Portfolio Update

Global equity markets extended their rebounds from April lows, reaching new all-time highs in August. Year-to-date, the MSCI ACWI is up 9.1% (total return in Canadian dollar terms), the MSCI EAFE 17.2%, the MSCI Emerging Markets 13.6%, and the S&P/TSX 17.6%. The S&P 500 has risen 5.8% since the start of the year, while advancing 26.0% from its trough on April 8^th.

This rally has unfolded against a backdrop of persistent uncertainty, from geopolitical conflicts to evolving trade policies and concerns over global economic growth. At the same time, equity valuations in several areas of the market appear stretched with expectations for earnings growth increasingly lofty relative to the backdrop of slowing economic activity. While we continue to expect a moderation in global activity, we do not foresee a broad-based recession at this stage. Going forward, the sustainability of these earnings forecasts and current valuation levels remains important to monitor, and we maintain a measured and cautious stance.

In an environment characterized by elevated valuations, ambitious earnings expectations, and investor sentiment that can be impacted by news headlines, our investment discipline is rooted in long-term fundamental analysis. This framework continues to guide us through various market and economic cycles and provides the foundation for identifying businesses capable of delivering sustainable value over time. An example of how this approach is applied in practice can be seen in our investment in Maple Leaf Foods, which we highlight below.

Driving Long-Term Value Through Fundamental Investing

At LetkoBrosseau, our long-term investment horizon allows us to approach investing as owners of businesses, rather than traders of stocks. Our objective is to identify high-quality companies with durable competitive advantages, strong management teams, and sustainable growth potential, and to position our portfolios to capture long-term value creation rather than reacting to short-term market movements.

To achieve this, our Investment Team of 20 global sector specialists conducts independent, in-depth research. Our analysts achieve this through examining raw data, engaging directly with management, and speaking with suppliers, employees, and customers. By leaving no stone unturned, we build a comprehensive understanding of each business and uncover companies capable of navigating short-term volatility while delivering sustainable growth over time.

Spotlight on Maple Leaf Foods

Maple Leaf Foods, a long-standing holding in our portfolio, exemplifies this approach. The company is the market share leader in Canada for processed meats, fresh pork and chicken, with flagship brands including Maple Leaf, Maple Leaf Prime, and Schneiders.

LetkoBrosseau has been a shareholder since 2002, building a significant position between 2006 and 2013, peaking at approximately 11 million shares. Our initial investment thesis focused on the company’s ability to improve margins through strategic initiatives, most notably the construction of a modern, large-scale pork processing facility to replace older, less efficient plants. Maple Leaf Foods successfully executed on this initiative, and its share price increased from roughly $10 to $35 between the period from 2010 to 2018. As the company delivered on its objectives, we gradually reduced our position to just over 1 million shares by 2020.

Over the last five years, the company faced headwinds from global pork markets as it was embarking on a new capital investment cycle, this time focused on its chicken operations. While the dislocation in global pork markets temporarily pressured margins, it also created an opportunity to increase our exposure once again. Our current position stands at approximately 5.9 million shares.

More recently, as global pork markets normalized and the benefits from the new poultry processing facility in London, Ontario were realized, Maple Leaf delivered strong margin expansion along with solid sales growth. This improved financial performance is reflected in a share price gain of over 58% over the last twelve months, with its share price currently standing at slightly above $35. The company currently trades at forward price-to-earnings multiple of 16.8 times and offers a dividend yield of 2.7%.

Maple Leaf demonstrates how long-term value creation often unfolds in phases: initial execution on transformative strategies, periods of cyclical headwinds, reinvestment for future growth, and the gradual strengthening of the business over time. This trajectory underscores the essence of fundamental investing – allowing high-quality companies the time and resources to realize their intrinsic value.

Concluding Thoughts

As stewards of capital, our focus is not on predicting every market swing, but on positioning portfolios to participate in the growth of real businesses through various market and economic cycles. Companies like Maple Leaf Foods demonstrate that value creation is rarely linear. With patience, discipline, and a long-term perspective, it is possible to capture the benefits of strong management, operational discipline, and durable competitive positioning, in ways that markets may often underestimate in the short run. We believe this fundamental approach is the most reliable path to sustainable wealth creation for our clients.