What is Relative Value?

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What is Relative Value Investing?

Investing style boxes were developed so that investors could understand differences between how managers made decisions. In the Canadian market, which is 75%* cyclical stocks in the materials, energy and financial sectors, a style box approach might not be suitable. Deep and traditional value managers tend to avoid cyclical stocks. We believe that it's difficult to be well-diversified in the Canadian market without exposure to most sectors.

Sionna takes a relative value approach, meaning that we participate in most sectors and select the cheapest stocks in each.

 

How Relative Value Differs from Traditional Value

1. Sionna Picks Stocks in All Sectors

We use traditional value when selecting non-cyclical stocks. We look for stocks trading with at least a 30% discount to our analysis of their intrinsic value. We use relative value for selecting cyclical stocks in sectors such as materials, energy and financials.

The benefit of shifting to a relative approach for cyclicals is that we can participate on the upside while remaining diversified.
We believe this offers a more steady approach for investors.

2. Relative Sell Decisions

We sell stocks relatively as opposed to absolutely to take advantage of what Nassim Taleb refers to as "skewness" in the markets. Taleb maintains that financial reports can't capture all of a stock's intangibles and most stocks trade through and above their traditional intrinsic value on general optimism. So, rather than sell at intrinsic value, we assess a stock's risk and sell incrementally as the stock trades above its intrinsic value. HOWEVER, risk is the key determinant. If risk is minimal, we sell incrementally and slowly. If risk is higher, we sell at intrinsic value and quickly.

*Source: FactSet 2011