Scott Jarvis and Brian Durno currently hold just nine stocks in the Investment Partners Fund and tend to carry larger-than-average cash balances. This allows them to take advantage of the often extreme volatility equity markets have experienced of late.

The portfolio managers’ trading system establishes a range for each of these names, whereby they sell as the stock approaches the top end of that range and buy near the bottom. However, that doesn’t rule out continuing to buy as a stock moves lower.

“Rather than being fully invested and moving exactly with the market, we have a desire to keep a cash balance on the sidelines that enables us to take advantage of days like we’ve had in the past few months,” Durno says.

“In general, I think it is a great time to be in equity markets,” Jarvis adds. “That being said, there is probably going to be some good pockets of opportunity for when you want to keep some dry powder and be opportunistic.”

Both have 100% of their investable net worth in the fund. It is long only, uses no leverage, and invests in Canadian equities, U.S. equities and ADRs – all of which are hedged back to the Canadian dollar.

The managers have generally been very active since the fund’s inception on October 1, 2009 and typically turn the portfolio over an average of three or four times a year.

It usually holds between 10 and 20 stocks, with the largest positions being as big as 10%. The managers frequently dip their toes into names with positions of 3% to 3.5%, while ensuring the portfolio is adequately diversified.

They currently have 32% in cash, compared to an average cash balance of 38.7% since inception. However, at times such as this past October, the portfolio was much closer to fully invested.

“As markets are flying through the roof, we tend to be selling into that strength and creating cash, waiting for the next opportunity,” Jarvis says.

He explains that they only invest in companies with three common characteristics. They must have high trading volumes, which allows the managers to get in and out without affecting the market price. They must also have strong balance sheets because when times are tough, those that don’t “really get into trouble,” Jarvis says. Thirdly, the managers focus on companies with solid earnings and return on equity. In other words, high-quality companies.

As a result, they are agnostic on the broader market most of the time. Instead, the managers focus on a list of the world’s largest 700 companies, determine an estimate of their intrinsic value, and monitor that list closely.

“We’re more responsive to what is happening in the market, as opposed to trying to guess what the next wiggle will be,” Durno says. “But when you have a market like we’ve had in the past little while, you get lots of stocks that are starting to approach more attractive valuations. We may not have overlying macro trading strategies, but we definitely pay attention to the big picture, and we’re not out of the woods yet.”




The position: 32% of the portfolio

Why do you like it? This cash position reflects the managers’ view that investors should not want to simply buy-and-hold with 100% exposure to stocks in markets such as these.
“We like to keep dry powder. That is important for any investor because opportunities do show up,” Jarvis says. “Particularly with what is happening globally, I think we’ll continue to see opportunities in the short term.”

Biggest risk: If the market continues to rally.

EnCana Corp. (ECA/TSX)

The position: Top 5 holding

Why do you like it? The managers consider EnCana to be the premier natural gas company in North America.
“This is when we want to be buyers of a blue-chip company like this – when natural gas is out of favour,” Jarvis says. “If you’re going to be buying into weakness like this, you want to be with one of the strongest companies in the industry.”
Durno points out that oversupply issues tend not to last forever, particularly with depleting natural resources.
“The market may be fixed on the data points right now, but EnCana has got some great properties and its valuation is attractive,” he says.

Biggest risk: Continued weakness in natural gas prices.

Royal Bank of Canada (RY/TSX)

The position: Top 5 holding

Why do you like it? The managers consider Royal Bank to be the best bank in Canada and continue to buy it on weakness as the company has been knocked off its pedestal.
RBC recently reported strong earnings, so the managers think it looks even better than it did a week ago.
“They did sort of get penalized because their U.S. experiment wasn’t all that successful,” Durno says. “Over the longer term, they’ve strengthened their market position through all the weakness globally.”

Biggest risk: Pressure on the European or U.S. banking sector may negatively impact valuations of Canadian banks.




The position: Avoiding exposure

Why don’t you like them? Despite being able to have as much as 50% of the portfolio in bonds, the managers have maintained zero exposure since inception.
“Most bonds have had a pretty strong couple of years relative to equities, so we’d be sellers of bonds and buyers of equities, in general,” Durno says. “Stocks have been pretty beaten up, so it’s a good time to do some rebalancing.”
He adds that inflationary pressures in the next three to five years should cause some concern for bond investors.

Potential positive: If GDP stays slow and the macro environment remains ugly, bonds prices could stay up for a lot longer.