Monthly Archives

May 2021

New Feature: Factor Exposure

A new feature is now available to help analyze companies using style factors including Value, Growth, Quality, Momentum, Volatility and Yield.

Investors are increasingly looking at factor investing as a valuable tool to enhance returns but they often face the challenge of finding reliable metrics. InoAdvisor fills this gap by providing a factor analysis tool to support our clients generate better risk-adjusted returns.

This feature is available for free with your StockPointer subscription. If you don’t have StockPointer yet, contact your Account Managers now.

Here is a breakdown of the Factor Exposure tab:

You can access the Factor Analysis page by clicking on the Factor Exposure tab of a company’s profile.
Overall Score by factor: The company is attributed a factor score for each factor family (Value, Growth, Quality, Momentum, Volatility and Yield). These scores are based on the sector percentile of the company’s factor details. A Value Score of 57 means that, according to our metrics, AAPL is in the top 43% of the stocks in its sector in terms of value investing.
The chart plots the company’s factor scores to the sector’s average factor scores.
The histogram displays each factor family’s key ratios, the stock’s current sector percentile, its one year minimum and maximum sector percentile and its historical minimum and maximum percentile.
The value of each ratio in the Factor family.
The percentile rank of the company in its sector.
The percentile rank of the company in the market, either Canada or US.
Ratios in the Factor Detail section were added to the Peers tab.
A side by side comparison of the peers’ factor ratios and the stock’s rank among its peers.

Portfolio Manager’s May Comment for April Results

In April, the S&P/TSX increased by 2.4% and the S&P500 rose by 5.3% while the MSCI ACWI ex USA gained 2.8%. At the end of the 12-month period ending April 30th, the S&P/TSX grew by 33.3%, the S&P500 gained 46% while the MSCI ACWI ex USA posted a return of 43.6%.

NQICAT increased by 2.4% while it climbed 37% on an annual basis.

Quaterly results published in April were in line to better than expected for the majority of companies.

The best TSX sectors for the month of April were Materials up 5.4%, followed by Consumer Discretionnary up 5.1% and Telecommunication Services up 3.4%. The worst performing sectors were Health Care down 9.9%, Industrials down 1.1% and Utilities down 0.6%.

The best monthly performers in NQICAT were Canfor up 17.9%, goeasy up 16.2% and Transforce up 14.6%. At the opposite, the weakest contributors were Canadian National Railway down 9.3%, Winpak down 5.2% and OTEX down 3.4%

3 stocks were sold and bought in the strategy in April. The strategy required an exposure reduction to 3 sectors, namely Consumer Staples, Consumer Discretionary and Energy. Empire Company (EMP.A) had the lowest SP score of our Consumer Staples therefore we sold it. We sold Thomson Reuters (TRI) due to its low SP score. Parkland (PKI) was sold since it was the only Energy stock in the portfolio and futhermore its EPI was below 1.

The model required an increased exposure to 1 Materials and 2 Financials. The names that made it into those sectors were Canfor (CFP), Power Corporation of Canada (POW) and goeasy (GSY).

StockPointer® Canada Portfolio Transactions – April 2021

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Canadian Model Portfolio, effective April 16 after market close.

Here are the details:

Ins:
1. Power Corporation of Canada (POW) Market trend. Increase in the Financial sector as seen in the Top 100 index, therefore, increasing our position in the portfolio. The company is in the top of its sector
2. goeasy Ltd (GSY) – Market trend. Increase in the Financial sector. The company is in the top of its sector
3. Canfor (CFP) - Market trend. Increase in the Material sector. The company is in the top of its sector

Outs:
1. Thomson Reuters (TRI)  Market trend. Decrease in the Consumer Discretionary sector as seen in the Top 100 index, therefore, decreasing our position in the portfolio. The company has the second lowest SP score of the sector. Richelieu Hardware (RCH) has the lowest SP score by one point, but we preferred it over TRI.
2. Empire Company (EMP.A) – Market trend. Decrease in the Consumer Staples sector. The company has the lowest SP score of the sector.
3. Parkland (PKI) Both Market trend and the EPI fell below 1. Decrease in the Energy sector. It was the only stock in the Energy sector.

How to add ESG factors to your portfolio? Positive/ Best-in-class screening

The best-in-class approach involves selecting top companies in terms of ESG metrics. These companies are actively making an effort to improve their ESG impact. Best-in-class screening rewards them by overweighting these companies in their portfolios. 

This method has the advantage of including companies that operate in industries that are not necessarily ESG-friendly. To illustrate, the energy sector is one of the worst sectors for sustainable investment due to its devastating effects on the environment. The energy sector represents 10.2% of the total nominal gross domestic product in Canada and represents over 12% of the S&P/TSX Composite Index as of March 31, 2021. Excluding this sector would mean a substantial deviation from the main Canadian market index. Positive screening also has the benefit of encouraging companies to adopt better ESG guidelines because that would make them more competitive compared to their peers. 

However, implementing a best-in-class screen is time-consuming, if done without the use of third party ESG ratings. Analysts must examine each company in the universe and rank them in terms of sustainability. Third party such as Sustainalytics, offered by InoAdvisor as an add-on, can considerably improve this tedious process. We provide a breakdown of the ESG Risk Rating, Notable Material ESG Issues, Product Involvement and a list of Controversies on over 12,000 companies worldwide. 

Implementation 

Best-in-class selection can be done on an absolute basis, when companies are selected based on their outperformance in terms of ESG characteristics in the entire universe, or on a relative basis, when companies are compared to their competitors within the same industry/sector and are selected based on their superior ESG ratings. 

We focus on the relative basis as it is the most used method. The steps are as follows: 

1. Assign an ESG rating to each company in the investible universe

Each company
has to be analyzed and assigned an ESG score in order to compare companies across sectors or industries and determine which ones are the best in terms of ESG performance. An alternative to this lengthy process is to use readily available ESG data providers.

2. Rank the stocks from best to worst in each sector

Classify the companies in each sector or indus
try from best ESG scored companies to worst ESG scored companies.

3. Overweight the ESG leaders and underweight the ESG losers in your portfolio

Depending on your strategy, you can overweight top ESG companies and underweight bottom ESG companies or only include top ESG companies in your po
rtfolio

Illustration 

Using the InoAdvisor’s screener, we find the best-in-class stocks in the Canadian energy sector. 

We apply the following filters to stocks listed on the TSX: 

  • Energy sector, 
  • Market capitalization of $1 billion or above, 
  • Current SP Score of 5or higher and, 
  • Positive Return on Capital. 

We get a list of 11 Canadian energy companies, ranked from lowest ESG risk exposure to highest ESG risk exposure. Portfolio Managers using the best-in-class approach will favor the lowest ESG risk exposed companies, which implies a higher ESG rating, to their portfolios. 

For a list of this screen, click here. Contact your account executive if you are not already subscribed to our new ESG add-on. 

Pembina Pipeline Corporation (PPLis the top company in our screen. Despite a high Overall Exposure Score of 44.3, the company’s ESG Risk Rating stands at 20.2. Iis able to considerably manage its ESG risk through its ESG measures. From their Sustainability Report 2020, Pembina 

  • Focuses on safe working conditions, with their safety records continuously exceeding the industry average, 
  • Is once again recognized as one of Canada’s Top 100 Employers, 
  • Advanced the implementation strategy for their Carbon Stand as well as their Inclusion and Diversity Stand, 
  • Demonstrated support to the communities in which they have a presence, with a direct investment of $10 million in 2019, a 30 percent increase over the prior year.

The Best-in-class ESG Integration technique helps investors align their values and enhance their risk-adjusted returnsUsing third-party ESG data improves the integration process by reducing the time and effort required to analyze how sustainable companies are. This method encourages companies to consider ESG issues in addition to their bottom-line because mindful investors favor ESG-friendly companies.