Why this money manager is buying Intact and selling Choice Properties REIT


April 12, 2024

Money manager Kevin Burkett isn’t waiting to see if the economy has a soft or hard landing, or how many interest-rate cuts could come this year. Instead, his four-person investment team at Burkett Asset Management Ltd. looks to buy high-quality companies that are out of favour or misunderstood by investors in the short term, and have the potential to do well over the long term.

“Our firm is small and independent, which we think gives us an advantage because we can be more nimble in making investment decisions,” says Mr. Burkett, partner and portfolio manager at the Victoria-based firm, which oversees about $340-million in assets.

The firm’s balanced portfolio, which includes an approximately 60-40 split of stocks and bonds, was up 13.2 per cent over the past 12 months. Its three-year annualized return was 7.6 per cent, while its five-year annualized return was 8.6 per cent. The performance is based on total returns and gross of fees as of March 31. (Fees range from 0.40 per cent to 1.25 per cent depending on the size of a client’s portfolio.)

The Globe and Mail spoke with Mr. Burkett recently about his investing style and what he’s been buying and selling.

Describe your investing style.

We strive to own a portfolio of companies that we consider higher quality than their peers. The two most important characteristics we look for are companies with long-term earnings growth prospects and shareholder-friendly capital management. These businesses provide long-term visibility for our model forecasts and resilience during down-market periods. The challenging part is acquiring those businesses at attractive prices. To accomplish this, we look for businesses with catalysts for positive change that may be currently out of favour, either owing to investor misconception or market overreaction about a stock in the short term.

What does your asset mix look like?

We like public stocks and bonds. We don’t invest in private or alternative assets. Those products are often more expensive and complex, which doesn’t always translate into higher returns. We’re always fully invested and try to have as little cash as possible. We consider bonds as our ‘safe bucket’ and source of funds to rebalance portfolios opportunistically as things come under pressure or as equity markets run higher. Right now, we have a heavier weight on shorter-term bonds. We customize the stock-and-bond mix depending on our clients’ preferences and risk tolerance.

What have you been buying?

We bought insurance company Intact Financial Corp. IFC-T +0.35%increase in the fourth quarter of last year and have been adding to it recently. The insurance sector, particularly here in Canada, is moving through a period of consolidation, and Intact has demonstrated a history of successful acquisitions. It’s acquiring smaller players across Canada at reasonable valuations and showing strong capital generation while remaining disciplined about deployment. Insurance may be a crummy business to be a customer of, given rising prices, but it’s a great business to invest in because a few key players dominate it.

More recently, we’ve been buying Ashtead Group PLC ASHTY -1.12%decrease, a British industrial equipment rental company with significant exposure to the U.S. and North America. It’s the second-largest equipment rental company in the U.S. We see it as having scale, expertise and experience and being able to win some mega projects in manufacturing and infrastructure. We consider it a defensive name while benefiting from the growing need for equipment it rents.

What have you been selling?

Choice Properties REIT CHP-UN-T -0.91%decrease is a stock we exited recently after owning it for about a year. We originally liked Choice for its grocery-anchored exposure. While this real estate category has outperformed others, as we had expected, the market now well understands Choice’s defensive nature and diversified tenant mix. Our growing concern about the impact of higher interest rates on development activities and fewer identifiable positive catalysts in the near term led us to redeploy those assets to where we felt were better opportunities.

We also recently exited Trane Technologies PLC TT-N -1.04%decrease, a large [heating, ventilation and air conditioning] company based in Ireland. It does a lot of business in the U.S. We did well on the stock, but our investment thesis ran its course, so we decided to put the money to work elsewhere.

Name one stock that you wish you hadn’t sold, and why?

MercadoLibre Inc. MELI-Q -1.96%decrease, one of the largest e-commerce platforms in Latin America, is a stock we wish we hadn’t sold. We started buying the stock in September, 2017. Although it was doing well, foreign competitors such as Amazon.com Inc. AMZN-Q -1.68%decrease and Alibaba Group Holding Limited BABA-N -0.94%decrease had more established logistics networks.

MercadoLibre was rapidly growing due to its free shipping strategy, and analysts thought it could quickly lower the program’s costs so the drag on margins would recede. That wasn’t our expectation. We thought building a logistics network to enable efficiencies and cost reductions would be a costly multiyear process. We concluded it was overvalued and sold it in August, 2018, at a nice profit.

However, MercadoLibre was able to reduce the costs associated with its free shipping service more quickly than we expected. The stock has since increased by more than 300 per cent in Canadian dollars. We missed the broader impact of the global shift to e-commerce, which greatly outweighed our concerns about margin pressure.

What did you learn from that?

Successful investment teams talk about their mistakes at least as much as their successes. We learned that you can spend a lot of time and energy and still make the wrong decision. Today, we’re more careful about focusing our time so we don’t get lost in details while worrying about one issue. For every company we analyze, we make sure to understand the broader, important trends that could alter how the company operates.

This interview has been edited and condensed.

S&P/TSX composite posts new record Thursday, U.S. markets also rise


May 9, 2024 -TORONTO — Canada's main stock index rose to a new record high, led by strength in energy,…

CRA reassessing charges for late trust filing after issuing penalties in error


May 9, 2024 - Taxpayers who filed information disclosing the beneficial ownership of a trust may have received a letter…