Monthly Archives

November 2018

Socially Responsible Investing

Today, we are exploring socially responsible investing (SRI) whose nature is attracting an increasing number of investors everyday. Infact, assets under management in this type of investment fund grew by 146% between 2011 ($ 4.45B) and 2017 ($ 10.9B) while net cash inflows increased from $ 655M in 2016 to $ 1.22 billion in 2017*. This trend is based on the growing influence of millennials on the investment community. This generation is much more attentive to ESG factors (Environmental, Social, Governance) and, hence, more and more fund managers are integrating those factors into their business risk analysis.

The choice of participants in the funds is no longer only done using negative filters, such as, “excluding companies in the arms industry”. The use of positive filters such as “low carbon footprint” or “women’s representativeness” is becoming more common. According to the article published in the “Finance et Investissement” newspaper in November 2018, we can expect that SRI will focus on tackling the 17 objectives set by the UN in 2015, where education, gender equality, and the elimination of poverty and hunger are the main goals.

NEI Investments is the leader in the field of responsible investing in Canada. The 30-year-old company bases its strategy on issues such as the global energy transformation, sustainable food production, and board diversity. As of October 31, 2018, the performance of the Canadian Small Cap Equity Fund- ER NEI Series A- over 3 years is 6.84%, 5.37% over 5 years, and 10.22% since inception. These results indicate that responsible investment funds can be just as successful as other types of ETFs.

On our platform, we can find the iShares Jantzi Social Index (“XEN”) Exchange Traded Fund (ETF), which has been running for more than ten years. It aims for long-term capital growth by replicating the return of the Jantzi Social Index, net of expenses. The Jantzi Social Index is a weighted market capitalization index consisting of 50 Canadian companies that have responded to ESG criteria. XEN’s SP Score, calculated as a weighted average of the SP Scores of the securities held, is 59.74. As of October 31, 2018, the 10-year compounded annual return is 8.37% compared to 7.36% for the S&P/TSX 60, according to data from Sustainalytics. After fees, the ETF’s return is 7.77%.

During this year, eight SRI ETFs were launched, including a range of climate change ETFs recently launched by Desjardins Global Asset Management. These new ETFs aim to significantly reduce the carbon intensity of the portfolio or avoid investing in the fossil fuel sector all together.

In conclusion, we can emphasize that Responsible Investment is becoming an increasingly common approach. These investment funds, intended for a clientele with more diversified objectives than usual, provide a new range of products.

* Source: Finance and Investments November 2018

Blog post written by Loic Chatelanat (intern), under supervision of Kimberly Yip Woon Sun (ETF Analyst).

Magna International Inc. (MG)

In today’s content analysis (Download), we will discuss Magna International Inc which has been in our Canadian model portfolio since December 31, 2012. There has been a lot in the news lately concerning the family dispute which has brought a lot of negative attention to this company, however, the auto parts giant Magna’s operations prove strength and continuity. Magna is the largest automotive parts manufacturer in North America by sales of original equipment parts and one of Canada’s largest companies, having garnered a spot in the S&P/TSX 60. Magna operates under Magna Steyr, Magna Powertrain, Magna Exteriors, Magna Seating, Magna Closures. Magna Mirrors, Magna Electronics and Cosma International. 

Q3 2018 Earnings Release

On November 9th, Magna delivered third quarter earnings per share of $1.56, versus $1.39 during the same period a year ago. Analysts had forecasted $1.49. Revenues for the company totaled $9.6 billion higher again then last years revenues of $8.9 billion but lower then analyst’s expectations of $9.8 billion.  EBIT declined from 705 million to 699 million. Magna reduced their forward guidance expecting total sales of $40.3B – 41.4B and profits of $2.3B – 2.4B. Down from their earlier estimates of sales of $40.3B – 42.5B and profits of $2.3B – 2.5B. All business segments of Magna experienced growth in sales

EVA Analysis

As of November 16th2018, Magna, had one of our highest EVA scores of 72 indicating that it is currently a quality company at a great value. MG is trading well below the Intrinsic Value. Trading at approximately half of its intrinsic value. The Future growth value (FGV) is another representation of whether the stock is trading at a discount of premium by comparing the market value to the current operating value. In the case of Magna, it is currently trading at a 29% discount.

Magna has constantly increased their year over year net operating profits after tax (NOPAT) by an average of 10%. We can also see that the return on capital has been increasing steadily since 2016 and so has the cost of capital. This resulted in a slight decrease in the performance spread from 1.64 to 1.60.

The EVA (TTM) graph is an important indicator of future performance and sustainability of the company. We can see that the EVA has been almost flat because even thought the profits increased, so did the capital charge, hence, flattening out the overall EVA trend.

Magna has had quite an aggressive share buyback decreasing the outstanding shares on average of 5.2% per year which is helping increase the intrinsic value per share.

Portfolio Manager Commentary – October 2018

Horizons Inovestor Canadian Equity ETF (INOC)

The S&P/TSX Total Return Index ended the month of October down 6.27% as investors are selling off risky assets on slower global growth, mounting inflation, peaking corporate earnings and rising bond yields, which coincides with a late-stage of the economic cycle. The Bank of Canada hiked its interest rate to 1.75% citing the economic output is operating close to its potential and trade risks are subdued with NAFTA 2.0. Meanwhile, the Canadian dollar fell 1.91% as commodities retreated. Our Nasdaq Inovestor Canadian Equity Index (NQICA) fell 6.35% for the same period, 8bps below the benchmark. Our sector allocation contributed 82bps as our decision to overweight staples and underweight energy proved to be fruitful. However, our stock selection contributed -90bps as a couple of our stocks clearly under performed. You will find below the top three and bottom three contributors to performance.

The top three contributors to performance were:

1. Metro (MRU), a food retailer, rose 3.3% as investors chose to invest in defensive sectors such as staples, which only declined 0.7% this month as stocks retreated from their highs.

2. Parkland Fuel (PKI), a consumable fuel producer, gained 2.1% after saying it would buy a 75% stake in SOL Investments, the largest independent fuel marketer in the Caribbean.

3. Gildan Activewear (GIL), an apparel manufacturer, increased 0.1% as Moody’s shifted the apparel industry to a positive outlook from stable after watching faster than anticipated growth.

The bottom three contributors to performance were:

1. CAE (CAE), a simulation equipment maker, declined -11.4% as industrial stocks faced a route with several bellwethers like Caterpillar (CAT) and 3M (MMM) warning of higher costs ahead.

2. NFI Group (NFI), a bus manufacturer, dropped -11.7% as industrial stocks faced a route with several bellwethers like Caterpillar (CAT) and 3M (MMM) warning of higher costs ahead.

3. Equitable Group (EQB), a mortgage and thrift company, fell -12.2% as the Bank of Canada raised its interest rates, another sign the Canadian real estate market could cool even more.

Best,

The Inovestor Asset Management Team

Sizing up the wealth creators among U.S. technology stocks

In the filter created this week for The Globe and Mail, we screened for Wealth creators in the U.S. information technology sector.

Signals indicating a nearing bear market have been encircling us for months. In periods such as these, fundamental analysis is key; we’re looking for real quality that can protect one’s portfolio. With U.S. technology stocks taking a particularly big hit recently, I decided to make that sector our focus. We screened the U.S. information technology sector by focusing on the following criteria:

  • Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA gives us a sense of how much value this stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the capital expense;
  • Positive EVA/share, and EVA/share growth over 12 months;
  • Economic performance index (EPI) – the ratio of return on capital to cost of capital – must be greater than one;
  • Average five-year return on capital must be greater than 10 per cent and the 12-month change in return on capital must be positive;
  • Future growth value/market value (FGV/MV) and its 12-month change. This ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
  • Beta – this gives us an idea of how closely the company mimics the market’s fluctuations. A beta of less than one would indicate the stock is less volatile than the market at large.

Read more in this article written by Noor Hussain, Analyst & Account Executive at Inovestor Inc.

 

Canadian ETFs October’s Launches And Terminations

In this research report created this week for The Globe And Mail, we look at Canadian ETFs: October’s launches and terminations

The Canadian ETF space is getting crowded with more than 650 ETFs offered by 33 ETF issuers. This month, iA Clarington Investments joined the industry with the active ETF series of IA Clarington Core Plus Bond Fund, iA Clarington Global Bond Fund and iA Clarington Emerging Markets Bond Fund. Two new providers are set to join the ETF industry in 2019.

National Bank Investments filed a preliminary prospectus to launch its first suite of ETFs. It consists of four ETFs: an active Canadian preferred shares ETF, an ETF that invests in equity securities of family-owned Canadian companies, a global real estate and infrastructure sectors ETF and a liquid alternatives ETF. Management fees for this suite range from 35 to 90 basis points.

Middlefield Group, a Specialty Investment Manager which creates and manages specialized investment products for individual and institutional investors, will convert two closed-end funds into exchange-traded funds. Middlefield Healthcare & Life Sciences Dividend Fund and REIT INDEXPLUS Income Fund, which together represent approximately $150-million in assets, are expected to be converted into ETFs in early 2019.

Find the full report click here 

This article is written by Kimberly Yip Woon Sun, ETF Analyst for Inovestor Inc.