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Slip into something more comfortable and delve into personal finance with Josh Sheluk and Colin White, experienced portfolio managers at Verecan Capital Management. Each episode demystifies complex financial topics, stripping them to their bare essentials. From investment strategies and financial planning to economic headlines and philanthropic giving, delivered with a blend of insight, transparency, and a touch of humour. Perfect for anyone looking to understand and navigate their financial future with confidence. Subscribe now to stay informed, empowered, and entertained.
Verecan Capital Management Inc. is registered as a Portfolio Manager in all provinces in Canada except Manitoba.
Episode Summary:
In this podcast episode, Kathryn Toope, VP, Marketing and Communications interviews Josh Sheluk, the Chief Investment Officer of Verecan Capital Management Inc, about the company's investment process and philosophy. Sheluk explains that their investment philosophy is rooted in the belief that the future is unpredictable, and they do not attempt to forecast it. They take a collaborative approach to decision-making and believe in diversification, downside protection, and robustness. They assess and mitigate risks in their investment portfolios and evaluate performance on both an individual and aggregate basis. They adjust their strategy based on performance results, but also consider other factors such as the underlying reasons for outperformance or underperformance. They also discuss the steps they take when deciding to buy or sell an investment and the importance of conducting thorough research and due diligence.
Speaker 1:
You are about to get lucky with the Barenaked Money podcast, the show that gives you the naked truth about personal finance. With your hosts, Josh Sheluk and Colin White, portfolio managers with Verecan Capital Management Inc.
Kathryn Toope:
It's actually Kathryn here with Josh today. I am hijacking the podcast to sit down with Josh in his role as our chief investment officer and have him talk about Verecan's investment process and investment philosophy. Josh, just in case there are one or two people out there who aren't familiar, can you introduce yourself and describe your role at Verecan Capital Management Inc?
Josh Sheluk:
Yes. I'm Josh Sheluk. I'm the Chief Investment Officer for Verecan Capital Management. The chief investment officer's main responsibility is to be the ultimate decision maker for the investment process and philosophy and investment decisions that get made on behalf of our clients. Verecan Capital Management is a part of the Verecan group of companies and overall we are an organization founded to provide financial advice for our clients. That covers a wide variety of different topics including portfolio management, investment advisory, tax planning, financial planning, insurance, and mortgages as well.
Kathryn Toope:
Great, thank you. So diving right into probably what is the most important or guiding factor for us, can you describe the investment philosophy and how it guides your decisions as CIO?
Josh Sheluk:
Yeah, absolutely. Our investment philosophy is really rooted in the idea that the future is unpredictable. It seems like an obvious statement, but there are far too many investment philosophies out there that seem to focus on the idea that we have some ability to forecast the future. We are humble in the sense that we admit that we cannot and will not try to forecast what's going to come. Once you admit that you can't forecast the future, it gives you the freedom to take a little bit of a more open-minded and broader approach to the investments that you're selecting. And largely that comes down to the belief that there is no one best investment, no best strategy, no best investment style. It's some combination of all of these things that is ultimately going to give us the best results for our clients.
Further to that, we are very collaborative in our approach. We believe deeply in our philosophy that having multiple people, multiple experienced people, multiple educated people, multiple people that are really focused on this investment aspect of the business, is going to help us come to better results for our clients than any one of us could individually.
Kathryn Toope:
We talk a lot in the podcast about various biases that impact people's decision-making across a broad spectrum, not just as it regards their finances. Does having a team approach, especially a large team, do anything to mitigate those risks?
Josh Sheluk:
You bet. Bias is inherent in every human being, everybody with an emotion anyway, which I think is all of us. And having multiple people on the team with different backgrounds, different experiences, different tendencies, different personalities, is going to help smooth out some of those biases that exists. Because if I have a bias for one thing, somebody else may have a bias that tilts a little bit in the other direction. And by taking a collaborative approach, one where we debate any of our investment ideas and their merits, it's going to help us address some of each other's biases and again, remove them from investment decision making.
Kathryn Toope:
What are the key principles that drive your investment philosophy?
Josh Sheluk:
So taking our philosophy for what it is, there's really three key principles that come into every investment decision that we make. And if you go back to our philosophy, I think it'll be very clear why these principles exist. First and foremost, it's diversification. Again, if you assume that our philosophy is correct and that the future is not predictable, then you need to build a diversified and resilient portfolio, one with natural contradictions into it because we don't know what's going to happen next. So an intense focus on diversification is absolutely paramount to our investment process. The second part of it is a focus on downside protection. This doesn't mean the portfolio is never going to go down in value. I can in fact guarantee that it will from time to time go down in value, but it does mean that we are avoiding the blowups, avoiding the catastrophe because a big part of the game is just staying in it as long as possible to allow compounding to take effect.
And the third principle that every decision is made by is one of robustness. And what I mean when I say robustness, it's something that is proven or as close to proven as you can get in the sense that there is not only a long track record of this type of approach being sensible and being value add from an investment perspective, but also some theory and rationale to back up why that is the case. If you're mirroring practice head theory together and getting the same consistency in your results, then that's going to lead to a robust outcome and something that is likely to be repeatable going forward.
Kathryn Toope:
And that leads us to the next question, which is how do you identify those potential investment opportunities?
Josh Sheluk:
It's all kinds of things really, but if I had to broadly separate all of these things into two categories, they come to two very different approaches. The first is us going out into the world as an investment team and bumping into good investment ideas. And really we don't know which investment idea is going to be good and bad before we bump into it. So we just bump into everything that we can and that helps us take some things away that are good. The few and far between that are interesting for us, but more often than not, it's an idea that we don't want to touch.
The second part of it is sometimes there's something very specific that we're looking for, and so we can do a very detailed and specific search for that type of investment. So you have two approaches. One is very, very broad and very, very unspecific, and the other is the complete opposite, very specific and very targeted.
Kathryn Toope:
Can you share an example of a specific need that we've had recently that you had to go searching for a solution for?
Josh Sheluk:
Yeah, absolutely. So over the past year we have identified that one of the mutual funds that we invest in, the active mutual funds, has had a lot of turnover in their investment personnel. And these are key personnel, people that are responsible for the decision-making at the firm as it relates to the investment portfolio. And not only as it relates to the investment portfolio, but for the direction of the firm as a whole. Although this investment has been quite a good performer over the years, it's something that gives us a little bit of discomfort. It's part of our ongoing due diligence process to continually evaluate every investment that we have in the portfolio. So here we see a specific need to replace this investment. To look for something that is in the same category, the same type of bucket that we think is going to deliver us good results just like the last investment that we've had, but one that we can feel more comfortable about the structure and the ownership and the decision-making going forward.
Kathryn Toope:
Can you tell us what data and factors you consider when conducting research?
Josh Sheluk:
Yeah. Again, it's all kinds of factors and data and it's really dependent on the type of investment or type of decision that we are analyzing. For an individual stock, for example, we're going to do deep fundamental research on that company and its industry, including things like where do we project the growth of that industry to go? Do we expect prices to increase or decrease in that industry? Do we expect volumes to grow? Then it relates to that company in the sense that do we expect that company to grow its share of revenue or its market share for the business? Do we expect that company then to grow its revenue? We can look at all kinds of things related to that specific company as it relates to its balance sheet, its income statement, its cashflow. We're projecting not only the growth of its revenue, but the growth of its margins and its capital intensity, its need for capital.
All of these things will ultimately get us to what we think is a reasonable target for that company. As it relates to a mutual fund, and I'll just broadly refer to all types of funds where it's a basket of investments, we'll look at a different set of criteria. We'll look at what we call our 5 P's. 5 P's stand for process, people, product, portfolio and performance. And just so you know, performance is specifically designed to be the last of those 5 P's because it's the last thing that we look at and maybe the least important of the five.
Process relates to how they make investment decisions. People relates to the personnel that they have making decisions there. Products are things like costs, how the product is structured doesn't make sense for what we want to accomplish for our clients. Portfolio is what the output is actually from all of those things. How does it manifest itself into an actual investment for the client? And lastly, performance is quite self-explanatory. How has that investment performed in the past?
And lastly, I'll mention the macroeconomic and bigger picture view that we take of the world when making investment decisions. And we have some key indicators that we look at that we think are maybe you can foreshadow a little bit as to what can happen in the future and this will help guide us with our asset allocation decisions. Do we tilt one way into the wind or maybe the other way a little bit away from the wind?
Kathryn Toope:
Can you give a little rundown on why performance is last?
Josh Sheluk:
There's a reason why every financial industry publication has past performance is not an indication of future results stamped on it. It's because there's not a lot of correlation between what's happened in the past and what's going to happen in the future for a specific investment. So understanding all of those other qualities and characteristics related to an investment before you try to look at performance is going to be more helpful when we're making decisions about the future. Unfortunately, we are not making decisions for the past. Hindsight's 2020 it would be very easy for us to make investment decisions if all we had to do is pick the best performing one.
Kathryn Toope:
So what you're saying is performance can be impacted for a reason that doesn't signify anything relevant to the underlying investment?
Josh Sheluk:
Yeah. Performance can be influenced by things that exist in the world that have nothing to do with the merit of the individual investment that you're looking at. Just the same way that one of the best athletes in the world can go through a stretch of time where they're not scoring points or not performing up to their standards. There could be all kinds of reasons for that. And that doesn't necessarily mean they're a bad player or no longer should be a professional. It just means that they're going through this period of time where it hasn't been up to their expectations.
Kathryn Toope:
Can you share an example of a recent investment decision that you made based on this total analysis that you do?
Josh Sheluk:
Sure, absolutely. So recently we have purchased an individual stock for our client portfolios called American Tower. This is a stock that we started researching over a year ago. It came to us through what we would call a screen. So looking for any stock really with specific criteria, things that we find are often predictors of a stock that might be of interest to us. And we did the research over a year ago and we did an in-depth dive on the stock at the time and identified it as a company that we thought had some good growth potential, but it was at a price where we didn't quite want to purchase it yet we didn't see enough upside for our investors. And when you're setting prices for individual stocks, it's always a bit of a ballpark estimate. You don't know exactly what price the stock should be, so you try to make conservative estimates and you try to give yourself enough margin of error.
So even if you're a little bit off with your target price, you're still going to get satisfactory outcomes for your clients for the investment. And we sat on this investment for just about a year. Sat on our watch list, we monitored it on a regular basis and held off until it reached that price, that target where we thought there is now sufficient upside for us. The market is showing us that the things that we want to see from it, the timing is right to purchase this investment because again, we do see the potential for it that is sufficient and gives us enough margin of safety that we're comfortable dipping our toes in.
Kathryn Toope:
Now can we touch a little bit on what exactly a deep dive is? Because I think I'm confident that not everyone realizes the lengths to which the team goes.
Josh Sheluk:
Yeah. I would say that no investment goes into our portfolios without dozens of hours of thought research and debate, and some it's several dozen and others it might just be one doesn't. But there's a lot of time and effort and thought that goes into any investment decision. Typically, we're starting with a high level overview on both a qualitative and quantitative basis of any investment that we're looking at. That could be relying on our data sources that we have to pull information, doing analysis and calculating ratios and looking at the factors and qualities of this investment that we find are most pertinent to it as a potential investment. From there, we're often doing, I guess what we would call boots on the ground research even though boots are often virtual these days. And we will try to do an actual interview with the manager or individuals that represent this potential investment opportunity.
And that's often eyeopening because when we do that, we're trying to challenge our original thoughts or our original thesis or answer any questions that we have remaining after that initial qualitative and quantitative analysis. From there, once we decide that an investment decision could be a potential addition to our portfolio, we bring it to our investment committee. Our investment committee is a group of like-minded, but different individuals on our team that meet every week and we debate the merits of any investment that goes into our portfolio.
And when we're meeting on a weekly basis, we are looking at what's happening in the world, what's happening in our client portfolios, and deciding if we need to make any changes to reconcile those two. So if an investment decision, a potential investment gets discussed at that meeting, there is still much debate to be had about whether it can fit in the portfolio. And ultimately if it does, then we can move on to the execution phase and implementation.
Kathryn Toope:
Let's shift gears slightly and start to talk a little bit about risk management. How do you assess and mitigate risks in our investment portfolios?
Josh Sheluk:
So at every investment that gets put into the portfolios, we do an explicit or implicit assessment of the risk. And with individual stocks, for example, there's an explicit and quantitative assessment of the risk for that individual position. For fund type positions, it's more of a qualitative assessment of the risk of that position as a whole. But more important to me than the individual assessment of risk for an individual position is the assessment for risk of the portfolio as a whole. And a big part of that comes down to, again, the idea that we can't predict the future.
There's a saying that goes, "That risk is what's left over when you thought of everything," and that fits in nicely with our overall philosophy. So understanding that we don't know what's going to happen next, we need to build a resilient portfolio and to build a resilient portfolio, you almost need to build natural contradictions into your investment selections. So when we look at portfolio risk as a whole, it's trying to understand what could potentially go wrong where this whole set of investments is not going to perform up to our expectations.
Kathryn Toope:
And in the decision making process, could we talk about what the steps are that you take when you're deciding to buy or sell an investment?
Josh Sheluk:
Yeah. So step one would be idea generation, and this is actually identifying the potential investment idea for inclusion in the portfolio. And as we talked about before, there's a wide variety of different ways that we'll go about that, but bottom line is we're always looking for interesting investment ideas, ones that can be additive to our portfolio. Step two would be to do our due diligence. This is all the detailed qualitative and quantitative analysis that we feel that is needed to completely vet this investment idea as a potential addition to the portfolio.
Step three I would say is to consider how this investment idea can fit within our portfolio because not every good investment idea is necessarily a good fit for what we're trying to accomplish. As an example, if you already have a pickup truck, there's probably not much sense in having a second pickup truck. You can only drive one pickup truck at a time.
And lastly, the implementation phase. We would bring any investment idea that we think fits well within the portfolio and that is value add over time to our investment committee to debate its merits to further challenge the idea that it should be a part of the portfolio. And once they get that final stamp of approval from the investment committee, then we can move on to execution and actually putting it into the portfolio as a part.
Kathryn Toope:
Jumping back quickly to something you said at the beginning of that, you said interesting investment ideas. Now I know that you don't mean the same thing many people listening to this will think you mean by using the word interesting. So what is an interesting investment idea, Josh, and what things out there seem interesting but are not interesting to you?
Josh Sheluk:
Interesting to us is something that has a demonstrated track record of adding value and that we can properly model or having a potential to add value in the future. And this differentiates an interesting investment idea for us from what many in the media or popular culture might think is an interesting investment idea. Interesting in the mainstream often relates to a flavor of the day type investment. What's interesting in the moment? What is doing very well right now? Often the best performing investment is the most interesting investment, which is totally contrary to how we think about the world. So we take a much more reserved approach and a much more disciplined and a much more academic approach to our assessment of interesting.
Kathryn Toope:
So now that we've discussed everything that it goes into building the portfolio, can we discuss a little bit about what you do to evaluate the performance?
Josh Sheluk:
We evaluate investment performance on both an individual and an aggregate basis. Every individual investment that goes into our portfolio has an appropriate benchmark assigned to it, and we're consistently comparing that investment to that benchmark to see if it's outperforming or underperforming. Secondly, we compare to a relevant benchmark at an aggregate level, and that means combining the stocks that we select and seeing if they're value add versus relevant benchmarks. We will look at the equity side, the stock side in aggregate of our portfolio and compare it to a relevant equity benchmark and we'll do similarly on the bond side of the portfolio.
And then at a very large scale bird's eye view level, we'll look at our balanced portfolio or interaction between the stock and the bond part of our portfolio and see again, if we're adding value versus a relevant benchmark. Every decision, every benchmark is chosen to give us some insights into how that investment is performing, but also how we're making investment decisions. How effective are we at making those investment decisions and are our investment decisions adding value over time.
Kathryn Toope:
And or how do you adjust your strategy based on performance results?
Josh Sheluk:
So maybe not in the way that you would think. It's not going to be a knee jerk reaction to something that's underperforming or outperforming. If something is underperforming, there could be very valid reasons for it's underperformance. It could just not be the right environment. Maybe something very specific happened to lead to its underperformance. When something is not performing as expected, we look to then understand why is it not performing as expected? Is it a reason that we think is just transitory, it's a temporary underperformance for reasons that we can understand and explain, or is it something that's going to be more permanent? If it's something that is going to be more permanent, then obviously that's our inclination to make a change.
When something underperforms, we want to understand why it's underperformed. If we can understand why it's underperformed and are comfortable with that explanation, then often we'll keep holding it. If something has underperformed and we can't understand why it's underperformed, often that's a reason for us to move on from that investment. And similarly, if something has underperformed and we know exactly why it's underperformed and it's something that we don't like, that we didn't expect to happen, then that's another reason why we may move on from the investment. So performance is a good guide. It's not an absolute, it doesn't tell you exactly what to do. It usually tells you just that you need to dig deeper and try to understand more.
Kathryn Toope:
And how does that apply to outperformance?
Josh Sheluk:
Well, similarly, outperformance may or may not tell you anything about how an investment has done. In the same way that underperformance can be explained, if you can understand outperformance and something is outperforming for valid and understandable reasons, then that's great. That's actually exactly what you want from an investment is one that is outperforming for reasons that you can understand. There are times when something outperforms and you still are not exactly clear why or it's outperformed and it's unexpected. You wouldn't have expected something to outperform in that type of environment.
And interestingly, both of these reasons are again, create an impetus for potentially looking to move on from an investment. I think ultimately you want to understand an investment and understand the types of markets and types of environments it's going to perform well in and not perform well in because then you can build a properly structured portfolio. If you choose an investment and you can't understand when and what environments it's going to outperform or underperform in, then that means that you should maybe be looking at something else as a piece of the portfolio.
Kathryn Toope:
When we're talking about over performance or outperformance and underperformance, to what extent does the process that we have already put in place help to ensure that the portfolio doesn't become underweight or overweight in a position simply because of overperformance or underperformance and the desire to capitalize on what you may believe or know leaves room for growth, but it changes the quality of the overall portfolio?
Josh Sheluk:
Closely related to performance evaluation is also understanding how that performance has impacted the underlying positions in the portfolio and their relative weight within the portfolio. Part of our risk management approach is to ensure that no position gets too large of a weight in the portfolio relative to its merits as an investment. So a period of outperformance could lead to a decision to scale back on an investment for no other reason than it's prudent risk management.
Similarly, a period of underperformance could lead to a position being a lower weight in the portfolio or lower exposure than we want. If we've done our due diligence properly, a period of underperformance for a position that was initially value add would mean that that position could be potentially even more valuable as a part of the portfolio. But now that it's a lower portion of the portfolio, we may need to add to it to make sure that that idea is well represented in the portfolio. If our initial thesis hasn't changed at all.
Kathryn Toope:
And have we run into a situation where we have seen an investment outperform and it has become overweight in the portfolio, we still saw room for growth in it, but we had to scale back to be prudent overall and to stay within our investment philosophy and process.
Josh Sheluk:
Yes. We've had several stocks that have grown as a portion of the portfolio quite rapidly because individual stocks can move quite quickly relative to other investments in the portfolio. And those individual stocks. It's often that our thesis hasn't changed. We still believe that there's upside. We still believe that the investment has merit as a part of the portfolio. We still believe it's a good solid company to hold onto, but the percentage has become so great as a part of the portfolio that we need to sell or need to scale back on that investment regardless of our beliefs.
Because again, we don't know what's going to happen in the future. All of a sudden there could be a global pandemic that nobody's anticipated and that could seriously impact that individual stock to an extent that it's representing too much of a part of the portfolio and has too much weight or the future results. As we said earlier, part of building a resilient portfolio is building one that is not going to blow up in any way, shape or form depending on what happens in the future. So prudently, we scale back on positions as they become too large of a part of the portfolio for our comfort level.
Kathryn Toope:
And when something does outperform or underperform and you're seeking to understand the underlying reason, if it's not immediately apparent, I assume you go back to the exact same steps. Originally, you do a deep dive, you talk to the people involved. Is that correct?
Josh Sheluk:
If it's not immediately apparent why something has outperformed or underperformed, then we go back to our initial steps of our investment process. We go back to our qualitative and quantitative analysis. We go back to our deep dive trying to meet with the company or meet with the organization that manages that fund and ask all the hard questions that again, are not immediately apparent. We're essentially reverse engineering perhaps to try to get to the root cause of what we're seeing.
Kathryn Toope:
Josh, thank you so much for your time. I know we went a little over. I really appreciate this and I believe that this will be valuable and very interesting to our listeners and our clients. Thank you so much.
Colin White:
If you're breaking a sweat trying to figure out what your financial advisor's talking about, you're not getting the service you need. You probably hate trying to get an answer from them, but you also think moving your accounts will be a headache and it might be, but working with don't rock the boat wealthplanning.com or AU isn't exactly stress free, is it? Call us. We will demystify the world for you.
Kathryn Toope:
Verecan Capital Management Inc is a registered portfolio manager in all of Canada except Manitoba. So sorry, Manitoba. Nothing in this podcast should be considered as a solicitation or recommendation to buy or sell a particular security. Statements made by the portfolio managers are intended to illustrate their approach and are meant for information and entertainment purposes only.
Speaker 5:
This should not be construed as legal, tax or campaign advice. This podcast has been prepared for information purposes only. The tax information provided in this podcast is general in nature, and each client should consult with their own tax advisor, accountant, and lawyer before pursuing any strategy described as each client's individual circumstances are unique. We've endeavored to ensure the accuracy of the information provided at the time that it was written. However, should the information in this podcast be incorrect or incomplete, or should the law or its interpretation change after the date of this document, the advice provided may be incorrect or inappropriate, there should be no expectation that the information will be updated, supplemented, or revised, whether as a result of new information, changing circumstances, future events, or otherwise. We're not responsible for errors contained in this podcast or to anyone who relies on the information contained in this podcast. Please consult your own legal and tax advisor.