits our price target and we feel the returns going forward will be too thin, or we feel we’ve made a mistake in our investment thesis. We sold out of it completely at around $60 in the fall of 2018. [The stock is now trading around $39.] Even though we like the company, we thought it was prudent to exit at that time.
What's one stock you wish you bought?
Air Canada: We were looking at it about eight or nine years ago when it was trading around $2 to $3. At the time, its balance sheet was slightly more levered than we would have liked. We failed to recognize the improvements they were able to make both in terms of their operations and the quality of their balance sheet. The market has taken notice. It’s now trading around $28. We’re still looking at it. There are some positives but also risks to that industry including competition, above-average exposure to the economy, and volatile fuel prices.
Any more advice for investors?
Whether you are a high-net-worth investor, or want to become one, my recommendation is to pay attention to the total fees you are paying. Unfortunately, in our industry, there are still fees being charged that are simply way too high. Some investors aren’t aware of the fees they’ve been paying. I find that disturbing. I think fees around the 1-per-cent level are reasonable for a balanced portfolio. Anything over 1.5 per cent is not. We still see double that amount sometimes. Over time, with the value of compounding, that eating into your returns over the years can be very significant.
This interview has been edited and condensed.