The Atkins Diet: High-Quality, Low-Carb(on)

As part of our ongoing series of articles reviewing key management teams, this time we are featuring David Atkins of the Value Partners group out of Winnipeg running the VPI Canadian Equity

In the world of investment, David Atkins’ approach to managing the VPI Canadian Equity Fund is akin to a well-balanced diet – focused on high-quality, sustainable choices. Despite recent market volatility, Atkins remains committed to his strategy of investing in companies with strong fundamentals, hard to replicate businesses and growth potential. He invests like a business owner and slowly builds the portfolio to be a collection of very good businesses themselves, rather than focus too heavily on the month to month changes of the stock price. 

As of June 2024, the fund’s performance tells a tale of short-term challenges and long-term resilience. While the S&P/TSX Composite boasts a 6.1% year-to-date return, the VPI Canadian Equity Fund is facing a 2.5% loss. However, zooming out to its full 18-year history under Atkins reveals a more appetizing picture, with the fund delivering an annualized return that outpaces the TSX index, even after fees. 

“The portfolio manager aims to acquire the best businesses at prices that are reasonable in relation to expected returns. The focus is on growth through business ownership where each business can grow earnings and dividends. The pool may also invest up to 50% in foreign equity securities.”  

A Curated Portfolio of Market Leaders 

Atkins’ investment philosophy is reflected in the fund’s concentrated portfolio of just 23 companies, a stark contrast to the 226 in the benchmark index. This focused approach allows for deep analysis and conviction in each holding. As an example, two key players in this exclusive club are Royal Bank of Canada (RBC) and Microsoft Corporation. Let’s look at these two as examples of what David and his team believe are important: 

Royal Bank of Canada: A Financial Powerhouse 

1. RBC stands as a cornerstone of the Canadian financial sector and a key holding in the VPI Canadian Equity Pool. The bank’s appeal lies in its: 
2. Market Dominance: As one of Canada’s largest banks, RBC enjoys a stable revenue base and significant market share. 
3. Dividend Growth: The bank has a long history of consistent dividend increases, aligning with Atkins’ focus on growing income streams. 
4. Diversified Operations: From personal banking to wealth management and capital markets, RBC’s diverse business lines provide multiple avenues for growth. 
5. International Expansion: RBC’s growing presence in the U.S. and other markets offers potential for further revenue diversification. 
6. RBC and the other big banks have consistently managed to grow through all sorts of interest rate and economic environments. 

Microsoft: A Tech Giant with Staying Power 

1. Microsoft represents the fund’s bet on the continued growth of the technology sector. The company’s inclusion in the portfolio is justified by: 
2. Market Leadership: Dominant positions in operating systems, productivity software, and cloud computing provide a strong foundation. 
3. Growth Prospects: Microsoft’s Azure cloud platform and gaming division offer significant growth potential. 
4. Innovation: Ongoing investments in artificial intelligence and mixed reality position the company at the forefront of tech innovation. 
5. Consistent Returns: A history of dividend growth and strong financial performance align with Atkins’ quality-focused strategy. 

Recent Investments: Mastercard & Visa Join the Party and kicking the Tire on a well known Canadian retailer 

Mastercard & VISA: More Than Just Plastic 

1. Revenue Machine: Mastercard is raking in over $25 billion in annual revenue, while Visa boasts over $32 billion. That’s a lot of swipes, taps, and online “Submit Order” clicks. 
2. Profit Margins to Die For: With a 45% profit margin for Mastercard  and 53% for VISA, they aren’t just making money; they are practically printing it (legally, of course). 
3. Digital Transformation: As the world increasingly ditches cash for digital payments, they are both positioned to benefit from this long-term trend. 
4. Innovation Pipeline: From blockchain to biometrics, they are both investing in technologies that could shape the future of finance and widen the moat from competitors 

By bringing Mastercard and Visa into the fold, Atkins is making a clear statement about the future of finance and commerce. These companies aren’t just processing payments; they’re building the highways on which the digital economy runs. The addition of these financial technology leaders aligns perfectly with Atkins’ strategy of investing in high-quality, difficult-to-replicate businesses. After all, it’s not every day you can invest in companies that make money every time someone buys a coffee, orders a pizza, or succumbs to a 3 AM online shopping spree. 

Canadian Tire: More Than Just Tires and Hockey Sticks 

When you think of quintessential Canadian companies, it’s hard not to picture Canadian Tire. This retail giant has found its way into David Atkins’ carefully curated portfolio, and for good reason. Let’s pop the hood and see what makes this company a standout in the VPI Canadian Equity Pool. The diversified retail powerhouse is far more than its namesake stores. It’s a retail conglomerate that’s as diverse as a Canadian’s wardrobe needs to be: 

Retail Segment:  

1. Canadian Tire: The flagship brand, offering everything from automotive parts to kitchen gadgets. 
2. Mark’s: Your go-to for work wear and casual clothing. 
3. SportChek: Catering to sports enthusiasts and weekend warriors alike. 
4. Other Known Brands like: Parts Source, NOMA, Woods, Helly Hansen, CANVAS, etc 

Financial Services:  Offering credit cards, insurance, and banking products.  

CT REIT: A real estate investment trust managing Canadian Tire’s substantial property portfolio. 

In addition, Atkins likes:  

1. Diversified Revenue Streams: With its fingers in retail, financial services, and real estate pies, Canadian Tire isn’t putting all its eggs in one shopping basket. This diversification helps stabilize revenues and mitigate risks. 
2. Dividend Growth: The company has a history of consistent dividend increases, fitting nicely with Atkins’ preference for businesses that provide growing income streams. 
3. E-commerce Adaptation: Canadian Tire has been investing heavily in its online presence and omnichannel capabilities, positioning itself well for the future of retail. 
4. Resilience: The company’s mix of essential and discretionary goods has helped it weather economic downturns, including the recent pandemic. 

Building more business inside the businesses: 

According to a recent spring newsletter, 11 of the 23 businesses inside the portfolio have acquired other businesses like RBC buying HSBC, Rogers buying Shaw, Microsoft taking OpenAI, etc. This sort of investment and reinvestment actually amplifies future growth for the business’ owners. 

FundFacts VPI Canadian Equity Pool- Series F (valuepartnersinvestments.ca) 

Navigating Short-Term Headwinds 

So with these and other excellent businesses owned inside the fund, what has happened lately? The fund’s recent underperformance can be attributed to several factors: 

1. The BIG ONE Sector Allocation: Almost no exposure to booming commodity sectors (Resources, Energy etc) has seriously impacted relative performance. 
2. Concentrated Approach: With only 23 holdings, underperformance in a few positions can significantly affect overall returns. 
3. Market Sentiment: Current conditions may favor short-term gains over long-term value plays. 

Despite these challenges, Atkins remains steadfast in his approach. The fund’s holdings boast attractive metrics, including a 3.9% average dividend yield and a reinvestment rate of 55%, higher than the benchmark’s figures. The dividend income produced by the fund’s holdings is expected to grow over 20%. 

Looking Ahead: Quality as a Long-Term Strategy 

While short-term market trends may not always favor Atkins’ strategy, the focus on high-quality businesses with strong financials and growth potential positions the fund for long-term success. The recent additions of Canadian Tire, Mastercard and Visa to the portfolio further demonstrate Atkins’ commitment to companies with robust business models and growth prospects. 

As market conditions evolve, the VPI Canadian Equity Fund’s emphasis on quality may prove to be a recipe for sustained long-term performance. For investors with a patient outlook, Atkins’ “high-quality, low-carb(on)” diet might just be the balanced approach needed to navigate the complex world of equity investing. Just make sure to use your Visa or Mastercard when out getting Woods camping supplies from Canadian Tire! 

Mutual funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and other expenses may be associated with mutual funds are not guaranteed, their values change frequently, and their past performance may not be repeated. 

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This blog was written, designed and produced by Kevin Cork for the benefit of Kevin Cork who is a Financial Advisor at The Absolute Group a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc.