MARKET COMMENTARY

Sticking To The Fundamentals

From a top-down and bottom-up perspective, here’s a closer look at the fundamentals in action and why they’re important, always.

04.23.2020 - Scott Guitard, Vice President, Portfolio Manager

Through good and challenging investing times, we talk a lot about a disciplined focus on the fundamentals. We asked Scott Guitard, vice president and portfolio manager, to take a closer look at what that means in terms of building and managing equity portfolios.

 

Q: Can you elaborate on what you mean by the fundamentals? 

Let’s look at this first from a bottom-up perspective, where talking about the fundamentals means cutting through the noise and establishing an objective understanding of a stock’s true value based on disciplined, proven research and analysis. The evaluation process may differ according to the region or sector in which the company operates, as well as its intended purpose in the portfolio.

The underlying fund managers we select generally do this work—evaluating and setting intrinsic value targets for individual companies in their investable universes. These specialty investment teams take a deep dive, looking at both quantitative and qualitative factors. They then assess whether the respective stocks are under- or overvalued by the market at any particular time. The results of their analysis will influence decisions on whether to buy, hold or sell a stock.

Conversely, our Investment Strategy Committee takes a top-down approach to evaluating the fundamentals, analyzing various regions, looking at the state of each economy and the underlying market to see if the share valuation metrics reflect the economic backdrop.

Q: How do these distinct areas of analysis come together?

Our asset allocation decisions are one of the most obvious ways to see the merging of top-down and bottom-up analysis. For example, it’s reflected in the underlying strategies we choose, how we might tilt the weighting of assets to one region over another or commit more to one management style over another.  

Q: What would be an example?

For instance, taking a high-level look at the equities allocation in the Balanced Growth Benchmark Portfolio for the last quarter of 2019, we chose to be underweight Canadian equities, with a bias towards high-quality stocks and light on growth types of companies. These decisions were based on combined top-down/bottom-up analysis, and our view that the Canadian stock market was vulnerable, with stocks generally priced for a little too much optimism. From there, it was up to selected underlying portfolio managers to pick stocks based on their fundamental analysis.

 

Q: What of today?

Clearly, there’s a lot of worry founded in a world full of uncertainty and unprecedented events affecting investment markets. We’re seeing a dislocation between the way the market is trading and the objective analysis of fundamentals. Such analysis provides an anchor for moving forward. As we’re speaking, we’re working in real time, adjusting our projections and targets as new information is available. Right now there’s a lot to sift through. You’ll see our current positioning reflected in Tested, Now Moving On on page four.

Fundamental analysis is crucial through all stages of the investment cycle; however, it’s in this kind of environment where staying true to your process and trading discipline can really enhance long-term portfolio returns.

 

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Scott Guitard, Vice President, Portfolio Manager

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