After a muted second quarter, Canadian equities performed very well in the third quarter of 2024. There were no summer doldrums this year for Canadian stocks, as Q3 featured substantial volatility as well as continued merger and acquisition activity.
By Jordan Zinberg, President & CEO, Bedford Park Capital
Drilling down into Canadian equity market attribution for the third quarter, there was a clear shift in investor preferences with a few previously out-of-favour sectors generating strong outperformance. Unsurprisingly, interest rate sensitive sectors such as telecom and real estate were standout performers, given the current downward trajectory of interest rates.
With respect to performance, the fund had a solid yet unremarkable third quarter. While still a respectable quarter in terms of absolute return, the fund underperformed the Canadian small cap indices on a quarterly basis for the first time in a while. That being said, fund performance year-to-date remains substantially ahead of these same indices. For the third quarter of 2024, the Bedford Park Opportunities Fund gained 3.9%, net of all fees and expenses.
Bedford Park Opportunities Fund performance v Benchmarks
| Q3 2024 | 2024 YTD | |
| Bedford Park Opportunities Fund* | 3.9% | 42.5% |
| S&P/TSX Small Cap Total Return Index | 8.4% | 18% |
| S&P/TSX Small Cap Index | 7.8% | 15.8% |
“The person who turns over the most rocks wins the game.” —Peter Lynch
Certain pieces of investment wisdom have stayed in my mind throughout my career. The above quote by Peter Lynch is one of them.
Ultimately, Mr. Lynch is referring to one undeniable fact: The more companies you look at, the higher the probability you will find a good one. That point alone is a good enough reason to constantly be looking at new companies; however, there are additional less obvious benefits as well.
It’s a numbers game
Let’s consider two fund managers. Fund Manager A looks at 25 companies a year and might find one good one. Fund Manager B looks at 100 companies a year and might find four good ones. While highly simplistic, our example is meant to drive home an important point: all else being equal, most investors would likely rather entrust their hard-earned money to Fund Manager B, who would have a better chance at generating long term outperformance.
For clarity, I’m not suggesting that investors should look at a large number of companies just for the sake of it. The corollary to the above-noted point is that all ideas need to be filtered for quality before spending any time on them. Investors need a good filter so that they are not wasting their time looking at stocks that have no chance of making it into their portfolio. At Bedford Park, we preselect and actively monitor 250 of what we believe to be the best small- and mid-cap growth stocks in Canada.
Looking at companies makes you better at looking at companies
Like many other things in life, the more you do something, the better you get at it. Investing is no different. Consistent with lifting weights, reps matter: new investors need to get their reps in.
Over a period of several years, investors can develop templates, lists, databases, screens, contact networks, mental models and many other tools that not only speed up the investment research process, but also make that process more effective. These tools, combined with more experience, allow investors to improve their investment acumen, which then allows them to look at more companies efficiently, which once again continues to increase their investment knowledge, creating an excellent positive feedback loop.
Sometimes things are not as they appear
Several times in my career I have agreed to take a meeting with a company that I initially thought I would likely not be interested in, only to find out through further diligence that there was an outstanding investment opportunity. Sometimes companies are going through a transition, or there is a new strategy or product, or a new management team, and the historical numbers are not giving investors an accurate picture of the future. For this reason, it’s important to look at each new investment opportunity with a clear and open mind, while simultaneously maintaining discipline.
You can always learn something
Even when I meet with a company that clearly doesn’t match our investment criteria, I still often learn something in that meeting. There could be a new trend in the industry, new technology, a change in the competitive landscape, or potential upcoming regulatory changes. In some cases, I might meet an executive or management team that ends up running a different company later on. This bank of knowledge builds over time, making an investor more knowledgeable in specific industries and better at pattern recognition. It takes time, but by building your internal knowledge bank you inherently become a better investor.
The bottom line is that sourcing and looking at new ideas is a critical component of success investing. One of the most common questions I get from investors or potential investors is some version of “are there any new names in the portfolio?” It’s human nature to be attracted to shiny new objects, but I think there is a common misconception that superior investors need to add new ideas to their portfolio on a regular basis. While this may be the case for managers who are more short-term oriented and are constantly looking for “trades”, this is not our investment style at Bedford Park.
We look for outstanding companies, and, by virtue of being outstanding, that means there simply aren’t that many of them. If we find three new ideas each year, I would be quite happy, and if we found five new ideas in a year that would be fantastic.
Our main goal is to produce attractive rates of return by identifying and owning great businesses. The only way to accomplish this goal is to consistently “turn over rocks.” In doing so, we aim to seize any opportunity to upgrade the quality of our portfolio. Ultimately, if we can identify great businesses before others, or have a view on a business that differs from others, we are often rewarded with very attractive long-term returns.
As we ease into third quarter earnings season over the next few weeks, we will get final updates from our portfolio companies for 2024 and start turning our attention to 2025 (and 2026). The fund is off to a very strong start so far in October and I look forward to reporting to you again in January to discuss our fourth quarter and full-year performance.
All the best, Jordan
* Based on time weighted rates of return for lead series (series 1), net of all fees and expenses. Past performance is not indicative of future results.
