The Bristol Gate US Equity strategy was recently added to a Canadian Broker-Dealer’s Preferred Manager SMA program. It is a portfolio of the highest dividend growth stocks in the S&P500 derived by leveraging our propriety Machine Learning model to predict dividend growth looking forward over the next 12 months then applying fundamental analysis to drive security selection.
In support of the launch, Bristol Gate’s Mike Capombassis, President, and Izet Elmazi, Senior Portfolio Manager, joined them for a conference call that highlights our firm’s history. Please find the transcript below:
Can you start by telling us about your firm?
Mike Capombassis: Thank you all for dialing in. We are excited and honoured to be a new addition to your platform and we look forward to working hard to earn your trust and help you grow your business.
Bristol Gate Capital Partners Inc. was founded in 2006 and is an employee-owned firm based in Toronto, Canada. The company was initially established to provide new product advice to a major Canadian chartered bank serving High Net Worth individual clients. Bristol Gate manages over $1B for advisors, pensions and institutions as well as through SMA programs and actively-managed ETFs which were launched in February of 2018 including our new Canadian Dividend Growers product. For a little perspective, four years ago our AUM was $150mm so we have experienced significant growth in that time.
Bristol Gate’s flagship US Dividend Growers strategy, which is focused on investing in the S&P 500’s best high dividend growth stocks, has a GIPS-verified track record going back to the Spring of 2009. We are passionate dividend growth investors and are not organized like most investment management companies. We believe in putting the scientific method up front in the Investment Process. Data Science and Machine Learning are part of our DNA and make us better at identifying opportunities that we can provide to support our investors. Our systematic approach combines the objectivity of data science with a rigorous and consistent approach to fundamental research to build concentrated portfolios of companies with superior dividend growth.
Our clients come to us to fulfill an important and complex need in the organization of their lives: growing their income, capital, and protecting their wealth in a world filled with risk.
Can you take us through your investment process?
MC: We follow a disciplined process that combines data science with fundamental research to identify the fastest dividend growers in the market.
Our universe is the S&P 500. From there, we eliminate any companies that are not investment grade rated, that do not pay a dividend or do not have a 3-year dividend history. Eliminating companies with poor balance sheets is some easy yet effective risk management we do upfront in the process.
That leaves us an opportunity set of approximately 300 companies that are input into our Machine Learning model. The model predicts and ranks that group of companies by expected dividend growth over the next 12 months and produces a focused list of the top 65 names which are then handed to the fundamental research team for evaluation.
Our job on the fundamental side, is to deeply understand these companies, their competitive environment, opportunities and risks and how they generate and deploy their capital. We call our fundamental process Productive Capital Analysis (PCA). As part of PCA we also verify the dividend prediction of the model and ensure that the dividend growth is sustainable.
We then construct a concentrated portfolio of 22 equally weighted names.
The fundamental and data science teams work together closely throughout the process, from model development, sharing insights to portfolio construction to ensure we are adequate diversified.
You mentioned that Data Science is an integral part of your firm but how does the addition of Human-driven fundamental analysis enhance your process and how do you differ from other strategies using Machine Learning?
Izet Elmazi: We believe the combination of humans and machines is essential in today’s digital world. It is estimated that more data has been created and captured in the last two years than in all history prior to that. How can you efficiently process the enormous amount of data we are exposed to daily without the use of technology? We don’t think you can and believe that many active managers will come to the same conclusion we did almost a decade ago if they want to survive and thrive in today’s environment.
We use our machine learning technology to efficiently sort through and gain insights from large amounts of financial data to produce a high-quality focus list. We know it’s a high-quality list because our back testing shows that our machine produced focus list beats the benchmark over time.
Our job on the fundamental side is to either increase return and maintain risk, or to maintain return and reduce risk. We do that using our experience and understanding to construct a portfolio of 22 names from the list of 65.
If you think about it, machines are good at calculating, reasoning, and are unemotional. Humans can understand, strategize, use experience and intuition. Our skills are complimentary, and we think the combination of humans and machines and a sound repeatable process is more powerful than either alone.
Our application of Machine Learning differs from most other managers, in that we are not using it for short term trading signals. We are using it to take a longer, forward looking view, answering the question “Who will be the fastest dividend growers over the next year?”.
Why do you believe high dividend growth investing works over time?
MC: We believe that finding high dividend growth stocks is like finding treasure. High dividend growth works over time because our research shows that a good proxy for a stocks total return is the combination of a stock’s dividend yield and the dividend growth. Our work shows that if you can build a portfolio out of the best dividend growers over the coming 12 months over time the portfolio will outperform the market with less downside risk. This is important because our US Dividend Growers strategy is a forward-looking product unlike most conventional dividend funds. We believe dividend growth stocks are singular investments that provide rising income and capital appreciation – and the icing on the cake is that are also inherently less risky.
How do you differ from some of the other strategies?
MC: We are very unique relative to a lot of popular strategies.
Unlike other Dividend strategies, we are agnostic to current yield and focused primarily on dividend growth rate. This means, we start with a lower yield than the market and grow more rapidly. If you compare our strategy to the S&P 500 Dividend Aristocrats, the most well-known dividend growth product in the world, it delivers higher than market current yield with about 5-10% dividend growth. We have around 1.4% current yield with upwards of 20% dividend growth. As a result, we only have two overlapping names.
While investment style is an output of our process and not something we manage to – we tend to chart to being a growthier portfolio. That being said, we are very different from other US growth portfolios which are often overweight to technology and do not deliver as much protection on the downside. As much as we would like to be in technology this year, because these companies generally do not pay dividends (or pay too low a dividend) it is a sector that we are typically underweight to. Furthermore, companies that are able to deliver 20% dividend growth have to exhibit growth in their business but the discipline of doing so makes them high quality companies that are able to handle downside better.
We are also a great complement to a Canadian equity portfolio because of the sectors we are typically underweight to – Energy and Financials. Energy is too inherently volatile to be consistent high dividend growers and Financials are higher dividend yielders but lower dividend growers.
Bristol Gate Capital Partners are passionate dividend growth investors. The flagship US Equity strategy has almost a 10 year track record (inception: May 15, 2009) and the Canadian Equity strategy has over a 5 year track record (inception: June 30, 2013). Both are concentrated portfolios of the highest dividend growth stocks in their respective universe and follow the thesis that If you can build a portfolio out of the best dividend growers over the coming 12 months, over time the portfolio will outperform the market with less downside risk.
This post is presented for illustrative and discussion purposes only. This post 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 post 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, and 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. The information contained in this post is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the post and is subject to change without notice. Every effort has been made to ensure accuracy in this post 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 www.bristolgate.com.