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Expanding The Toolshed

2021-11-19, Daniel Morgan

On some weekends I get the privilege to work with my family on building things like a tire rack for the garage, a workbench for retooling a small engine, or an experimental aircraft (yes, you read that correctly). I’ve never been much of a handyman, to say the least, thus I am often struck by the confidence my relatives have in their designs while admiring the construction acumen they have honed to bring their visions to reality. Their insistence on working with proper safety gear and implementing the right fail-safes in the process has never made me doubt the legitimacy of their DIY operations. Upon reflection about these experiences, I have come to recognize that there are parallels here to portfolio management and investment research at QV.

Building a proper investment portfolio requires deliberate planning, use of several tools, and systems to check for problems (ideally before they happen). To realize our vision of delivering excellence in investment management and client service, our team routinely employs several time-tested approaches while developing all sorts of new tools to assist us. A rare, fundamental tool which QV Investors has been developing for 25 years now is its collegial culture, which fosters ease within the team to bring forth new ideas and welcome healthy scrutiny. The latter nods to the warning from the American psychologist Abraham Maslow:

“To the man who only has a hammer, everything he encounters begins to look like a nail.” – Abraham H. Maslow

Application of our seven tests in every research report at QV is another time-tested tool which prevents us from being fixated on one aspect of any opportunity, no matter how tempting it may appear. Under the lens of each test, we rank a business relative to the existing portfolio. Ranking enables the use of our benchmarking tools which help make decisions to improve the quality and expected return of the portfolio. Transforming this data, our team can visualize the relative quality and the gap between price and value for stocks in our investment universe.

The monthly risk management audit is another routinely used device in the QV toolshed. Like the needle nose pliers, it dependably serves many functions. One of those is to validate whether the decisions being made are leading the portfolio in the right direction. Using our database of more than two decades of portfolio holdings and market statistics, the Investment Committee has plenty of information to understand each team’s strategy positioning. The audit compels us to step back regularly to review our portfolio construction progress.

A few newer devices which have proven helpful at QV include the “nudge report”, our management change scorecards, and ESG scorecards. The former prompts an assessment of the situation when the share price of a holding declines swiftly, including a review of whether the investment thesis has changed and whether we need to address this change by either refining the thesis or eliminating our position. The second tool mentioned requires an investigation of whether executive leadership changes are being carried out thoughtfully and by a desire to improve operations or strategy. We have needed this tool numerous times this year, with one example being the announcement that Canadian National Railway (TSX:CNR) will be hiring a new CEO. Upon the release of this information, we gathered information from several sources to answer each question in our scorecard, ultimately determining that our reasons for owning it had not been rendered moot nor did the risks of the business materially change. Thirdly, each of our investments are graded on their disclosures, management, and leadership with respect to environmental, social, and governance considerations. This involves reviewing information from various stakeholders, the company, and its industry peers to identify material risks or opportunities within the business. For instance, we see good value in Quebecor (TSX:QBR.B) shares and believe that it possesses a robust franchise, though our assessment of the governance risks associated with it guided us to limit our exposure in the Canadian large cap strategies.

Much like the scene in my family’s garage, the number of tools available at QV is growing while the trusted, foundational ones are still working well. By expanding our selection, our analysis process gains efficiencies and decision making becomes more consistent and effective in different market conditions.

All views and projections are the expressed opinion of QV Investors Inc. and are subject to change without notice. This Update is provided for informational purposes only. QV Investors takes no legal responsibility from any losses resulting from investment decisions based on the content of this Update.


Daniel Morgan | Research Associate

Daniel analyzes investment opportunities and monitors existing holdings for the Canadian large cap strategy.