The market downturn has unearthed a number of buying opportunities for investors, but portfolio manager Teresa Lee warns the window may be short.
“Having a portfolio that’s down is challenging, but it’s actually quite pleasant to be analyzing businesses in this kind of environment because you have interesting businesses trading at very attractive valuations in some cases. You’re actually able to able to buy names where the perceived risk is overblown,” says Ms. Lee, co-chief investment officer at Toronto-based Sionna Investment Managers, which manages $5-billion in assets.
“For us, long-term, this is the perfect environment for value managers. We are able to look at good companies and then buy them at an attractive price. It’s a very short window, so you have to take advantage of it,” says Ms. Lee who manages the small-cap portfolio with assets of about $100-million.
Her small-cap portfolio has returned 6.2 per cent for the year ended Sept. 30 versus a 1.6-per-cent return for the BMO Small Cap Blended Index. Over 10 years, her portfolio has seen annualized returns of 11.2 per cent, compared with 7.1 per cent for the BMO index. In October, her portfolio was down 6.6 per cent and 1.4 per cent in November, compared with a drop of 8.5 per cent and 3.7 per cent for the BMO index.
The Globe recently spoke to Ms. Lee about how small caps are faring in the current market environment and some stocks she’s been buying and selling.
What concerns are you hearing from investors today?
Since the volatility we’ve seen in October, investors are pretty skittish. Negative news is causing stock prices to overreact. There are also more fears that we’re heading into a recession.
What's your take on where the markets are heading in the short term?
Nobody can predict what will happen in the short term. We spend most of our time focusing on equities that are trading attractively and ignoring the market noise.
How is the small-cap market performing during the current market volatility?
Right now, we are seeing some significant price moves, but it can also be hard to buy and sell in the small-cap market now. There’s not as much liquidity. The volatility has caused people to be afraid to act. We have to be slow and steady with our purchases. Small caps are attractive now, trading at a discount to large caps. It’s a bigger discount than normal and there are a lot of good businesses trading at attractive prices.
What’s a stock you’ve been buying lately?
One company we think is quite resilient that we’ve been adding to is Winpak Ltd. It’s a name we’ve held for a long time. It’s one of the more quality names we own. They make packaging for the food industry, such as coffee pods and bacon, which is quite resilient, in particular, given the strong demand for convenience foods. It’s a high-quality business with significant advantages that have translated into pretty interesting margins. The business generates a lot of cash, has no debt and is a market leader.
There are other names we are adding that I don’t want to talk about yet, but there have been a lot of opportunities in sectors ranging from restaurants to consumer products to industrials. It has been a pretty indiscriminate selloff. We have been seeing a lot of neat opportunities and have actually had to sell some of our better performers to make room.
What have you been selling?
We recently sold our position in Granite Real Estate Investment Trust, which deals in industrial real estate. We owned it for about five years. The company has very stable cash flows and a really strong balance sheet and opportunities for growth, so it was tough to sell it. We still hold it in other funds but sold it in our small-cap portfolio so that we could raise cash to invest in other areas. It demonstrates the importance of having a resilient portfolio – you can sell some of the stable names to buy names that maybe haven’t fared as well.
What's the one stock you wish you bought?
I can’t think of anything. Everything I wanted to buy is coming back to me now. As a value manager there will always be companies that you miss, but we believe that eventually the market should give you the opportunity to buy that name back, which we are seeing now with the volatility. We try to focus on making sure we have done our homework. We don’t know how the long will market will present opportunities, so we’re ready to pounce.
This interview has been edited and condensed.