Canada’s market gets some respect
For the second time in the past few years, Kim Shannon, a relative value manager who formed Sionna Investment Managers a dozen years back, has revisited an old essay whose central thesis is there’s no point in being afraid of the local stock market.
Shannon, whose firm plies its trade in the domestic market, argues Canada could become the “The Rodney Dangerfield market,” in that we do not respect it enough.
“We find it interesting that Canadian investors are willing to consider severe criticism — that our market is sub-par and exposure to it should be minimized for our best interests — with very little backlash,” she wrote in the piece titled Home Sweet Home.
Shannon isn’t arguing for all local investors’ dollars to be committed to Canada.
“I totally believe in diversification. But so many people are saying the Canadian market is so idiosyncratic that we should overdiversify away from Canada. And that’s where I beg to differ,” said Shannon.
Instead, Shannon, whose 10-year old firm manages more than $5 billion of assets for a mix of institutional and retail clients, presents a big picture thesis to support her view.
Over the long run, market returns and standard deviation are “in line with other developed markets,” though Canada is “modestly more weighted” in its top three sectors.
From 1970-2012, when the standard measure of a market’s return is applied, Canada is the third-best performer at 12.3%, with only Europe (12.6%) and the Pacific (13.3%) posting higher results. Meanwhile, the so-called geometric mean (an alternate way of measuring the average return) of the Canadian market at 10.1% was higher than all other regions except for Europe (10.3%). On both measures, Canada outperformed the U.S.
But when the standard deviation — a measure of risk— is introduced into the mix, the Canadian market doesn’t fare as well. Over that 32-year period, the standard deviation was 21.9% — the fourth-highest among the six regions selected. At 17.6%, the U.S. was the lowest; at 30.7%, the Pacific ranked highest.
As for the concentration of the Canadian market, Shannon produces a table that shows, as of March 31, 2015, the top three weights range from 43.53% (for France) to 77.85% (Australia.) Even the world benchmark (the Morgan Stanley Capital World Index) has a 47.36% weight for the top three sectors.
Not that Shannon is a supporter of a market-cap weighted index such as the MSCI which currently has a 57.39% allocation to the U.S. market. Indeed, she has seen that movie before: as countries, sectors or individual stocks (Nortel and Valeant in Canada) pull ahead “only to eventually fall back and offer normal profits and returns as economic gravity inevitably takes hold. That tendency is known as reversion to the mean — a central element of value investing.”
The five biggest positions in Sionna’s large cap fund are Bank of Nova Scotia; TD Bank, Suncor; Canadian Natural Resources and Imperial Oil.