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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

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. 

Canadian ETFs – September’s Launches and Terminations

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

Four asset managers entered the Canadian ETF Industry this month: Fidelity Investment, Coin Capital Investment Management, Starlight Capital and First Block Capital.

Fidelity’s first suite of ETFs consists of six divided-factor ETFs covering the Canadian, U.S. and international markets. The funds seek to replicate Fidelity’s in-house indices that are based on three dividend factors: dividend yield, payout ratio and dividend growth for FCCD, FCUD, FCUH and FCID. A fourth factor, correlation to 10-year U.S. Treasury yields, is considered for FCRR and FCRH.

Find the full report click here  

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

Portfolio Manager Commentary – September 2018

Horizons Inovestor Canadian Equity ETF (INOC)

The S&P/TSX Total Return Index ended the month of September down 0.89% as the Canadian equity
market was pressured lower on uncertainties surrounding a new trade agreement with the US.
Meanwhile, the Bank of Canada decided to maintain its overnight rate target at 1.5% and adopt a wait
and see approach. The Canadian dollar rose on higher crude oil prices and hawkish comments from
Governor Poloz at the Bank of Canada on a potential rate hike next month. Our Nasdaq Inovestor
Canadian Equity Index (NQICA) fell 1.83% for the same period, 94bps below the benchmark. Our sector allocation contributed -15bps as our decision to overweight discretionary, and underweight health care proved to be detrimental. Our stock selection contributed -79bps as a couple of our stocks clearly underperformed. You will find below the top three and bottom three contributors to performance.

The top three contributors to performance were:

  1. Equitable Group (EQB:CN), a thrifts & mortgage provider, rose 6.4% after origination activity,
    borrowing retention, loan growth all came better than expected in Q2 2018 last month.
  2. Linamar (LNR:CN), an auto part manufacturer, gained 3.7% as investors are optimistic the US
    and Canada will reach a trade agreement that won’t impose auto tariffs on Canadian vehicles.
  3. Couche-Tard (ATD.B:CN), a convenience store operator, increased 3.6% as it posted strong Q1
    2018 results: EPS of $1.15 (beat by $0.09) on Revenues of $19.3B (beat by $1.4B).

The bottom three contributors to performance were:

  1. Canadian Tire (CTC.A:CN), a general merchandise retailer, declined -7.3% after DOL reported
    weaker same-store sales and revised its guidance downward, which is a bad omen for CTC.A.
  2. Norbord (OSB:CN), a wood-based panel maker, dropped -13.8% after CIBC analyst downgraded
    the company’s outlook on lower-than expected building permits in the U.S. housing sector.
  3.  Dollarama (DOL:CN), a chain of dollar store operator, fell -17.6% after disappointing investor
    expectations in its Q2 2018: EPS of $0.43 (miss by $0.01) on Revenues of $868M (miss by $24M).

Best,

The Inovestor Asset Management Team

StockPointer® Canadian Equities Model Portfolio Transactions – October 2018

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Canadian Model Portfolios, which will be effective on October 19th after market close. Here are the details:

 

Ins:

  1. Parkland Fuel Corporation (PKI) – Market Trend. Increase in Energy sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  2. West Fraser Timber Co. Ltd. (WFT) – Intra Sectorial transaction. WFT replaced OSB, whose score fell below minimum.

 

Outs:

  1. Power Financial Corporation (PWF) – Market Trend. Decrease in the Financial sector as seen in the Top 100 index.
  2. Norbord Inc (OSB) – SP Score. OSB score fell below minimum.

 

You can also find the transactions on Inovestor For Advisors, in the Model Portfolios – StockPointer Canada section.

Please contact us for more information.

 

The Inovestor Team

 

It is recommended that you do your own analysis prior to investing in any stock that we suggest. The information contained in this message is provided for informational purposes only and should not be interpreted as investment advice or recommendation to buy or sell any specific securities.

Canfor Pulp Products (CFX)

In today’s content analysis (Download), we will discuss Canfor Pulp Products, a leading producer and vendor of northern bleached softwood kraft pulp and paper. Canfor operates in two segments: Paper and Pulp, the latter being the main source of revenue for the company. It has been the highest rated Canadian company on our platform for a while and it currently holds an Spscore of 78%.

During the Q2 Earnings release on July 25th, CFX reported impressive results with an earnings surprise of 12.8% ($0.97 versus the market expectation of $0.86). In addition, sales were above expectations as well; $396.4M versus $346.5M leading to a surprise of 14.4%.

EVA Analysis

The company looks great from both a value and growth perspective. Although the stock price has been increasing dramatically (YTD return of 107% and 5-year average return of 32%), it is still trading at a discount of 36% given by the future-growth-value metric. This is due to the fact that the current operating value has been increasing at a quicker rate on average of 46% over the past 5 years and the market believes that the stock price isn’t fully reflecting this growth yet. In addition, NOPAT grew by 31% on average over the past 5 years leading to a current return on capital of 27% which is very impressive.

The economic performance is attractive as well. With a high return on capital and a respectively low cost of capital, the economic performance index is 3.71, hence, the company is generating returns for its shareholders at three times the cost incurred for raising that capital. Furthermore, the overall EVA trend is important when trying to identify if the company has potential to continue growing at the same speed or not, in our case the 5-year trend is positive and at a strong momentum.

Lastly, by glancing over the company balance sheets, the company seems to be quite healthy. This is concluded by rising net income and free-cash-flows, and stable dividend payout and total liabilities.