BEAM | Q4-2018 / Annual Performance Review February 7, 2019
8888 University Drive | Burnaby | British Columbia | Canada | www.beedie.sfu.ca/beam Agenda
I. Executive Summary Blake Coombes Portfolio Manager
II. Fixed Income Update Carl Davies Portfolio Manager
III. Equity Update Philip Tashin Portfolio Manager
IV. Going Forward Blake Coombes Portfolio Manager
V. Questions
VI. Appendix I. Executive Summary Blake Coombes | Portfolio Manager [email protected] I. Executive Summary
BEAM Overview - Objectives
1 To preserve inflation-adjusted invested capital
To outperform the equity benchmark by 150 basis points and outperform the fixed 2 income benchmark by 40 basis points on a rolling 4-year average
Use ESG as a tool to conform to SFU endowment responsibilities and the UN’s 3 principles for responsible investment
Provide an engaging educational experience that trains the next generation of 4 responsible and ethical finance professionals
4 Program has been a positive educational experience
Alumni well prepared for first job placements
Alumni Feedback Alumni Placements
Other How valuable was BEAM in getting your first job? 24%
Investment Banking 4.5/5.0 41% Consulting 10%
Equity How was your overall experience in BEAM? Research Asset 10% Management 14%
Other placements include: 4.7/5.0 ▪ Private Equity ▪ Technology ▪ Sales & Trading ▪ Corporate Finance ▪ Accounting ▪ Corporate Development ▪ Public Sector
5 Successfully recruited 12 new members
New interview process contained team-based project
Round 1 Round 2
All were invited for Round 2 interview
Candidates separated into teams and Individual interviews were conducted presented a buy/sell recommendation on a assessing technical and behavior skills along company (2.5 hours allotted time) with market knowledge
Moving Forward
9th Cohort Contracts Signed First Meeting Cohort Training Interviews
Complete
In Progress Jan. 18-19 Jan. 25 Feb. 1 Feb-Mar
6 We are not meeting our client’s expectations
Performance Since Inception(1)(2)
2011 - 2012 2012 - 2013 2013 - 2014 2014 - 2015 2015 - 2016 2016 - 2017 2017 - 2018 Cohort Cohort Cohort Cohort Cohort Cohort Cohort
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18
Mar-15 Mar-13 Mar-14 Mar-16 Mar-17 Mar-18
Dec-16 Dec-12 Dec-13 Dec-14 Dec-15 Dec-17 Dec-18
Sep-18 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17
Portfolio Return Benchmark Return
(1)Total portfolio benchmark is composed of S&P/TSX Total Return Index (60%); FTSE TMX Canada Universe Bond Index (38%); 91-day T-Bill Index (2%) (2)Assumes inception date of July 1, 2012, which marks the date at which the portfolio was fully constructed
7 Compliance summary
Current IPS Guidelines and Constraints Compliance
General • Asset Mix within IPS Range ✓
• Limits on equity security holdings ✓
• Micro Cap, prohibited ✓
Equity • 7 Sectors, with 50% allocation relative to benchmark ✓
• At least 25 stocks ✓
• 15 largest stocks, at most 70% of equity value ✓ • Less than 5% per issuer, excluding federal and ✓ provincials
Fixed Income • Allocation limits based on bond ratings ✓
• Duration within ± 1 year of the DEX ✓
8 II. Fixed Income Update Carl Davies | Portfolio Manager [email protected] Underperformed Fixed Income benchmark by 36 basis points
Relative Return Tracking Error Information Ratio
YTD-2018 (0.36%) 0.22% (1.64)
2.0% 1-Year Portfolio vs. Benchmark Total Return
1.5% 1.35% 1.0% 0.99% 0.5% 0.0% (0.5%) (1.0%) (1.5%) (2.0%)
Portfolio Benchmark 0.1%
0.0%
(0.1%)
(0.2%)
(0.3%)
(0.4%)
(0.5%) Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
Source: Bloomberg 10 Note: As of December 31, 2018. Underperformance from Curve Change and Allocation
Poor duration and allocation decisions
Active Curve Return Active Return Attribution
6M Selection 0.26%
1Y
Allocation (0.39%) 2Y
3Y Total Excess (0.13%)
5Y
7Y Curve Carry (0.01%) 36 basis point underperformance
10Y Curve Change (0.22%)
20Y
Total Curve Return (0.23%) 30Y
(0.40%) (0.30%) (0.20%) (0.10%) 0.00% 0.10% 0.20% (0.50%) (0.40%) (0.30%) (0.20%) (0.10%) 0.00% 0.10% 0.20% 0.30%
Curve Carry Curve Change Total
Source: Bloomberg 11 Note: As of December 31, 2018. Fixed Income portfolio strategy
Strategy creates lumpiness in allocation
Strategy Rationale Implications
Quoted spreads on inventory are large 1. Invest in provincials, municipals and Decreases trading costs due to lower so prefer to trade most liquid names corporates; trade federals quote spreads only Ceteris paribus, positive active yield Having a higher yield requires taking 2. Maintain positive active yield equals outperformance more risk 3. Invest only in corporate bonds Investing on only the short end provides maturing in <7 years and hold to Minimizes default and illiquidity risks less yield compared to the long end maturity 4. Generate alpha through good Strategy 1 does not allow for fluidity of Creates lumpiness in YoY allocation selection and duration decisions allocation performance
2018 Allocation Timeline (1) 60% 50% 40% 30% 20% 10% 0% Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
Federal Provincial Municipal Corporate Note: As of December 31, 2018. 1. Allocation shown does not include ETF exposure
12 Deeper dive on Curve Change
Bear steepening thesis has not come true
2018 2Y-10Y Spread (%)
0.60
0.50
0.40
0.30
0.20 Percentage
0.10
0.00 2018 Portfolio Active Duration
0.40
0.20
0.00
(0.20)
Years (0.40)
(0.60)
(0.80)
(1.00) Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Note: As of December 31, 2018. 1. Allocation shown does not include ETF exposure
13 Active duration positive as of December 31, 2018
Current asset and rating mix
Active Duration Active Yield Option Adjusted Spread
YTD-2018 0.20(1) 0.12%(1) 11.87
ETF 6% Federal 16%
AAA, 22%
Municipal 4%
AA, 32%
Corporate 39%
A, 33%
Provincial 35% BBB, 7%
Source: Bloomberg Note: As of December 31, 2018. (1) Active duration and active yield include ETF exposure in both the benchmark and the portfolio.
14 Dissonance between active weight and duration
Inconsistency between active weight and duration due to strategy
Active Weighting Sector Market Value Contribution to Duration Medium Medium Short Term Long Term Short Term Long Term Term Term
(1-5 Years) (6-10 Years) (10+ Years) Total (1-5 Years) (6-10 Years) (10+ Years) Total
Federal (21.65%) (1.22%) 4.22% (18.65%) (0.56) (0.16) 0.74 0.02 Provincial (1.07%) (0.20%) 3.21% 1.94% (0.11) (0.06) 0.35 0.17 Municipal (0.46%) 3.99% (0.83%) 2.70% (0.01) 0.25 (0.12) 0.11 Corporate 13.89% 7.81% (7.61%) 14.00% 0.41 0.47 (0.98) (0.11) (1) (1) Total (9.38%) 10.38% (1.00) 0.00% (0.28) 0.50 (0.02) 0.20
Active Contribution to Duration 1.5 1.0 0.5 0.0 (0.5) (1.0) Short Term Medium Term Long Term Source: Bloomberg, BlackRock Federal Provincial Municipal Corporate Note: As of December 31, 2018. Note: Contribution to duration and active weights include ETF exposure in both the benchmark and the portfolio. 1. Total duration does not equal the sum of Federal, Provincial, Municipal and Corporate duration due to rounding error
15 Projecting yield curve to shift upwards
BEAM believes there is more room for the curve to shift upwards
Yield Curve Projection (6 months)
3.0%
2.5%
2.0%
1.5%
1.0% 1Y 2Y 5Y 10Y 20Y 30Y
December 31, 2018 June 30, 2019
Period Current Projected Outlook
Overnight 1.75% 2.00% ▪ Even with the excessive volatility in financial markets, BEAM continues to predict two more rate hikes before 2020, while the market expects an early 1Y 1.87% 2.15% end to the hiking cycle 2Y 1.92% 2.23% ▪ The Bank of Canada will be more data dependant going forward as the effects of the Canadian oil industry are reflected in the macroeconomic data 5Y 1.95% 2.35% ▪ Global growth concerns are premature and concerns reflected in the long end 10Y 2.01% 2.47% of the curve are misplaced; yield curve steepening will resume until neutral rates are reflected in the 30Y 20Y 2.15% 2.52% ▪ Economic data and BoC communication suggests more room for the curve to 30Y 2.20% 2.55% shift upwards
16 Maintain underweight duration position
Current Initiatives
Short-Term Curve Strategy Provincial Strategy
▪ Furthering underweight duration position should ▪ Decreasing overall exposure due to illiquidity risk curve flatness persist ▪ Continuing to hold long-dated names such as ▪ Adding active weight to sovereign exposure to allow Saskatchewan and Manitoba but decrease shorter for flexibility in duration moves term exposure in favor of corporates
Corporate Strategy Long-Term Curve Strategy
▪ Building theses on telecommunications and ▪ Positioning the portfolio to have a greater active insurance issuers for potential BBB exposure weight in sovereign and corporate bonds
▪ Looking for value in sectors that have been hit ▪ Swapping out illiquid names to allow for duration exceptionally hard by volatility maneuverability
▪ Maintaining underweight duration position to minimize illiquidity and interest rate risks
17 III. Equity Update Philip Tashin | Portfolio Manager [email protected] 2018 was our worst year in equities
The market was down and BEAM underperformed BEAM TSX TSX + 150bps
Market Value as of $3,663,053 $3,915,015 $3,995,192 Dec. 31, 2018
Difference - ($251,962) ($332,139) 3-Year CAGR 4.3% 6.6% 7.1%
$4,800,000
$4,350,000
$3,900,000 TSX
BEAM
$3,450,000
$3,000,000 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
19 Learning from past selection decisions
Initial research was thorough Some stocks performed poorly but Emphasis was placed the thesis evolved on selection, with no more than a 2% over/underweight in a sector
Buy decisions were well documented, completed with financial models and presentations Some stocks did well for a while but we hung on too long
20 Equity underperformance - issues in our selection
Addressing issues within the selection process
Buying Stocks That ▪• Entering positions in attractive growth names that don’t Contradict Our incorporateespouse the the “value “value and and quality” quality” factors factors Philosophy
No Exit Strategies, ▪• Failure to planoutline for exit when strategies / why we results should in sell a prolonged stocks after buyingholding period Limited External ▪• RelianceNo consideration on in-house to use modelling external over sources using to external “check” our Reference Checks sourcesinvestment to “check”decisions our investment decisions
▪• Evolving our hypothesis when our original thesis breaks Failing to Sell Stocks insteadinstead ofof sellingselling ourour positionposition When Our Thesis ▪• Undermines the due diligence ofof the initialinitial thesis andand Breaks removes accountability fromfrom the new analysts reanalyzing the company the company
21 Negative three year selection in all but two sectors
But concentrated in very few stocks
Health Care (0.23%)
Real Estate (0.84%)
Utilities (0.15%)
Consumer Discretionary (0.11%)
Information Technology 0.46%
Consumer Staples (0.28%)
Communication Services (1.69%)
Industrials (2.22%)
Materials (1.75%)
Energy (2.82%)
Financials 1.01%
(3.50%) (3.00%) (2.50%) (2.00%) (1.50%) (1.00%) (0.50%) 0.00% 0.50% 1.00% 1.50%
Source: Bloomberg Note: As of December 31, 2018. Note: Telecommunication Services has been changed to Communication Services.
22 We’ve held more losers than winners
TSX’s 30 Best Performers and 30 Worst Performers
▪ BEAM held one of the top 30 stocks in the TSX Composite over the past three years ▪ Unfortunately, we held four of the bottom 30 stocks in the TSX Composite over the past three years ▪ We exited our positions in Bausch (Valeant) and Baytex in early 2016, so BEAM’s performance was not as bad as these stocks did over the time period
Note: Performance shown above is calculated from December 31, 2015 to December 31, 2018. However, in some cases, performance has been adjusted to only reflect the performance of the stock while it was / is in the TSX Composite.
23 Some of the top performers don’t fit our investment style
▪ BEAM elected not to invest due to our negative ESG outlook
▪ Does not fit BEAM’s investment philosophy as it is valued in excess of $10B despite not generating any cash flows or earnings
▪ BEAM elected not to invest in Great Canadian Gaming due to our poor ESG outlook on it and its handling of money laundering at its casinos
▪ Intermediate producer with assets in questionable jurisdictions (Nicaragua, Burkina Faso, Mali)
24 We’ve done well on stocks that fit our philosophy
Characteristics to look for moving forward
Best Performers Common Characteristics
Strong cash flow generation
Relatively Long-term strong ESG track record scores of success
Prudent Intrinsically capital undervalued allocation
25 Three stocks account for two-thirds of underperformance
Three Year Attribution (Contribution to Return)
Swing-and-a-miss (Losers that we held)
(2.64%) CTR
(1.54%) CTR
(0.90%) CTR
(0.86%) CTR
(0.80%) CTR
Source: Bloomberg Note: As of December 31, 2018.
26 35% of our underperformance came from Advantage
Problem stock #1: Advantage Oil & Gas
Advantage Oil & Gas Ltd. (TSX:AAV)
$12.00 A further 2,000 shares are acquired near the end of Q1 2017 at $8.20 per Additional 2,000 share shares purchased at end of Q3 2017 at $10.00 $7.97 per share
3,000 shares sold $8.00 near the end of Q1 Trans Mountain 2018 at $3.84 per Pipeline halted by share Federal Court $6.00 BEAM acquires 10,000
Share Price Share shares of AAV @ $8.51 per share in Q1 2017, $4.00 exiting our position in Arc Resources in the process Additional 5,000 shares purchased at $2.00 end of Q4 2017 at $5.20 per share
$0.00
27 35% of our underperformance came from Advantage
Problem stock #1: Advantage Oil & Gas
Our Initial View What Went Wrong…
▪ Natural gas producer focused on Montney (Alberta) ▪ We didn’t think U.S. natural gas overproduction and asset development Canadian transportation bottlenecks would be a problem ▪ Lowest cost natural gas producer in Canada ▪ High concentration in one area exposed AAV to ▪ Takeaway capacity secured through 2019 transportation bottlenecks and buyer concentration ▪ Lower cost U.S. natural gas favoured over Canadian
Average natural gas price ($ / mcf) $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00
Note: Chart shows Advantage’s average natural gas price, including realized hedging.
28 35% of our underperformance came from Advantage
Problem stock #1: Advantage Oil & Gas
Holding Snapshot Mistakes We Made
Current Position: 0 (sold on Jan. 17, 2019) ▪ A considerable run-up in the preceding several years may have led analysts to push valuation Weighted Average Purchase Price: $6.85 expectations
Q4 2018 Ending Share Price: $1.98 ▪ Failing to adjust to weakening natural gas prices
Impact on 3 year CTR: (2.64%) ▪ Evolving our thesis to reflect the change in conditions and failing to create an exit strategy Market Value Lost: ($127,502)
BEAM Moving Forward
▪ Avoid evolving theses post investment recommendation: ▪ Analysts mandated to articulate fundamental thesis and conditions that warrant exiting ▪ If thesis breaks or exit conditions are met, the position should be sold ▪ Increase analysts’ accountability to act by selling the position and finding a stronger alternative
Note: See slide 47 for an example of BEAM’s original due diligence on Advantage.
29 20% of our underperformance came from Torex
Problem stock #2: Torex Gold Resources
Torex Gold Resources Inc (TSX:TXG)
$40.00 BEAM acquires 2,550 shares of TXG @ $30.06 per share in Q1 2017 $35.00 TXG deals with a hostile union blockade that costs $30.00 millions in delayed production
$25.00
$20.00 Share Price Share $15.00 Additional 950 shares purchased at $10.00 end of Q1 2017 at All 3,500 shares $26.66 per share sold near the end of Q4 2017 at $13.56 $5.00 per share
$0.00
30 20% of our underperformance came from Torex
Problem stock #2: Torex Gold Resources
Our Initial View What Went Wrong…
▪ Gold producer with a single asset in Mexico ▪ Operational issues led to sizable misses on guidance ▪ Low-cost operator with track record of efficiency ▪ Local labour dispute led to suspension of operations at its only mine ▪ Paid a fair price for a reasonable production outlook and balance sheet ▪ Underestimated the ESG-related risks
2017 Gold Production (oz) 2017 AISC ($ / oz)(1) 400,000 $1,200 350,000 $1,000 300,000 250,000 $800 200,000 $600 150,000 $400 100,000 50,000 $200 0 $0 2017 Management Actual 2017 Management Actual Guidance Guidance Note: 2017 Management Guidance reflects the midpoint of guidance issued at the beginning of 2017. (1) AISC refers to all-in sustaining costs.
31 20% of our underperformance came from Torex
Problem stock #2: Torex Gold Resources
Holding Snapshot Mistakes We Made
Current Position: 0 (sold on Nov. 28, 2017) ▪ Failed to consider the risk of a geographically- concentrated asset Weighted Average Purchase Price: $29.14 ▪ Inadequately weighed prior ESG concerns Time of Sale Share Price: $13.16 ▪ Bought following run-up Impact on 3 year CTR: (1.54%) ▪ Missed out on other strong gold producers Market Value Lost: ($54,520)
BEAM Moving Forward
▪ Despite the idiosyncratic risks associated with Torex, more emphasis will be placed on: ▪ Historical issues ▪ ESG risks ▪ Geographically-concentrated assets ▪ Adhering to our value, quality, and ESG philosophy – negatively scoring companies not meeting our philosophy
Note: See slide 48 for an example of BEAM’s original due diligence on Torex.
32 12% of our underperformance came from Cineplex
Problem stock #3: Cineplex
Cineplex Inc. (TSX:CGX) $60.00 Q2 2017: CGX misses EPS estimates by over 90% $50.00 Q3 2018: CGX misses estimates once again
$40.00 2,750 shares of 750 shares were Cineplex were sold at $50.90 in Q1 purchased for 2017 $29.80 in Q2 2012 $30.00
Share Price Share 300 additional $20.00 shares are bought at $38.97 at the end of Q3 2017
$10.00
$0.00
33 12% of our underperformance came from Cineplex
Problem stock #3: Cineplex
Our Initial View What Went Wrong…
▪ Dominant business with ~80% market share of ▪ Declining attendance numbers due to online substitutes Canadian box office ▪ Lost box office market share due to increased ▪ Excellent operational success and quality dividend competition ▪ Strong cash flow profile to fund dividend growth ▪ Began investing in businesses where it had little market share (restaurants) and slowed investment in businesses with high market share (movie theatres)
Attendance (millions)
77.0 74.6 72.7 73.6 70.4
2013 2014 2015 2016 2017
Source: Public company filings
34 12% of our underperformance came from Cineplex
Problem stock #3: Cineplex
Holding Snapshot Mistakes We Made
Current Position: 0 (sold on Jan. 17, 2019) ▪ Failed to sell after the stock doubled in price, three years after initial investment Weighted Average Purchase Price: $30.54 ▪ Mid 2017 - Evolved our thesis to justify the declining Q4 2018 Ending Share Price: $25.44 share price
Impact on 3 year CTR: (0.90%)
Market Value Lost (since 2015): ($38,290)
BEAM Moving Forward
▪ As previously mentioned, theses will no longer be evolved when our initial thesis breaks
▪ More emphasis will be placed on major shifts in corporate strategy
▪ We will no longer be complacent with outperformers; positions that outperform the benchmark over a sustained period of time will be re-examined under our value, quality and ESG philosophy
35 IV. Going Forward Blake Coombes | Portfolio Manager [email protected] Implementing modest over-weight in equities
Bearish fixed income forecast and attractive equities valuation
61.4% 60.0%
37.2% 38.0%
1.4% 2.0%
Equity Fixed Income Cash
Portfolio Benchmark
Note: As of January 24, 2019.
37 Outline of the improved process
BEAM’s strategy going forward
1. Investment Decisions Aligned with Philosophy
Use of conformational tools such as HOLT Lens Value, Quality, ESG
2. Tangible Reports
Ensures thesis, exit conditions, and philosophy Simplifies the performance measurement process are readily accessible by future cohorts
3. Selling When Conditions Change Initial Thesis
Solves the issue of the evolving hypothesis Places accountability on sector analysts
4. Changing the Investment Recommendation Process
Moving away from consensus decisions Ordinal ranking – additional analyst accountability
38 Standardized research reports
A requirement for each buy going forward
Investment Thesis: Reports will contain the full thesis crafted by the analyst. Conditions will be monitored to see if the thesis is breaking.
Exit Strategies: Reports will have certain positive or negative signals that will assist the analyst in making a sell decision if necessary.
Philosophical Alignment: Reports will highlight how the company fits our investment style from a value, quality, and ESG perspective.
39 Tests our views on quality and value
HOLT Lens – Unbiased Confirmation Tool
Track record of excellent economic returns Confirms our view that the business is confirms OTEX is a high quality business significantly undervalued
Source: Credit Suisse HOLT Lens
40 Recent transactions reflect commitment to philosophy
Recent transactions
Sold Purchased
▪ Scotiabank is undervalued after a rocky 2018 and has potential for stronger earnings growth with its recent wealth management and LatAm acquisitions
▪ Vermilion’s geographically diversified operations contribute to stable cash flow generation, which should support its 8.7% dividend yield
▪ OpenText’s high quality product line, successful M&A strategy and intrinsic undervaluation offers better risk / reward than Cineplex
▪ Recent weakness in PBH’s share price gives us an attractive entry point into a stable business with strong cash flows
41 Appendix 2018 Balanced Portfolio return
Appendix
Relative Return Tracking Error Information Ratio
YTD-2018 (2.04%) 2.14% (0.95)
Portfolio vs. Benchmark Total Return 3.00%
1.00%
(1.00%)
(3.00%)
(5.00%) (4.77%)
(7.00%) (6.81%) (9.00%)
(11.00%) Portfolio Benchmark 0.00%
(0.50%)
(1.00%)
(1.50%)
(2.00%)
(2.50%) Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
Source: Bloomberg 43 Note: As of December 31, 2018. 2018 Equity Portfolio return
Appendix
Relative Return Tracking Error Information Ratio
YTD-2018 (3.18%) 2.55% (1.25)
Portfolio vs. Benchmark Total Return
2.00%
(2.00%)
(6.00%) (8.83%) (10.00%) (12.01%) (14.00%)
(18.00%) Portfolio Benchmark 0.00% (0.50%) (1.00%) (1.50%) (2.00%) (2.50%) (3.00%) (3.50%) (4.00%) Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
Source: Bloomberg 44 Note: As of December 31, 2018. 2018 Equity Selection
Appendix
Utilities (0.03%)
Real Estate (0.42%)
Materials (0.50%)
Information Technology 0.30%
Industrials (0.82%)
Health Care 0.12%
Financials 0.18%
Energy (1.41%)
Consumer Staples (0.35%)
Consumer Discretionary 0.87%
Communication Services (0.55%)
(2.00%) (1.50%) (1.00%) (0.50%) 0.50% 1.00%
Source: Bloomberg Note: As of December 31, 2018. Note: Telecommunication Services has been changed to Communication Services.
45 We often buy things after they have done well
Share price performance prior to BEAM initiating a position
Note: Table only shows new positions initiated from December 31, 2015 to December 31, 2018.
46 Exhibit – original due diligence on Advantage
Dated: February 10, 2017
47 Exhibit – original due diligence on Torex
Dated: February 10, 2017
48 Other poor performers – Finning and Whitecap Resources
Appendix
Holding Snapshot - Finning Holding Snapshot – Whitecap
Current Position: 4,212 Current Position: 13,950
Weighted Average Purchase Price: $31.96 Weighted Average Purchase Price: $7.36
Q4 2018 Ending Share Price: $23.80 Q4 2018 Ending Share Price: $4.35
Impact on 3 year CTR: (0.86%) Impact on 3 year CTR: (0.80%)
Market Value Lost: ($27,285) Market Value Lost: ($42,042)
Reasons for Underperformance - Finning Reasons for Underperformance – Whitecap
▪ We missed a strong run up from 2016 to early 2018 ▪ Canadian oil & gas transportation constraints due to booming demand for investment ▪ Investor sentiment towards Canadian energy stocks ▪ Once we entered Finning, trade concerns and the has soured after blowout in heavy oil differentials threat of an economic slowdown hindered the share price
49 Other poor performers – Valeant / Concordia
Two pharmaceutical companies that we didn’t fully understand and should never have held
Holding Snapshot – Valeant (Bausch) Holding Snapshot – Concordia
Current Position: 0 Current Position: 0
Purchase Price: $216.28 Purchase Price: $103.57
Quantity Purchased: 370 Quantity Purchased: 750
Sale Price: $30.07 Sale Price: $27.67
Market Value Lost: ($68,898) Market Value Lost: ($56,925)
Reasons for Underperformance
Valeant: Purchased after it had fallen 35% from its peak in Summer 2015 due to issues with debt covenants with the belief that covenant restructuring had alleviated the issues. However, the Philidor scandal in September 2015 further reduced the share price by 85%.
Concordia: Purchased at nearly the stock’s all-time high after it had a 180% gain in price in the preceding year. Shares proceeded to crash nearly 80% after investors grew wary of a large equity raise to fund an expensive acquisition and the news that the U.S. government had subpoenaed Valeant (Bausch) in regards to drug price hikes, a similar practice to that of Concordia’s.
In both cases, BEAM strayed from its investment philosophy and was motivated by the “fear of missing out” in these high-performing, popular drivers of the index.
50 Banks – winners that we missed
Three Year Attribution (Contribution to Return)
▪ It’s difficult to hold every Big 6 bank in our portfolio; doing so would limit our holdings in the insurance and asset management sub-sectors (which limits our diversification) ▪ Over the past three years, we chose to hold four of the Big 6 banks ▪ Even though Bank of Nova Scotia and Bank of Montreal contributed negatively to our returns (to the aggregate tune of -2.05%), our overall bank strategy yielded a positive net 0.25% contribution to return
CTR from our Big 6 bank holdings CTR from Big 6 banks we did not hold
(2.05%) CTR
2.30% CTR
51 Other winners that we missed
Three Year Attribution (Contribution to Return)
▪ BEAM held(0.87%) Enbridge CTR for most of this time period, which generated 0.47% CTR, helping offset some of the miss on TransCanada (0.89%) CTR ▪ In mid-2018, we swapped our position in Enbridge for TransCanada due to its stronger financial outlook and better ESG performance
▪ Although BEAM has not held Barrick, we have held positions in Franco-Nevada and Wheaton Precious Metals, both of which, on a (0.87%) CTR combined basis, have a similar weight in the TSX Composite relative to Barrick
▪ BEAM elected not to invest due to our negative ESG outlook (0.67%) CTR
52 Advantage’s relative performance
Significantly underperformed peers since purchase
AAV TSX J.E. Port
CAGR (Feb. 2017) (54.2%) (5.3%) (22.7%)
AAV Difference - (48.9%) (32.5%)
Market value lost ($127,502)
120
100 TSX
80
Junior 60 Energy Port*
40
AAV 20 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18
* - Constituents summarized on slide 58 53 Torex’s relative performance
Significantly underperformed peers while we held it
TXG TSX Producers Port. CAGR (Feb – Nov (67.7%) 2.1% (30.0%) 2017) TXG Difference - (69.8%) (37.7%)
Market value lost ($54,520)
120
100 TSX
80 Producers Port*
60
40 TXG
20 Feb-17 May-17 Aug-17 Nov-17
* - Constituents summarized on slide 58 54 Cineplex’s relative performance
Cineplex underperformed the broader market
CGX TSX
CAGR (Dec. 2015) (18.8%) 3.3%
CGX Difference - (22.1%)
Market value gained (lost) ($38,290)
130
110 TSX
90
70
CGX 50
30 Dec-15 Dec-16 Dec-17 Dec-18
55 Whitecap’s relative performance
Significantly underperformed peers since purchase
WCP TSX J.E. Port
CAGR (Jan. 2016) (15.3%) 6.2% 7.8%
WCP Difference - (21.5%) (23.1%)
Market value lost ($42,042)
250
200
150 Junior Energy Port* TSX 100
WCP 50 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18
* - Constituents summarized on slide 58 56 Finning’s relative performance
Underperformed its closest competitor by a wide margin
FTT TIH STINDU TSX
CAGR (Jan. (35.1%) (6.9%) (4.0%) (8.9%) 2018) FTT Difference - (28.2%) (31.1%) (26.2%) Market value ($27,285) lost 120
TSX Industrials 100 Index TIH TSX
80
FTT
60 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18
57 Customized portfolio constituents
Appendix
Junior Energy Gold Producers
Advantage Oil & Gas Barrick Gold Corp.
Birchcliff Energy Ltd. Agnico Eagle Mines Ltd.
Baytex Energy Corp. Alamos Gold Inc.
Enerplus Corp. B2Gold Corp.
Gran Tierra Energy Inc. Centamin Plc.
Kelt Exploration Ltd. Detour Gold Corp.
Meg Energy Corp. Endeavour Mining Corp.
NuVista Energy Ltd. Goldcorp Inc.
Paramount Resources Ltd. IAMGOLD Corp.
Parex Resources Inc. Kinross Gold Corp.
Torc Oil & Gas OceanaGold Corp.
Tamarack Valley Energy Ltd. Pretium Resources Inc.
Whitecap Resources Inc. Torex Gold Resources Inc.
58 Exclusionary Screening
Appendix
Principle 2: no human rights abuses Principle 4: elimination of forced and compulsory labor Principle 5: abolition of child labor Principle 10: no corruption or bribery
▪ Companies producing cluster munitions or nuclear weapons are excluded. ▪ Companies earning greater than 5% of revenues from the manufacture, distribution, or sale of tobacco are excluded.
Serious violations of widely accepted international norms of responsible corporate behavior
Source: United Nations
59 ESG Methods
Appendix Avoiding companies on the basis of traditional Exclusionary Best-in-Class moral values Screening Selection
Active Ownership Thematic Investing
Systematic and explicit inclusion of ESG risks and opportunities in investment Impact Investing ESG Integration analysis (revising forecasts and discount rates)
60 ESG Integration Templates
Appendix
Factors Sectors
▪ Violations of human rights ▪ All Sectors
▪ Lack of Indigenous consultation ▪ Commodity-Based Sectors
▪ Spill response time ▪ Energy and Railways
▪ Transition from coal to low-carbon ▪ Utilities emissions
Other ESG Factors Environmental Social Governance Carbon Intensity and Water Total Reportable Incident Women on Board Usage Frequency Total Energy Consumption Loss-Time Injury Frequency Independent Directors Waste Produced Community Engagement Executive Compensation
61 Equity Holdings
Appendix
Company Name Shares/Par Local Price Market Value % of Total ALGONQUIN POWER & UTIL CORP 4,777 $14.45 $69,027.65 1.73% BANK OF NOVA SCOTIA 2,291 $74.47 $170,610.77 4.26% BROOKFIELD ASSET MGMT INC 3,000 $55.79 $167,370.00 4.18% CAMECO CORP 1,850 $15.84 $29,304.00 0.73% CANADIAN NATIONAL RAILWAY CO 2,386 $109.58 $261,457.88 6.53% CANADIAN NATURAL RESOURCES LTD 4,756 $35.74 $169,979.44 4.25% CANADIAN UTILITIES LTD 1,600 $33.49 $53,584.00 1.34% CGI GROUP INC 2,000 $85.92 $171,840.00 4.29% FINNING INTERNATIONAL INC 4,212 $24.32 $102,435.84 2.56% FIRST QUANTUM MINERALS LTD 6,839 $14.23 $97,318.97 2.43% FRANCO-NEVADA CORP 1,122 $100.32 $112,559.04 2.81% GILDAN ACTIVEWEAR INC 2,385 $44.07 $105,106.95 2.63% INTACT FINANCIAL CORP 1,152 $103.26 $118,955.52 2.97% INTERTAPE POLYMER GROUP INC 3,600 $19.56 $70,416.00 1.76% ISHARES S&P/TSX CAPPED 1,858 $36.49 $67,798.42 1.69%
Source: CIBC Mellon Note: As of January 30, 2019.
62 Equity Holdings (cont.)
Appendix
Company Name Shares/Par Local Price Market Value % of Total MANULIFE FINANCIAL CORP 9,333 $21.05 $196,459.65 4.91% NATIONAL BANK OF CANADA 1,900 $61.65 $117,135.00 2.93% NUTRIEN LTD 1,697 $68.40 $116,074.80 2.90% OPEN TEXT CORPORATION 1,900 $46.41 $88,179.00 2.20% PREMIUM BRANDS HOLDINGS CORP 1,076 $77.34 $83,217.84 2.08% ROYAL BANK OF CANADA 2,184 $100.03 $218,465.52 5.46% SAPUTO INC 3,083 $38.21 $117,801.43 2.94% SIENNA SENIOR LIVING INC 3,552 $17.24 $61,236.48 1.53% STANTEC INC 2,700 $31.14 $84,078.00 2.10% SUNCOR ENERGY INC 5,137 $42.52 $218,425.24 5.46% TELUS CORP 2,924 $46.13 $134,884.12 3.37% TORONTO DOMINION BANK 4,222 $73.73 $311,288.06 7.78% TRANSCANADA CORP 3,606 $55.61 $200,529.66 5.01% TRICON CAPITAL GROUP INC 8,493 $10.27 $87,223.11 2.18% VERMILION ENERGY INC 1,729 $32.09 $55,483.61 1.39% WHEATON PRECIOUS METALS CORP 3,000 $26.87 $80,610.00 2.01% WHITECAP RESOURCES INC 13,950 $4.49 $62,635.50 1.57%
Source: CIBC Mellon Note: As of January 30, 2019.
63 Equity Transactions
Appendix
Date Name Buy/Sell Shares/Par Fill Price Transaction Amount 20190117 ADVANTAGE OIL & GAS LTD SELL -15,125 $2.29 $34,508.75 20190117 ALGONQUIN POWER & UTIL CORP BUY 4,777 $14.13 -$67,656.78 20190117 BANK OF NOVA SCOTIA BUY 2,291 $72.93 -$167,241.63 20190117 CAMECO CORP SELL -1,350 $15.70 $21,045.00 20190117 CANADIAN IMPERIAL BK OF COMM SELL -1,453 $108.43 $157,373.32 20181212 CANADIAN NATIONAL RAILWAY CO BUY 286 $106.58 -$30,631.88 20181231 CANADIAN NATURAL RESOURCES LTD BUY 610 $32.87 -$20,200.70 20190117 CANADIAN UTILITIES LTD SELL -600 $33.20 $19,767.00 20190117 CINEPLEX INC SELL -2,300 $27.97 $64,172.00 20181107 FINNING INTERNATIONAL INC BUY 642 $27.26 -$17,650.92 20181231 FINNING INTERNATIONAL INC BUY 870 $23.76 -$20,821.20 20181107 FIRST QUANTUM MINERALS LTD BUY 1,212 $12.98 -$15,881.76 20181231 FIRST QUANTUM MINERALS LTD SELL -1,393 $10.96 $15,117.77 20181231 INTACT FINANCIAL CORP BUY 122 $99.20 -$12,252.62
Source: CIBC Mellon Note: As of January 30, 2019.
64 Equity Transactions (cont.)
Appendix
Date Name Buy/Sell Shares/Par Fill Price Transaction Amount 20181214 INTERTAPE POLYMER GROUP INC SELL -764 $15.41 $11,623.24 20190117 ISHARES S&P/TSX CAPPED SELL -996 $35.87 $35,576.52 20181214 LOBLAW COMPANIES LTD SELL -1,132 $60.83 $68,709.56 20181231 MANULIFE FINANCIAL CORP BUY 733 $19.34 -$14,322.89 20181214 NUTRIEN LTD BUY 191 $63.13 -$12,207.83 20181231 NUTRIEN LTD BUY 364 $64.01 -$23,449.64 20190117 OPEN TEXT CORPORATION BUY 1,900 $46.09 -$87,726.00 20181214 PREMIUM BRANDS HOLDINGS CORP BUY 1,076 $77.28 -$83,303.28 20190117 ROYAL BANK OF CANADA BUY 272 $98.35 -$26,900.20 20181231 SUNCOR ENERGY INC BUY 529 $38.05 -$20,278.45 20190117 TELUS CORP SELL -525 $45.88 $23,937.00 20181231 TORONTO DOMINION BANK BUY 222 $67.79 -$15,200.38 20181107 TRANSCANADA CORP BUY 399 $51.97 -$20,886.03 20190117 VERMILION ENERGY INC BUY 1,729 $32.71 -$56,707.30 20181214 WESTON (GEORGE) LTD SELL -152 $93.01 $13,987.52
Source: CIBC Mellon Note: As of January 30, 2019.
65 Fixed Income Holdings
Appendix
Issuer Maturity Date Shares/Par Coupon Rate Market Value % of Total 407 INTERNATIONAL INC 5/26/2021 100,000 4.30% 103,570.03 4.31% ALIMENTATION COUCHE-TARD INC 8/21/2020 54,000 4.21% 55,255.74 2.30% BMO MID CORPORATE BD INDEX ETF NM 9,100 NM 145,054.00 6.04% CONSUMERS GAS CO LTD 7/5/2023 46,000 6.05% 51,949.29 2.16% ENBRIDGE PIPELINES INC 4/6/2020 67,000 4.45% 68,428.77 2.85% FARM CREDIT CORPORATION 10/5/2020 45,000 4.30% 46,728.10 1.95% GOVERNMENT OF CANADA 6/1/2041 55,000 4.00% 72,574.47 3.02% GOVERNMENT OF CANADA 6/1/2029 57,000 5.75% 77,097.55 3.21% GOVERNMENT OF CANADA 9/1/2021 24,000 0.75% 23,360.48 0.97% GOVERNMENT OF CANADA 6/1/2025 60,000 2.25% 61,407.08 2.56% GOVERNMENT OF CANADA 12/1/2048 55,000 2.75% 61,929.64 2.58% GOVERNMENT OF CANADA 6/1/2024 81,000 2.50% 83,717.31 3.49% HYDRO ONE INC 1/13/2022 72,000 3.20% 73,074.63 3.04% IGM FINANCIAL INC 1/26/2027 76,000 3.44% 75,868.74 3.16% LAURENTIAN BANK OF CANADA 9/12/2022 50,000 3.00% 49,430.30 2.06% MUNICIPAL FINANCE AUTH OF BC 12/1/2027 74,000 4.95% 86,401.71 3.60%
Source: CIBC Mellon Note: As of January 30, 2019.
66 Fixed Income Holdings (cont.)
Appendix
Issuer Maturity Date Shares/Par Coupon Rate Market Value % of Total NATIONAL BANK OF CANADA 6/30/2022 80,000 1.96% 78,162.86 3.26% PEMBINA PIPELINE CORP 1/22/2024 53,000 2.99% 52,218.16 2.17% PROV OF ALBERTA 12/1/2048 65,000 3.05% 63,420.69 2.64% PROV OF ALBERTA 6/1/2024 110,000 3.10% 113,588.33 4.73% PROV OF BRITISH COLUMBIA 12/18/2020 74,000 3.70% 76,349.22 3.18% PROV OF MANITOBA 3/5/2042 97,000 4.40% 114,322.24 4.76% PROV OF MANITOBA 3/5/2038 81,000 4.60% 96,535.14 4.02% PROV OF ONTARIO 12/2/2046 46,000 2.90% 43,991.90 1.83% PROV OF PRINCE EDWARD ISLAND 9/2/2020 89,000 3.70% 91,247.17 3.80% PROV OF SASKATCHEWAN 6/1/2040 80,000 4.75% 99,598.50 4.15% PROV OF SASKATCHEWAN 9/5/2033 58,000 5.80% 76,879.17 3.20% ROYAL BANK OF CANADA 12/5/2023 110,000 2.33% 108,046.16 4.50% TERANET HOLDINGS LP 12/16/2020 50,000 4.81% 51,436.91 2.14% TORONTO DOMINION BANK 7/24/2024 91,000 3.23% 93,250.89 3.88% YORK ONTARIO REGL MUNICIPALITY 12/15/2025 107,000 2.60% 106,142.77 4.42%
Source: CIBC Mellon Note: As of January 30, 2019.
67 Fixed Income Transactions
Appendix
Date Name Buy/Sell Shares/Par Fill Price Transaction Amount 20181227 PROV OF BRITISH COLUMBIA SELL -118,000 $102.63 $121,104.46 20181227 GOVERNMENT OF CANADA SELL -90,559 $94.98 $86,009.68 20181227 GOVERNMENT OF CANADA SELL -99,000 $98.05 $97,072.87 20181107 GOVERNMENT OF CANADA SELL -40,000 $99.72 $39,887.08 20190122 GOVERNMENT OF CANADA SELL -52,000 $111.86 $58,167.98 20181121 GOVERNMENT OF CANADA SELL -27,000 $106.34 $28,712.99 20181207 PROV OF QUEBEC SELL -210,870 $51.27 $108,108.20 20181207 GOVERNMENT OF CANADA BUY 30,000 $111.65 -$33,495.24 20181227 GOVERNMENT OF CANADA BUY 40,000 $113.93 -$45,570.32 20190122 GOVERNMENT OF CANADA BUY 24,000 $97.85 -$23,484.14 20181207 GOVERNMENT OF CANADA BUY 57,000 $134.40 -$76,606.46 20181227 GOVERNMENT OF CANADA BUY 55,000 $132.98 -$73,141.64 20190122 FARM CREDIT CORPORATION BUY 45,000 $103.79 -$46,705.64 20181121 PEMBINA PIPELINE CORP BUY 53,000 $97.41 -$51,629.42
Source: CIBC Mellon Note: As of January 30, 2019.
68