Monday, 16 October 2017

Canadian Life Insurers; Screening for value - GWO, MFC & SLF

I wanted to look at some Life Insurance businesses to see if I can find some big cap value positions. These three large Canadian LI businesses offer attractive dividend yields and seem to be relatively attractively valued. In this piece I will demonstrate a quick screening process that helps me to focus on individual equities.

Soft Factors

These companies have slightly different overall profiles. Manulife (TSE: MFC) has generally struggled since the financial crisis due to aggressive underwriting of guaranteed investment policies ahead of the 2009 crash. MFC does however have a strong business in Asia with good growth prospects and was one of the first western insurers to target Asian markets. It has the biggest market cap of the three at CAD$51bn. 

It has generally been a poor performer since the GFC; losing 39% of its value over 10 years. 

(MFC Blue -39%, SLF Red -6% and GWO Yellow -0% )

Great West Lifeco (TSE: GWO) is the second largest by market cap at CAD$36bn and it largely escaped the problems that hit Manulife as it was late the investment guarantees party. GWO is more focused in Europe through its Canada Life and Irish Life subsidiaries than MFC. The management have an excellent reputation and unlike MFC it didn't cut its dividend following the crisis.

Finally Sun Life (TSE: SLF) is the smallest of the three at CAD$30bn. This company sits somewhere between MFC and GWO in terms of its risk exposure but like GWO it has better weathered the storms of the last crisis - it has restructured selling its struggling US Life and Annuity business to focus on more group life products and the Canadian domestic market.

Financial Screening

I use a simple sheet developed by the UK Value Investor to screen stocks for 10 year performance when looking for the best investment opportunities or to compare several companies across industries. The results from screening these three companies gave some interesting basic data points which made me prefer GWO. 

[The metrics used are generally only useful for defensive value investments i.e large and stable acyclical businesses as the screening won't like cyclical value plays like CMMC for obvious reasons.]

Profitability, Yield and Growth

The first thing to note is a quick look at 10 year average ROCE - this gives us a good picture as to the underlying quality of returns from these businesses. GWO and SLF both have strong returns on capital employed at 9.1%, MFC on the other hand is weak with the return at just 6.1%. This indicates that both GWO and SLF are better managed at least historically have generated better returns. 

Dividend yields are similar across all three businesses although GWO has a slightly higher yield at 3.8% vs 3.3% for SLF - these are all broadly comparable. On the growth front again MFC is the laggard with a paltry 60bps growth rate. This estimate is based on 3 year average revenue, earnings and dividend growth. Both SLF and GWO have low but acceptable growth rates given these are large mature businesses in slow growing markets.

Risk Metrics

SLF is the standout when looking at risk due to its much higher debt load against its overall profitability. The greater leverage of the business (in the debt ratio / 5 year avg earnings) makes it inherently more risky and it should exhibit greater volatility in earnings. Both MFC and GWO have low debt ratios. 

Dividend cover is good for all three businesses at >1x - investors in these kind of defensive value businesses investors expect strong and consistent dividend returns. In addition as highly regulated businesses they must preserve capital so if these ratios were to drop below 1x an immediate dividend cut would be highly likely.

Note so far that GWO has both the best ROCE, dividend yield, dividend coverage and the second best growth rate and debt/ earnings ratio. It gets better though, it's also the cheapest...


A high level assessment of valuation based on PE ratios indicates that GWO is the cheapest on a 10 year average basis at 16.9x with SLF the most expensive but both SLF and MFC trade at premiums to GWO. Some of this is to do with the way that GWO has managed to generate higher consistent earnings since 2007 due to its lower risk profile in the crisis on 2008/9.

The current PE ratios make GWO cheaper than MFC but it trades at a premium to SLF. All three stocks trade in a pretty close range.


The basic high level screen indicates that GWO is better value due to it's cheaper long term PE ratio and better dividend yield. Not only that but the dividend is better covered (meaning room to go higher), the business has a lower risk profile due to lower debt and the growth rate is decent with a high (for a mature business) ROCE over 9%. MFC looks the least favourable stock here and SLF is pretty neutral but has a few bright spots.

Net/net I think the best stock for further examination in detail is GWO.

Disclosure: I have no positions in GWO, SLF or MFC at this time. This may change in the future. These are opinions only, not investment advice. If in doubt read my disclaimer.

Friday, 6 October 2017

Portfolio Strategy: October update

So a quick portfolio update as I have made a few changes in the past month increasing some positions:

Amiable Minotaur Portfolio


I will call this my Second Quarter review as the portfolio began on the 19th of April. How has performance been? Including all fees and costs I have returned 1.7% in GBP since inception and relative to FTSE AW which gained 2.82% in GBP. I have under performed by 4.38% in the period. 

This is a substantial improvement from the first quarter due to several stock picks having strong performance and now whilst I am lagging the benchmark I do have a positive absolute return.

I expect to continue to under perform for as long as the wider market and especially the S&P grinds higher. The stronger GBP also has a negative impact on performance in absolute but not relative terms due to around 40% of the portfolio being in FX (mostly USD) and another 18.3% in Gold which acts as a proxy currency.

Stocks: The Worst and Best

My worst positions have been in Acacia Mining, Short NASDAQ and Bed Bath & Beyond.

Acacia has continued to suffer with no positive news flow on resolving their dispute with the Tanzanian government. Given cash flow constraints they are going to have to suspend production at 2 of their 3 mines if no resolution is reached. Barrick Gold executives are currently negotiating with the government. I feel captive here because either this stock takes another major hit from more bad news (already I have lost 31%) - or it rallies very strongly on a resolution. I think it is worth north of £3 a share even discounting this debacle, assuming a resolution.

Shorting the NASDAQ is obviously not working as central bank flows keep this market grinding higher - however despite the all time highs momentum is broken and I foresee at least a modest pullback of 10% or so before renewed propping up of the market. This is a valuation call lacking an immediate catalyst.

BBBY results were soft again this month and further declines followed. It feels like a value trap for a while but ultimately it will turn, and fast - when results stop declining. Just like we have seen in Next PLC. It's a hold for now.

The best positions have been in Next and Kirkland Lake Gold

Next has started to deliver results which are less bad - and the stock has popped up 20%. This is my biggest position so that pop had a major impact on the portfolio. A much welcomed development. I reduced the position 25% following the Q end just to take some gains as it approached my fair value of around £60 a share. I may add again after it has been faded.

Kirkland Lake Gold has had interstellar performance from its top quality assets and results. The stock rose 60%+ but I sold out following those gains at the end of August. I may add again on a pullback - perhaps switching for Goldcorp as on reflection this junior miner has more fundamental upside to run.


CMMC - I bought this stock as a highly leveraged play on improved copper prices. The fundamentals stack up and the risk / reward is compelling. It's really a micro cap stock rather than a small cap - high risk but simple to understand and analyse.

It is also noteworth that Diamond Offshore and Tullow Oil may have bottomed here as an inflationary impulse in the commodities space looks likely. I may look to add to these in future on a pullback.

I bought some large cap Pharma in the case of AstraZeneca which sold off strongly following a failed drug trial. Since buying that dip the stock is up 15% which is a nice move. I screened the fundamentals and history but didn't do a deep dive on this one as it required a quick and timely move to buy.

Amiable Minotaur Portfolio

Gold Stocks

I continue to like Gold Mining stocks and have added to my position in Klondex Mines which has started to move upward as we move away from the GDXJ rebalancing debacle. 

Weights are:

ACA        2.2%
KLDX    6.2%
GG          2.2%

Position Sizes

My biggest positions in terms of sectors are Gold Miners, Retail and Energy. 

Amiable Minotaur Portfolio

My biggest single stock position is Next plc at 12% which I added to on recent weakness. I continue to love this stock but have reduced slightly following a strong pop.


Unchanged from last quarter! 

I remain bearish overall as regards the wider market. Volatility is very low, equity prices are very high, central bank liquidity is very high, interest rates are very low. Not exactly fertile conditions for findings assets at attractive prices. I remain long term bullish commodities and associated stocks and gold due to under valuation vs financial assets. 

I am looking for cyclical value plays in retail, energy, base metals and all other markets in general.

Disclaimer: I have an interest in all the securities mentioned in this article at present but i may change these in the future. These are opinions only, not investment advice. Construct your own portfolios with due care and attention.  If in doubt read my disclaimer.