Investment Commentary

Report to Investors 1st Quarter 2021

It has been roughly one year since the S&P 500 hit its low point of the COVID-19 market crash. The last year has been challenging and the human tragedy significant but not all the effects of the virus have been negative. One area where the coronavirus appears to have had a positive effect is on the environment. According to the European Environmental Agency, air quality has seen a dramatic improvement, especially in some of the world’s most polluted cities[1]. Other studies have cited lower water and noise pollution and reduced pressures on tourist destinations and the restoration of related ecological systems[2]. One of the benefits we noticed in our own neighbourhood was the amount of wildlife that roamed the streets once human activity ceased. With the return of the spring this year and our local fox out hunting for its pups, we are reminded of Phil Tetlock’s book Superforecasting: The Art and Science of Prediction and his foxes and hedgehogs analogy.

According to Tetlock, hedgehogs approach current events in a deductive frame of mind. They are domain experts that tend to organize their thinking around big ideas. They try to tackle complex problems with rules of thumb and treat anything that does not fit their framework as irrelevant. Hedgehogs are confident in their forecasting ability and slow to change their views. Foxes on the other hand are pragmatic generalists that entertain ideas that are counter to their views. Foxes recognize the difficulty in predicting the future, draw conclusions from the data and are ready to adjust their ideas as new information arises. Foxes consistently beat hedgehogs on forecasting accuracy. As Tetlock states, foxes pick bits and pieces of big hedgehog ideas and create a mish-mash that on average has more predictive power than the original ideas.

In midst of the COVID uncertainty, our Q1 2020 note ( commented:

Our investment process attempts to remove some of the emotional baggage that can significantly impair decision making during times of stress by using a systematic model driven process to identify high potential ideas…our dividend prediction model consistently processes fundamental, market, analyst and macro data in an unbiased fashion to guide us to where the best income growth opportunities exist. While no model is perfect, and this crisis is somewhat unprecedented, our machine learning model is performing as well as can be expected given the volatility.

With the benefit of hindsight, we can now see if we are more like Tetlock’s foxes or hedgehogs.

In the chart below, we have plotted[3]:

  • Bristol Gate’s median 12-month forward dividend growth prediction for the top 65 dividend growers (blue line).
  • The median 12-month forward dividend growth for the top 65 dividend growers based on consensus estimates (cyan line) as predicted by Wall St. analysts.
  • Actual 12-month forward median dividend growth for the perfect foresight top 65 dividend growers (black line). This group comprises the actual fastest dividend growers at a particular point in time, lagged 12 months on the graph.

Exhibit 1. Bristol Gate and Consensus Dividend Predictions Vs. Actual Results

Source: Bristol Gate Capital Partners, Factset, company reports.

If we take March 31, 2020 data points as an example, corresponding with the last data point we have for the perfect foresight portfolio (black line), Bristol Gate predicted the median dividend growth for the top 65 would be 13.1% for the year ending March 31, 2021. This compared to the consensus estimate of 12.6% at the time. Now that we have passed March 2021 and know the results with certainty, we know the actual top 65 dividend growers grew a median of 18.9%.

Bristol Gate’s forecasts began discounting both the negative impact of COVID-19 and the subsequent recovery earlier and more aggressively than consensus forecasts. Bristol Gate’s dividend growth estimates fell from 18.0% in November 2019 to 16.0% in February 2020, appropriately beginning to capture the effects of the virus and an expected slowdown in cash flows across the market. On the other hand, consensus estimates increased from 14.3% to 14.6% over the same period despite the market having already begun its decline from the peak on February 19th. Bristol Gate’s estimates bottomed in April 2020 and recovered to pre pandemic levels by July. In contrast, consensus forecasts bottomed in September 2020 and have yet to return to pre pandemic levels despite having long cleared the most uncertain of times.

When it comes to forecasting dividend growth, it appears Wall St. analysts are more like Tetlock’s hedgehogs. They are domain experts in their areas of coverage, exude confidence in their analysis and always have a great story to tell. They use simple rules of thumb for forecasting dividends (e.g., next year’s dividend will be this year’s EPS multiplied by some payout ratio) and appear to be slow in revising their predictions in response to new, relevant information both at the onset of the crisis and subsequent recovery.

On the other hand, we at Bristol Gate act more like foxes. We understand reality is complex and use a sophisticated model that incorporates a variety of data sources to help us predict dividend growth. We update our predictions monthly as new data arises, critically evaluate our outcomes and continuously assess new methods, testing and techniques with the goal of getting better. We believe these behavioural traits have consistently resulted in our model demonstrating better dividend prediction accuracy than Wall St. analysts and do not foresee that changing as long as their behavioural biases remain consistent.


Bristol Gate US Equity Strategy (all returns USD)

During the quarter, the US Strategy returned 4.8%, trailing the 6.2% for the S&P 500 Total Return Index. Relative to the benchmark:

  • Our zero exposure to Energy and our overweight in Technology were the largest detractors from an allocation perspective.
  • Roper, Cintas and Moody’s were the largest selection detractors.
  • Applied Materials, Texas Instruments and Home Depot were our largest contributors.

On an absolute basis:

  • Thermo Fisher, Roper and Zoetis were the largest individual decliners.
  • Applied Materials, Texas Instruments and Home Depot were our largest contributor benefiting from strong capital spending by semiconductor manufacturers to satisfy growing demand and a strong housing market.

Exhibit 2. US Strategy Returns & Risk

Net Returns

Two changes were made to the portfolio during the first quarter, along with all positions being rebalanced on January 7-8. Danaher was sold and replaced with Thermo Fisher Scientific. We also added Applied Materials to the portfolio, funding it with the sale of Tyson Foods. See our 2020 Annual Letter for a full discussion on the changes (

We believe our strategy’s recent underperformance has largely been driven by macro trends and positioning rather than any actual shifts in long term fundamentals. Our portfolio has historically had a quality, growth and momentum tilt. Unfortunately, those attributes are generally not rewarded in the early parts of an economic recovery. Like past periods immediately following major recessionary bottoms, much of the rally over the last year has been driven by low quality, high volatility stocks that many investors flock too as fears of widespread bankruptcies dissipate. At this point, we believe much of the bullishness of a reopening economy is priced into that segment of the market and now the fundamentals must catch up to price.

Exhibit 3. S&P 500 Q1/21 & Long Term Factor Returns

Source: S&P Dow Jones Indices.

Over the longer term, the inherent exposure to quality and growth our high dividend growth focus generates has served us well. As Morgan Stanley points out in a recent note, high quality stocks appear to have recently troughed in relative performance compared to the broader market and now look extremely cheap. We believe this bodes well for the prospects of our portfolio. During the Q4/20 reporting period our portfolio delivered 13.8% average EPS growth on 9.5% average revenue growth vs the market 3.6% EPS growth on 3% revenue growth according to Zacks. We expect these trends to continue in the upcoming Q1/21 reporting period and ultimately be rewarded over time.

Exhibit 4. Quality vs. Low Quality

Bristol Gate Canadian Equity Strategy

During the quarter, the Canadian Strategy returned 6.2% compared to 8.1% for the S&P/TSX Composite Index. Relative to the benchmark:

  • Our underweight in Financials and Energy were the largest sectoral detractors. Both sectors were amongst the worst performers last year but accounted for approximately 75% of the Index’s return in the first quarter.
  • Two of our US holdings, Zoetis and UnitedHealth along with TMX Group were the three largest individual detractors. Our US holdings were negatively impacted by a declining US dollar.
  • CCL Industries, Stella Jones and Premium Brands were the largest individual contributors.

On an absolute basis:

  • Zoetis, Alimentation Couche-Tard, and Visa were the largest detractors.
  • CCL Industries, Premium Brands and TC Energy were the largest contributors.

The trends we saw in the US were perhaps more pronounced in Canada with approximately 60% of the Canadian Index exposed to commodity based industries (Financials – rates, Energy – oil/gas, and Materials – metals/minerals/chemicals). As we have highlighted in the past, our focus on high, sustainable and predictable dividend growth generally steers us away from industries that have little control over the pricing of their goods or services and as such, were not surprised with our relative performance in Q1.

Exhibit 5. Canadian Strategy Returns & Risk

Net Returns

Two changes were made to the portfolio early in the first quarter, along with all positions being rebalanced on January 12. Enbridge was sold and replaced with Thomson Reuters. We also added Zoetis to the portfolio, funding it with the sale of UnitedHealth. See our 2020 Annual Letter for a full discussion on these changes (

In February, two additional changes were made. Toronto Dominion Bank and the Royal Bank of Canada were sold and replaced with Jamieson Wellness and InterRent REIT. In Jamieson we acquired a market leader that has demonstrated an ability to consistently gain share in the vitamin and mineral supplements market through innovation and a strong, nearly 100 year old brand. An aging population and health and wellness were global mega trends that supported growing demand for vitamins, minerals and supplements that accelerated during COVID as consumers looked to prevention through immunity boosting and general health supplement products.

InterRent is a growth oriented REIT focused on multi tenant residential buildings. Apartment demand has historically been driven by a number of factors including immigration and international students, both of which took a significant hit in the last year due to COVID-19. This ultimately increased vacancy rates in the company’s buildings and drove down its share price. In response to falling well short of its 341,000 immigration target in 2020, the Canadian government increased its targets over the next three years to 401,000 this year and 421,000 in 2023. We believe many of these immigrants will eventually find a home in InterRent’s units.


Firm Update

With the recent government imposed lockdown in Ontario, our return to the office remains uncertain. That has not impeded our business or growth, however. Our AUM/AUA is approaching CAD $2.3 billion as of March 31, 2021 and is up approximately 50% from the previous peak before the COVID induced market decline.

We thank our clients for their continued support.

Yours sincerely,

The Bristol Gate Team

Important disclosures

Gross returns in this report refer to the Bristol Gate US Equity Strategy Composite and Canadian Equity Strategy Composite. No allowance has been made for custodial costs, taxes, operating costs, management and performance fees, which will reduce performance. Past performance is not indicative of future results. Allowance for withholding tax in the US strategy composite is partially reflected in the composite returns for periods commencing January 2017 and after. The Net returns for the Bristol Gate US Equity Strategy Composite and Canadian Equity Strategy Composite are reflective of the maximum management fee charged by Bristol Gate of 1% and 0.70%, respectively. Past performance is not indicative of future results.

The Bristol Gate US Equity Strategy Composite was formerly known as the Bristol Gate US Dividend Growth Composite until April 1, 2015. The Composite inception date was May 15, 2009. The Composite consists of equities of publicly traded, dividend paying US companies and is valued in US Dollars.

The Bristol Gate Canadian Equity Strategy Composite was formerly known as the Bristol Gate Canadian Dividend Growth Composite until April 1, 2015. The Composite inception date was July 1, 2013. The Composite consists of equities of publicly traded, dividend paying Canadian and US companies and is valued in Canadian Dollars.

The S&P 500® Total Return Index measures the performance of the broad US equity market, including dividend re-investment, in US dollars. The S&P/TSX Composite Index measures the performance of the broad Canadian equity market, including dividend re-investment, in Canadian dollars. This index has been provided for information only and comparisons to the index has limitations.

There is the opportunity to use leverage up to 30% of the net asset value. Leverage is not used as an investment tool to enhance returns, but for cash management needs of certain composite portfolios.

This Report is for information purposes and should not be construed under any circumstances as a public offering of securities in any jurisdiction in which an offer or solicitation is not authorized. Prospective investors in Bristol Gate’s pooled funds or ETF funds should rely solely on the fund’s offering documents, which outline the risk factors associated with a decision to invest. No representations or warranties of any kind are intended or should be inferred with respect to the economic return or the tax implications of any investment in a Bristol Gate fund.

Bristol Gate claims compliance with the Global Investment Performance Standards [GIPS®]. To receive a list of composite descriptions and/or a presentation that complies with the GIPS® standards, please contact us at Bristol Gate Capital Partners Inc. has been independently verified for the periods commencing May 2009 until December 2015 by Ashland Partners International PLLC and from January 1, 2016 – December 31, 2019 by ACA Performance Services.

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.



[3] A universe consistent with our investment process (three years dividend history, investment grade rating, etc.) was used for this analysis.

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