Tuesday, April 10, 2007

These are a few of my favorite things . . .

At a loss for what to post, I decided that I would give you some insight into what a few of my favorite financial products are and why I like them. Today I am highlighting one of my favorite mutual fund managers - Kim Shannon and her company - Sionna Investment Managers.

From the Sionna Investment Managers website:

"Kim founded Sionna in the summer of 2002 and has 23 years ofinvestment management experience. She was previously CIO at Merrill Lynch IM, Canada and led large cap equities at AMI Partners. Kim is past President of the Toronto CFA Society andis currently on the CFA Institute's Canadian Advisory Committeeand the Canadian Coalition for Good Governance's Accounting & Audit Policy Committee."

From the Brandes website:

Sionna's Investment Philosophy and Approach

Sionna is an active investment manager with a value driven, bottom-up approach to stock selection. They manage portfolios with a disciplined, approach that has produced superior long-term returns.

Sionna believes that the stock market reflects human emotions as much as it reflects fundamental value, which leads markets as a whole, as well as individual stocks, to euphoric highs and depressed lows. The Sionna team attempts to take advantage of human emotion by determining the value of securities in a disciplined way that allows them to remain dispassionate.

They believe that stocks tend to revert back to their intrinsic values in the fullness of time, and seek to buy stocks trading significantly below this level and patiently wait for them to revert back to intrinsic value, resulting in conservative portfolios. Sionna manages Canadian equity portfolios in a relative value style.

The Sionna Process

Sionna applies sound, fundamental analysis to find companies that are worth more than their current stock market price. They think in simple terms: buying a dollar’s worth of a company at a price of 70 cents or less. Sionna begins by considering a universe of 500 companies, and through rigorous screening, distills it to about 70 to 140. From this, a focused portfolio of 35 to 60 companies emerges.

Diversification

Sionna believes that diversification mitigates risk, and therefore favours well diversified portfolios, with no more than a +/- 5% differential to index sector weights. However, they also believe that by focusing on stock selection, rather than sector timing, risk to the investor is further reduced. Therefore Sionna will occasionally go overweight in a sector, or take a zero position, depending on the availability of value opportunities.

Why mohican likes them so much?

1) They are disciplined value investors.
2) They recognize great investment opportunities that many others pass by.
3) They keep fees low because of their initial quantitative process.
4) They outperform over the long run and by a large margin. The fund that Sionna previously managed was the CI Canadian Investment fund which had a fantastic record of outperformance - especially during downmarkets.

10 comments:

RentingSucks said...

I mean it all sounds good but I've heard it said that the best fund managers over the long term will only be able to beat the market by a few percentage points. AIC was the disciplined value investing market darling 10 years ago that was kicking butt. I think they've fallen on harder times in the last few years.

I've actually been in a bit of a quandary for quite some time about what to do. If the top fund managers can eke out 2 or 3 percent extra percent out of the market over the long term and most management fees are 2 or 3 percent and most fund managers aren't in the "top" category the math doesn't look so good.

Does that mean you switch to low MER index funds? (That was the recommended strategy a few years back.) Or just suck it up and realize that your performance is going to be market - 2 or 3 percent on average for your mutual funds.

What about switching to a talented broker after your RRSP gets big enough? Can you trust these guys not to churn? Heck it even seems like my mutual fund manager is churning my stuff every year to generate more kickbacks.

Warren said...

How about doing some research and making your own stock picks? Not for everyone, but its a lot more rewarding. I have some funds within my RRSP that are managed, but I also have some smaller investments outside my RRSP that I run myself.

mohican said...

AIC lost their agreement with Brandes to manage their funds about 5 years ago and they really stink now. Brandes is the one kicking butt, getting new talent like Kim Shannon and Sionna.

When shopping for a fund, you need to focus on the manager not the company. The marketing hype rarely lives up to the promise. Fund companies rarely inform you of management changes although there is nothing that affects performance more than a manager change.

Index funds have a place but I am fearful to use them personally because of the downside protection that I get with active management - especially with value managers like Sionna.

Using a broker - meh - not for me - I'd rather do my own research but not everyone has the skills to make wise investment choices.

RentingSucks said...

I have thought about that but it seems like you need a basket of well diversified stocks for this to be a good idea. This also means you probably need a fairly large chunk of cash to properly diversify and not get bled by the feeds. A rough guess would be 10 stocks 10 grand each or something before it makes sense?

I had a lone stock called Bombardier in my portfolio once and it was doing really really well and then it went down the dumper post 9/11. A good lesson about not being diversified.

RentingSucks said...

When I said "feeds" above I really meant "fees".

Warren said...

I recently read Derek Foster's book "Stop Working..." something. Anyway, he focuses on value investing in dividend paying stocks. Particularly recession-proof, Canadian companies (for the tax advantages). He makes some excellent points and you don't have to spread the diversification as far if you are investing in solid companies.

I heartily agree regarding specific mangers.. ignore the company.

Aleks said...

Is the MER factored into the annualized performance or do you need to subtract it yourself to determine the real performance?

mohican said...

aleks - It is illegal and unethical for a mutual fund company or financial advisor to publicly post a return without factoring in the MER. You do not need to subtract the MER from the performance numbers - the numbers are already NET of fees.

warren - i have also read some of derek fosters stuff and it is generally this approach that I like to use - focus on value and dividends. A strategy based on value and dividends typically weather downturns exceptionally well.

blueskies said...

How about doing some research and making your own stock picks?

i was thinking along these lines...

holding dividend stocks directly and not through a mutual fund with the attendant MER charges....

is this a plausible scenario?

Warren said...

mohican,

I also like to include cashflow (dividends). I invest to work less and retire early, not build a giant net worth and then die. :)

blueskies,

There's something to be said for simply looking at the top investments of your favorite funds (either the top 5 or 10 by %), and just buy those.