Verus International Growth

It's finally here. After almost five months which seemed like an eternity to me, I am happy to announce that our International Growth mandate, managed by Polen Capital out of Boca Raton, Florida, is now up and running and is live as of today, April 5th, 2021. Although it took a considerable amount of time to make this mandate come to fruition, National Bank Financial has been true to its word of allowing us to onboard new managers that we select.

At Verus Financial, we pride ourselves on bringing together some of the world’s most unique and prestigious portfolio managers into one compelling offer. Our comprehensive due diligence process, in-depth analysis, and research have allowed us to offer our clients the apex of investment management. By combining all these managers into a customized portfolio, centered around the individual or institution's objectives and constraints, we have proudly delivered superior risk-adjusted returns for over two decades.

It’s been almost 17 months since we moved our practice to National Bank Financial. In that short period of time, we’ve been able to add six new mandates encompassing eight new portfolio managers.

Polen Global Growth

Damon Ficklin – Head of Team, Portfolio Manager & Analyst

Jeff Mueller – Portfolio Manager & Analyst

Polen International Growth

Todd Morris – Portfolio Manager & Analyst

Daniel fields, CFA – Portfolio Manager & Analyst

Crimson Asset Management

Ken Jesudian, HBA, CFA – Co-Founder, CEO & CIO

Anthony Ferrari, MSc, MPA, MBA – Co-Founder & President

Bristol Gate Canadian Equity/ Bristol Gate US Equity

Achilleas Taxildaris, CFA

Verus Strategic Fixed Income

Cody Gordon, CFA- Portfolio Manager, Wealth Management Advisor

At present we have a total of 9 diversified mandates.

Despite these enormous successes, we are still hard at work in our efforts to bring you a few more mandates that are uncorrelated to the S&P 500 and the S&P/TSX. We are incredibly excited about what the prospects hold for you with our new International Growth mandate. We believe that regardless of your age or risk tolerance, we would like to have every one of our clients have at least some exposure to our new International Growth mandate. The timing and the amounts will vary between clients, but we are hopeful that by the end of 2021, everyone will have some exposure to international markets.

I have been very busy over the last couple of months, getting in touch with each of you to discuss taking some risk off the table as the valuations of North American stocks have become highly elevated. In our upcoming first quarter 2021 Wealth Notes publication, I will write extensively on why we firmly believe that it is prudent to move some equity assets outside of Canada and to take some profits in the United States’ high flying tech sector. In a nutshell, valuations internationally are sustainably more compelling than what they are in Canada and the United States. On my review calls to you, I mentioned that we wanted to look for a new mandate that had significant weights in International Informational Technology companies and healthcare companies.

The Polen International Growth mandate has an approximate weighting of 24% in Information Technology and a 22% weighting in healthcare. You cannot find these types of companies in Canada. Most managers in Canada are chasing the same regurgitated 60 names that comprise the S&P/TSX 60. In my opinion, it is getting harder for Canadian fund managers to add value by switching in and out of the same stocks over an extended period of time. That is a challenging way to add value when you have such a limited universe of companies. The Canadian financial service sector represents 28.6%, and energy represents 22%, which is over 50% of the Canadian marketplace. We think everyone needs diversification away from Canadian banks and Canadian energy names.

Over the last couple of years, I have found it exhausting watching portfolio managers get in and out of the same names repeatedly. It's time to change our strategy. This would not be possible without our move to National Bank Financial. I want to thank Ben West, our Regional Manager and Simon Lemay, Senior Vice President and National Manager, for allowing us to do what we do best. Gentlemen, on behalf of Verus Financial and all of our clients, we would like to extend a big thank you to both of you. Having the ability to do our own extensive due diligence and use my years of experience selecting the best in class/world-class managers separates us from most wealth advisory teams in Canada today.

The two charts above explicitly depict the substantial valuation gap when comparing U.S. stocks to international stocks. The valuation picture continues to overwhelmingly favour Global Ex/US equities. U.S. equities are extremely expensive versus historical valuations. EX-US equities have rebounded, but they remain attractive based on historical valuations. The chart clearly shows the huge valuation gap leading up to the tech bubble and the huge gap on where we’re at today.

International equities have rebounded but still remain very reasonable versus long-term valuations. Also, of interest, is that 90% of countries still trade at least 20% cheaper than the U.S. So, the valuation case is compelling.

I would now like to introduce the two new International Growth Portfolio Managers.

Todd Morris- Portfolio Manager & Analyst

Todd joined Polen Capital in 2011. He is lead portfolio manager of the firm’s International Growth strategy. During his time at Polen Capital he has served as a Research Analyst and the Director or Research. Prior to joining Polen Capital, Todd worked in research and marketing roles with Prudential Insurance and Millennium Global Asset Management, respectively, and served for seven years in the U.S. Navy. During his naval career Todd navigated a warship on three deployments, taught at the U.S. Merchant Marine Academy and served with the U.S. Army in Iraq. Todd received a B.S. in History from the U.S. Naval Academy where he was a student athlete, and an M.B.A from Columbia Business School.

Daniel Fields, CFA- Portfolio Manager & Analyst

Daniel joined Polen Capital in 2017. He is co-portfolio manager of the firm’s International Growth strategy. Prior to joining Polen Capital, Daniel spent eight years in Hong Kong where he worked for GraveKal Capital and Marshall Wace LLP as a Research Analyst evaluating Asian growth companies. He began his career at Fisher Investments as a Junior Analyst analyzing Emerging Markets companies. Daniel received a B.S. in Finance from the University of Idaho and a M.S. in Global Finance from the BYU Stern School of Business and HKUST Business School. Daniel is a CFA charterholder.

At Verus Financial, we have always said and maintained our belief that concentration of assets creates wealth. You would be hard-pressed to find an international portfolio that only has 24 names where their top 10 represents almost 60% of the entire portfolio. When you consider that their benchmark is the MSCI all-country world index XUS is made up of 2,359 names, you will clearly see that this is a very concentrated portfolio. That is one of the main reasons why we selected Polen. When you buy an Exchange Traded Fund (ETF), you basically own all 2,359 names. Having a concentrated portfolio gives you the advantage of creating superior risk-adjusted returns. When looking at two other popular international growth funds, you should know that Fidelity International Growth has 80 names, with the top 10 representing 35%. Vanguard International Growth has 118 names, with their top 10 names also representing 35% of their portfolio. Clearly, there is a huge difference between the structure and mindset of the different managers.

Here is a list of the top 10 holdings including a brief description of what the companies do.

Tencent Holdings Ltd - Chinese multinational technology conglomerate holding company

Alibaba Group Holding Ltd - Alibaba Group is a Chinese multinational technology company specializing in e-commerce, retail, internet, and technology

ICON PLC - Irish-headquartered developer of drugs to the pharmaceutical, biotechnology and medical device industries

New Oriental Education & Tech - New Oriental Education & Technology Group, one of Chinas largest afterschool tutoring and education companies

Medtronic PLC - American domiciled medical device company that generates the majority of its sales and profits from the U.S.

Adidas AG - German multinational corporation that designs and manufactures shoes, clothing, and accessories

Accenture PLC - An Irish multinational company selling consulting and processing services

SAP SE- Shares of German Software company is the world’s leading provider of software applications that enterprises use to run their businesses

CSL Ltd - Global specialty biotechnology company that researches, develops, manufactures, and markets products to treat and prevent serious human medical conditions

Aon PLC - Multinational British professional services firm that sells a range of financial risk-mitigation products, including insurance, pension administration, and health-insurance plans

Here are the distinguishing characteristics of Polen International Growth.

Please note, that they have no energy or commodity exposure and they also have virtually nothing in financials. Also, you can clearly see that they don’t track the index. They have double the weights in consumer discretionary, information technology and healthcare.

As I have mentioned repeatedly over the last 35 plus years, the secret to managing money is to keep your alphas high and your betas low. Clearly, the International Growth mandate does exactly just that. Since inception, which was January 1st, 2017, they have the 7th best alpha, the number one ranking beta, the 5th ranking Sharpe ratio, and the number one downside capture ratio. As a reminder, the Sharpe ratio is the return of an investment compared to its risk. Active share is an intuitively simple way to answer the question: “How active is your Portfolio Manager?” Active share is measured on a scale from 0% to 100%. The higher the number the better. A fund with an active share above 80% is considered to be highly actively managed.

Cody and I will be reaching out to all of you individually when we see the opportunity to add this mandate into your portfolios. As always, should you have any questions or concerns, please don’t hesitate to give Cody or myself a call. Be well, be safe.

Cheers,

Ken