Bristol Gate formula comes to ETFs

Manager rated in global top 10 for returns

Afew miles north of the financial district in Toronto sit the offices of Bristol Gate Capital Partners, a privately held money manager which, over the past nine years, has posted results from investing in U. S. stocks, that place it in the top 10 per cent of managers around the world.

In other words, performance, with a more than commensurate risk management focus, doesn’t come from proximity to the rest of the investment professionals but from implementing a carefully and scientifically based approach to i nvestment management, in this case picking the best 22 stocks from the S&P 500 index.

Since May 2009, when the U. S. strategy started, to Jan. 31, the firm recorded an 18.43- per- cent annual compound rate of growth — or 200 basis points above the 16.46- per- cent gain for the S& P 500 over the same period. The numbers are gross of fees.

The firm, which manages about $ 1 billion for institutions and high-net-worth individuals, uses a unique approach that combines data science with rigorous fundamental analysis to pick those 22 stocks.

But the 22 are all selected because they are all dividend growers — companies which can be expected to grow their dividends and provide more income to the portfolio over the next year.

It’s the way the 22 are selected that’s Bristol Gate’s secret sauce: the process starts with those companies that have revenue growth and is then adapted for operational performance ( essentially growth in cash flow.) Put the two together and the firm’s proprietary methodology, that it says leverages machine- learning algorithms, predicts the 22 stocks with the highest dividend growth for the upcoming 12 months. Over the past year, the U. S. strategy posted an 18.9- percent growth in dividends.

On all three measures, growth in sales, cash flow and dividends, Bristol Gate’s equally weighted portfolio, rebalanced each quarter, is in the top 10 per cent of all funds. But rising dividends is not a natural outcome: 34 per cent of the members of the S& P 500 have cut dividends over the past 23 years.

Now the singularly- focused firm, whose U. S. strategy had only been available to accredited investors, and whose two co- chief investment officers are Peter Simmie and Reyer Barel, is taking the next step in its development.

This week it launched two actively managed ETFs, one based in its U.S. strategy and the other based on a Canadian strategy that uses the same methodology as the U. S. strategy. In this way, investment advisers and their clients will have better access to investment strategies like Bristol Gate’s.

“Our objective has always been to identify opportunities that can support our investors’ portfolios through capital growth and by providing them more income in the future as well,” said founder Richard Hamm in an interview.

Hamm stressed the two ETFs will be actively managed. “We will be combining the firm’s skills in data science and fundamental analysis. We won’t be using a rules-based passive model.”

And Bristol Gate is not embarking on this new development blind: it does have a track record for both its U. S. and Canadian strategies.

In July 2013, it put its own money into the Canadian strategy and since then has been managing the fund using the methodology that will be used for the Canadian ETF.

Performance has been stellar: according to Global Investment Performance Standards ( GIPS) verified numbers, that real money has generated a 13.7-per-cent annual compound rate of return or 440 basis points above the TSX’s return over the same period. ( Those numbers are gross of fees.) The Canadian fund, which is underweight the financial and energy sectors, is home to 25 stocks.