Author: admin

In October 2020, Pierre Daillie of Advisor Analyst.com led a discussion that included Bristol Gate CIO Izet Elmazi as well as other prominent portfolio managers Kim Shannon (Sionna Investments), Greg Taylor (Purpose Investments), and Sri Iyer (Guardian Capital) to discuss where they get their insights, what informs their judgement, and shapes their investment processes.

Important Disclosures

There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at www.bristolgate.com/regulatory-documents.

This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at bristolgate.com.

A Note About Forward-Looking Statements

This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.

These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.

The ultimate goals and purposes of specific foundations and endowments may vary slightly; however, these investments typically aim to provide stable and reliable payouts to support charitable missions and operations, while maintaining the independence from the institution and growing the endowed capital.

Understanding the purpose, requirements, and investment beliefs of your foundation or endowment will drive management of two critical, and often competing, factors: spending target and real return target. An inherent conflict arises.

Endowments and foundations with an annual disbursement quota are facing a difficult set of market conditions. The typical foundation or endowment is required to annually disperse approximately 3.5% of fund assets and spends, on average, 1.5% of fund assets on the annual operational budget.[1]

Depending on the Spending Policy, the requirement of 5% annual payouts may lead to the fund not taking enough risk, resulting in inflation eroding principal asset values.

When it comes to the Investment Policy Statement, a desire to grow the principal value of donated assets may lead the fund to take on too much risk. This approach raises the possibility of impairment to payouts and the risk of risk of not being able to pay out full spending targets in market drawdowns.

In our ultra-low interest rate environment, it is growing increasingly difficult to both grow capital and generate adequate income on investments to meet annual spending targets. A fund with a 40% target allocation in low-yielding bonds and money market instruments will struggle to preserve and grow capital while spending 5% per year. How best to meet the conflicting needs of a 5% annual spending rule and the desire for consistent capital growth while abiding by asset allocation requirements?

Rather than focusing on current dividend yield, a portfolio of companies with consistently superior dividend growth is the most efficient way of providing both sufficient liquidity and capital gains for investors in the current low interest rate environment.

Growing yield on cost is the single most important factor in providing adequate income to liquidity-sensitive investors such as endowments and foundations. The growing yield on cost phenomena allows our investors’ income stream to grow to meet spending targets in a variety of market conditions. The added benefit of this approach is that stock prices historically tend to increase in the long term with increases in dividends.

[1] Source: MIT – Endowment Spending: Goals, Rates and Rules. Mehrling, Goldstein, & Sedlacek

Important Disclosures

A Note About Forward-Looking Statements

When most of us think of dividend strategies, we think of how much income we will receive today with a focus on the current yield. The types of companies that can deliver high yields are often mature companies with consistent, predictable cash flows. These “high” yield strategies are often heavily weighted in sectors like Utilities, Financials, and REITs. Given their level of business maturity, these stocks are considered more Value stocks as their valuation metrics factor in lower but steady growth going forward.

On the other hand, dividend growth strategies tend to have broader sector exposure because of the dynamic nature of where dividend growth can be sourced at any given point in time. As the graph above shows, the dividend growth portfolio (on the left) is a mix of Growth and Value stocks. The dividend growth portfolio is not as beholden to the rotation between Value and Growth. It lies in between. This makes sense, because to deliver a sustainable growing dividend the organic growth of the business itself must be generating the free cash flow to support the rising dividend. The chart below helps illustrate how dividend growth (S&P500 Dividend Aristocrats) fits between typical Growth (Russell 1000 Growth) and Value (Russell 1000 Value).

At Bristol Gate, we identify the fastest dividend growth companies of the highest business quality. The result is a portfolio based on Growth but in a more defensive way and with a better risk profile than the typical secular growth strategies that often do not hold dividend payers.

Often investors wonder where Dividend Growth fits into their personal portfolio. We argue that Dividend Growth holds a place between Growth and Value because the attributes that Dividend Growth strategies bring to a portfolio are uniquely positioned between the two of them. The underlying quality factors of dividend growers may help enhance an investor’s overall asset mix.

Important Disclosures

A Note About Forward-Looking Statements

Throughout the past 20 years buybacks have become an increasingly popular way for senior management to use excess free cash flow generated from business activities. By reducing shares outstanding, buybacks increase the percentage ownership of ongoing shareholders. Unfortunately, buybacks do not treat all shareholders equally.

Buybacks do not carry the same level of commitment as dividends and can be cancelled without the same severity of negative consequences that follow a dividend cut. While in certain circumstances buybacks may be beneficial, they require that management effectively time the market and purchase their shares at a favorable price relative to expected fair value.

Examining the history of buybacks, we can see that companies often implement share repurchase plans when stock prices are higher rather than lower – effectively rewarding selling shareholders, while ongoing shareholders are punished. More concerningly, buybacks are often used to accumulate stock for executive option plans – it is advantageous for executives to buy back stock when prices are high as option strike prices are often considerably lower. Consider the negative impact, for example, executive options to purchase shares at $50 that were recently bought back at $100.

Buyback policies are not consistently aligned with the interests of all shareholders and are often poorly timed. The graph below highlights how recent market volatility has impacted buyback plans in the U.S. market – decreasing over 50% since March. In theory, the market selloff would have been an ideal time to repurchase shares for companies with excess cash reserves; however, the exact opposite occurred.

Bristol Gate invests in companies with growing dividends and a long dividend-paying history. By committing to a dividend policy, our portfolio companies signal a long-term commitment to shareholders by treating all equally. Bristol Gate’s US strategy has achieved an annualized dividend growth rate of over 20% since inception by investing in companies with remarkable ability to increase free cash flow and with strong management teams committed to sustainably returning excess capital to shareholders.

Important Disclosures

A Note About Forward-Looking Statements

Passive index funds are a simple and fast way for investors to access a diversified portfolio. These funds provide the investor with index returns for a low cost. However, not all indices are the same with some being better suited for passive exposure than others.

As an example, the Canadian market defined by the S&P/TSX Composite consists of 230 companies and has historically been heavily weighted to the Energy and Financials sector. On the other hand, the US market defined by the S&P 500 consists of 505 companies that represent a much more broad based economy and therefore balanced index. Often investors fail to realize these flaws before buying the Canadian market passively thinking they are buying a diversified portfolio.

The two charts illustrate the historical sector exposure of the US vs. Canada – as you can see in the bottom graph, representing the Canadian market, there is a notable concentration in Energy and Financials in Canada.

S&P500

S&P/TSX Composite

Given the smaller size of the Canadian market, companies have a tougher time growing into global leaders. Comparatively, the U.S. is home to most of the largest companies in their respective industries. This is not to say that global leaders do not come out of Canada – for example, we have Shopify in e-commerce and CAE in aviation training. However, when a company outgrows the Canadian market and sees success globally the ability for one company to dominate the index is considerably higher than in the U.S.. The best example of this was the Canadian telecom giant Nortel which at it’s height in 2000 accounted for 35% of the index.

In order to avoid these potential pitfalls of the Canadian market, the best solution is to invest in a strategy that does not look like the broad index. Typical active share numbers (a measure of how different your portfolio looks from the index with 100 being completely different and 0 being exactly the same) for Canadian equity funds usually fall into the 50’s[i] – essentially mimicking the index. This is a result of two factors: the first is that given the size of the market large funds gravitate towards the larger market cap names to ensure liquidity and the second is that portfolio managers protect their jobs by providing index-like returns rather than deviating too far from the index.

The Bristol Gate Canadian Equity strategy – with an active share of over 70 – pairs and complements both passive indexes or more typical Canadian equity managers. As you can see below, the sector allocations below show the meaningful difference between the Canadian strategy and the S&P/TSX Composite.

With large weightings in Financials, Energy and Materials, the TSX will perform well in an environment when these sectors are strong. Conversely, our Canadian Equity strategy will trail in this environment. However, the benefit of diversification is that in adding the Strategy to a more index-looking product, when the dominant sectors lag, the Strategy will perform better.

While the breadth of the Canadian market will never be able to match the U.S. market, there are still a number of quality companies across different sectors – some that are widely owned and some that are smaller and under the radar. In a market dominated by certain sectors and few large companies, we believe the importance of decerning investment managers is even more important.

[i]https://cdn.canadiancouchpotato.com/wp-content/uploads/2017/03/Active-Share-Doesnt-LIve-Up-to-the-Hype.pdf

Important Disclosures

A Note About Forward-Looking Statements

Bristol Gate has recently been featured in the following Wealth Professional articles:

Canadian success story that’s grown to $1.75 billion

Every crisis has a silver lining for active managers

The first article speaks to the firm’s tremendous growth amidst the Covid-19 pandemic, and reiterates our investment process: finding the highest dividend growers at the highest quality.

The latter discusses how our portfolio was positioned during the crisis, and the active decisions we were able to execute on in order to benefit the portfolio for years to come.

Important Disclosures

A Note About Forward-Looking Statements

Bear markets can be triggered for any number of reasons. They can last for a number of months or a number of years and can affect the whole market or certain sectors. No two bear markets are the same.

Dividend growth investing has always been a good place to invest in the market over time but following bear market periods it particularly shines. Companies that are committed to growing their dividends because of their quality and disciplined capital allocation weather these storms better and/or recover faster.

Looking at three of the most recent significant drawdown periods of the last 20 years – the early 2000 tech bubble, the 2008 financial crisis and the fourth quarter of 2018 – we will analyze how dividend growth performed relative to the S&P 500 in terms of down capture and time to recover. We use the S&P 500 Dividend Aristocrats as a proxy for Dividend Growth. The Aristocrats is an index the 64 companies (as of March 31, 2020) in the S&P 500 that have increased their dividend annually for the last 25 years.

2000 Dot Com Bubble

In the late 1990s, the advent of the information age and growth of the information technology sector drew speculators into equity markets and created a flurry of Initial Public Offerings. Valuations of companies that had anything to do with the internet rose dramatically. Often these companies had little or no revenues but the fear of missing out meant investors took a leap of faith.

Unfortunately popularity does not always equate to profit and by early 2000, the bubble burst leading to a two-and-a-half-year bear market that lasted from March 2000 to October 2002 which was elongated by the September 11^th attacks in 2001.

How did Dividend Growth perform?

By the time the bear market started in March 2000, the technology sector made up such a substantial part of the index that as the sector started to wane it took the index down with it. However, since these nascent technology companies were early in their life-cycle they did not pay dividends. As a result, dividend growth companies were, for the most part, immune to the pain of the two-and-a-half year bear market. While the broader market saw a drawdown of 47%, dividend growth appreciated until a violent drawdown in March 2003 on the back of the Iraq war. The impact of the tech bubble on the market lasted over 6 years as the S&P 500 did not break even from its March 2000 level until October 2006. By comparison, the Dividend Aristocrats over the same period had more than doubled in value.

2008 Great Financial Crisis

The 2008 Financial Crisis was the worst bear market and recession since the Great Depression in the 1930s. It started in October 2007 and lasted until March 2009 eroding over 55% of the value of the S&P500. The bear market was spurred on by weakness in the US housing market that infiltrated other aspects of the economy and systemically weakened the financial system. Lower mortgage lending standards and increased housing speculation led to a surge in popularity of securitized mortgage backed securities (MBS) that were comprised of subprime mortgages (lower quality with higher chances of default). These MBS’s were then traded throughout the financial system and held on the books of the big banks. When default rates started to rise, there was a realization that these MBS’s were much higher risk than initially thought. When the investment banks Bear Sterns collapsed in March 2008 and Lehman Brothers in September 2008, it shook the entire financial system sending equity markets spiraling downward.

How did Dividend Growth perform?

The bear market of 2007-2009 affected all aspects of equity markets. Even the best performing sector of 2008 (Consumer Discretionary) lost over 15%. Selling was indiscriminate regardless of the fundamentals of companies. As a result, even dividend growth companies were not immune to the drawdown. The Dividend Aristocrats declined over 47% (vs. over 55% for the S&P500). However, it made up for it during the subsequent recovery getting back to break-even 2 years faster than the S&P 500 – April 2010 vs. April 2012 for the S&P 500. Often after these sell-offs, investors focus on companies with stronger fundamentals to get back into equities which prompts the faster recovery of dividend growth companies. Dividend Growth is a good proxy for strong fundamentals.

Fourth Quarter of 2018

While not a true bear market, in the fourth quarter of 2018, we saw a violent correction of almost 20%. The sell-off was driven by a number of factors related to concerns of a of recession in 2019. They included, slower corporate earnings growth, trade tensions between the US and China, and a potential increase in interest rates. It started in October when the market lost 7% but stabilized in November. However, when the market wobbled again in December, momentum continued to drag the market down over 8%.

How did Dividend Growth perform?

Dividend Growth companies performed a little better over the period than the S&P 500. However, given the fear of recession the impact was felt broadly across all sectors of the equity market. As a result, the Dividend Aristocrats declined around 14% while the S&P500 declined 19%. In January 2019, there was a quick recovery fuelled dividend growth companies. The Dividend Aristocrats recovered by February 19^th while the S&P 500 recovered in April.

Looking at the COVID-19 crisis, it is too early to say how the market and dividend growth will fare from peak to trough to peak. However, we can look at the drawdown that took place from the S&P500 all-time highs on February 19^th to the bottom on March 23^rd.

The drawdown that took place was over 33% in a little over a month. It is the fastest drawdown in history and was brought on by panic and fear over the spread of COVID-19 and the ensuing lockdown. While we have not seen a lockdown of this magnitude for over 100 years, fear and panic are nothing new in equity markets. Over the period, even the best performing sector – the defensive Consumer Staples sector – was down 24% suggesting indiscriminate selling similar to what we saw in 2008. Also similar to 2008, this crisis will cause fundamental changes for companies and the economy. However, there is also a case to be made that a number of companies were the “babies thrown out with the bath water” and as we saw in 2008, it is likely that quality companies recover faster.

Volatility is common to all markets – from orange juice to stock markets. It is caused by different factors and fears and can impact companies and sectors differently. While it is impossible to pinpoint the moment when one will take place, it is most important to accept that they will happen and prepare your portfolio for it. A consistent approach that stays the course from peak to trough and back again is always more effective than trying to chase what may be working for a short period of time. Historically, dividend growth provides an attractive place to stay the course. While it might not always be on the way down, it has shown a way to preserve and to grow wealth over time and through all market and economic cycles.

Important Disclosures

A Note About Forward-Looking Statements

FOR IMMEDIATE RELEASE

TORONTO, January 2, 2020 /CNW/ – Bristol Gate Capital Partners Inc. (“Bristol Gate Capital Partners” or the “firm”) today announced the final annual 2019 reinvested distributions for the Bristol Gate Exchange-Traded Funds (the “Bristol Gate ETFs”).

Unitholders of record on December 31, 2019 received notional distributions representing net investment income and/or realized capital gains within the ETFs for the 2019 taxation year. A notional distribution is when the units from a reinvested distribution are immediately consolidated with the units held prior to the distribution and the number of units held after the distribution is identical to the number of units held before the distribution.

The taxable amounts of reinvested distributions for 2019, including tax characteristics of the distributions, will be reported to brokers through Clearing and Depository Services (CDS) within the first 60 days
of 2020. All values are expressed in Canadian dollars, unless otherwise indicated. This information is not intended to provide legal, accounting, tax, investment, financial or other advice and should not be relied upon for providing such advice.

Details of the per-unit reinvested distributions for the Bristol Gate ETFs are as follows:

¹Distribution per unit amount is reported in USD for BGU.U converted as at December 31, 2019

Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Before investing, investors should carefully read the prospectus and ETF facts and carefully consider the investment objectives, risks, charges and expenses of the ETFs. ETFs are not guaranteed; their values change frequently, and past performance may not be repeated. For this and more complete information about the ETFs call 416-921-7076 or visit www.bristolgate.com for the prospectus and ETF facts. Copies of the prospectus and ETF facts are also available on www.sedar.com.

Important Disclosures

A Note About Forward-Looking Statements

About Bristol Gate Capital Partners Inc.
Bristol Gate Capital Partners is an independent, employee-owned, Toronto-based investment management company serving individual and institutional clients. The firm uses predictive machine learning in combination with fundamental analysis to identify high quality companies that have the capacity and willingness to significantly increase their dividends in the year ahead. Bristol Gate Capital Partners currently manages $1.25 billion in a US equity strategy and a Canadian equity strategy and manages two ETFs following both strategies. To learn more information, please visit www.bristolgate.com.

For more information, please contact:

Michael Capombassis
President
416-921-7076 x 248
mike.capombassis@bristolgate.com

TORONTO, December 19, 2019 /CNW/ – Bristol Gate Capital Partners Inc. (“Bristol Gate Capital Partners” or the “firm”) today announced the estimated 2019 reinvested distributions for the Bristol Gate Exchange-Traded Funds (the “Bristol Gate ETFs”). These annual reinvested distributions generally represent realized capital gains and/or excess net income within the Bristol Gate ETFs.

The distributions will not be paid in cash but will be reinvested and reported as a taxable distribution. The reinvested distributions will increase the unitholder’s adjusted cost base for the respective ETF. The ex-dividend date for the 2019 annual distributions will be December 30, 2019. Unitholders of record on December 31, 2019 will receive the actual 2019 reinvested distributions which may vary from the estimated amounts disclosed below.

The actual taxable amounts of reinvested distributions for 2019, including the tax characteristics of the distributions, will be reported to brokers through Clearing and Depository Services (CDS) in early 2020.

Distribution estimates are only approximations, are not guaranteed and are subject to change prior to the final distribution date. All values are expressed in Canadian dollars, unless otherwise indicated.

The estimated 2019 annual per-unit reinvested distributions for the Bristol Gate ETFs are as follows:

¹Distribution per unit ($) amount is reported in USD for BGU.U converted as at December 18, 2019

Important Disclosures

A Note About Forward-Looking Statements

For more information, please contact:
Michael Capombassis
President
416-921-7076 x 248
mike.capombassis@bristolgate.com

Author: admin

CIO Izet Elmazi Panel Discussion at Mindpath’s 7th Annual ETF Conference

The Spending Dilemma – Endowments and Foundations

Fitting Dividend Growth into the Asset Pie

Which Companies Value their Shareholders? Buybacks vs. Dividends

Uncovering the Canadian Equity Market

A Canadian Success Story

Dividend Growth in Bear Markets

Bristol Gate Announces Final Annual Reinvested Distributions for Bristol Gate ETFs

Bristol Gate Announces Estimated Annual Reinvested Distributions for Bristol Gate ETFs

How much do you know about dividends?

LET’S STAY IN TOUCH