The phrase “controlling the controllables” is often applied to athletes and the pursuit of mental toughness. The pitcher cannot control the umpire’s call; even if the pitch is perfect, the umpire could still erroneously call it a ball. The only thing the pitcher can control is making quality pitches, consistently. The idea is to focus on what can be controlled, and to not allow what cannot be controlled to interfere with mental fortitude. The global pandemic led governments to respond with drastic, rapid, and unprecedented actions. Under this context, management teams across our portfolios were forced to take some form of action, but first had to determine what they could control.
MANAGEMENT TEAMS AT QV PORTFOLIO COMPANIES
Since the onset of the pandemic, the QV Small Cap team has had the opportunity to speak with management teams to assess what actions they are taking in a period of elevated uncertainty. Common themes have been present throughout the conversations. First and foremost, management teams are prioritizing the health and safety of their people. For example, companies with office-based staff saw a shift to work-from-home (QV included) as the early uncertainty of the pandemic was assessed. While this transition may have caused initial momentary disruptions in productivity, it improved as staff largely settled into their new work environments at home. In fact, at some companies, utilization/productivity trends even improved to above normal levels. The swiftness with which companies were able to enact policies and exert control was aided by proactive business continuity planning, conducted in preparation for low probability but potentially high-risk events. QV Canadian Small Cap Strategy holding Stantec Inc., for example, has had a Pandemic Committee in place for the last 10 years. Furthermore, historical IT investments ensured the company would have the capability to transition its entire global employee base to working from home – key for a human capital-driven business.
Management teams further prioritized their employees by ensuring adequate personal protective equipment (PPE) was available for staff. Parkland Corporation, for example, secured PPE, installed plexiglass shields in convenience stores and prioritized increased sanitation. In some cases, companies also provided raises or bonuses to essential workers – for example, Empire Co. (Sobey’s) provided employees with “Hero Pay” raises.
We also saw management teams exert control over expenses and liquidity to ensure that cash could be harvested to weather the near-term uncertainty. Actions on expense management included management teams taking salary cuts, halting discretionary expenditures, and redeploying some staff into alternate roles. Unfortunately, in some cases, layoffs were necessary for savings as business activity halted. However, in most cases, these layoffs were temporary in nature; as companies were able to reopen, they generally brought staff back to work (further aided by fiscal supports). On the liquidity front, we had 9 small cap holdings cut or temporarily suspend dividends. Dividend cuts were a prudent way to conserve capital in the face of immense uncertainty, but were also a show of solidarity with employees who were being temporarily laid off. We also saw capital budgets reduced and, in some cases, capital being raised.
We believe these actions – including proactive investments in preparedness, physical and financial support for employees and the prioritization of financial flexibility – have helped ensure our portfolio companies will endure through the challenges ahead and continue to prosper over the long term.
CONTROLLING THE CONTROLLABLES AT QV
The QV Small Cap team is also focused on what we can control. We found opportunities to purchase and add to businesses at good valuations during the pandemic-induced market sell-off, which helped to improve the portfolio’s risk/reward. However, as the market has recovered swiftly off the lows, we have been forced to acknowledge some of the dynamics around uncontrollables and the impact they are having on our portfolio’s performance relative to the benchmark. For example, lower-quality, momentum-driven equities and gold have led the benchmark’s recovery. The gold sub-index was up 91% in the quarter, contributing over 13% to the benchmark’s record quarterly return of 45.4%. The QV Canadian Small Cap Strategy has no direct exposure to gold miners (compared to the mining-heavy index), as we believe there are more consistent opportunities for quality-over-the-cycle through other compounding businesses. Although it’s difficult to watch gold equities rally from the sidelines, like the good management teams of the companies we own, we are focused on sticking to our process and investing in businesses that exhibit quality and value.