DISCIPLINED EQUITY STRATEGY
Discovering
Quality Through
a Different Lens
The real voyage of discovery consists not in seeking
new landscapes but in having new eyes.
— Marcel Proust
DISCIPLINED EQUITY STRATEGY | DISCOVERING QUALITY THROUGH A DIFFERENT LENS
M
any investment firms seek out high-quality
companies for their large-cap U.S. equity
strategies. CIBC Atlantic Trust Private Wealth
Management is one of them. In managing our
Disciplined Equity Strategy, we look for
companies with characteristics that ref lect
quality, such as strong cash f lows, proven
management teams and leading competitive
positions in attractive industries.
With so many managers on the hunt for quality, why has the Atlantic Trust Disciplined Equity
Strategy been able to stand out from the pack in terms of its performance? In the pages that
follow, we review the Strategy’s track record and the main drivers of its long-term success.
THE WEIGHT OF THE EVIDENCE
The Disciplined Equity Strategy has typically produced higher returns than the S&P
500 index and the Morningstar Large Blend peer group—with less volatility—and
protected capital on a relative basis in down markets.
CIBC Atlantic Trust launched the Disciplined Equity Strategy on October 1, 2003. As of December
31, 2016, the Strategy:
n Outperformed the S&P 500 index and the large blend peer group over three-, five- and
10-year periods and since inception
n Outperformed the S&P 500 index in nine out of 12 calendar years since inception and
the large blend peer group in 11 out of 12 calendar years
n Had less volatility than the S&P 500 index and the large blend peer group, as measured
by standard deviation since inception
n Captured 106.4% of the return of the S&P 500 in up markets but only 83.9% in down
markets since inception
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DISCIPLINED EQUITY STRATEGY | DISCOVERING QUALITY THROUGH A DIFFERENT LENS
DISCIPLINED EQUITY PERFORMANCE
Outperformance with Less Volatility and More Downside Protection
Investment Results vs. Benchmark (%) as of December 31, 2016
Volatility
Annualized
Returns
(Standard
Deviation)
Market
Capture
1 Yr
3 Yr
5 Yr
10 Yr
Since
Inception
Since
Inception
Up Capture
Since
Inception
Down
Capture
Since Incep.
Disciplined
Equity Strategy
Composite
[Gross]
10.61
9.56
15.18
8.67
11.05
13.98
106.41
83.90
Disciplined
Equity Strategy
Composite
[Net]
9.51
8.44
14.00
7.63
9.95
13.94
101.67
87.08
S&P 500
Index
11.96
8.87
14.66
6.95
8.53
14.81
100.00
100.00
Large
Blend Peers
10.04
6.33
12.66
5.60
7.34
15.02
95.21
104.34
Source: CIBC Atlantic Trust, Russell, Lipper Inc. Portfolio information is derived from a large representative
member of the composite and is presented for illustrative purposes only. Holdings and characteristics are subject
to change. Past performance is not a guarantee of future results. The Lipper Index represents an equal weighting
of the 30 largest names in the Lipper category. An investment cannot be made directly into an index. All data
as of 12.31.16.
Key Takeaways
n
The Disciplined Equity Strategy is a tax-efficient, large-cap U.S. equity strategy
with a proven record of outperforming the S&P 500 index and providing
downside protection in weak markets.
n
While many large-cap U.S. strategies pursue quality companies with similar
attributes, the Disciplined Equity Strategy has several unique elements that have
led to higher returns with less risk. These include a focus on leading companies
that generate significant free cash flow and a willingness to go against the grain
to invest opportunistically.
n
The Disciplined Equity team has a proven ability to add value through individual
stock selection. This may be particularly beneficial over the next few years,
when we expect U.S. stocks to deliver more muted returns than they have
throughout much of the current bull market.
cibcatlantictrust.com | 33
DISCIPLINED EQUITY STRATEGY | DISCOVERING QUALITY THROUGH A DIFFERENT LENS
CRITICAL SUCCESS FACTORS
Many elements of the Disciplined Equity Strategy have contributed to its exceptional longterm performance. Below, we highlight four of the most important factors driving its
strong results.
1. A Focus on Bottom-Up Fundamental Analysis to Identify Quality Companies to
Invest in for the Long Term
Our primary skills are researching and investing in companies whose unique characteristics
should allow them to grow and thrive for years to come—we do not try to time the market, but
instead, determine entry points for individual stocks that allow for attractive risk/return potential.
We make investment decisions based on the in-depth research we perform on a broad range
of large-cap U.S. companies. We don’t chase macroeconomic trends or position portfolios
around the likelihood of geopolitical events where forecasting the timing and outcomes is
extremely difficult and often futile. Managers that run portfolios this way, from the top down,
frequently get caught on the wrong side of the trade.
Our bottom-up approach leads us to what we consider to be very high-quality companies—
companies whose stocks we can often hold for three to five years or more, provided their valuations
remain attractive. As a result of our long holding period, and because we are tax conscious in
general, the Disciplined Equity Strategy tends to be very tax efficient. Annual portfolio turnover has
averaged about 25% since inception and even lower during the past few years.
2. An Emphasis on Free Cash Flow
We put considerable weight on a company’s ability to consistently generate free
cash flow and utilize the cash to benefit shareholders.
We look at a number of characteristics when evaluating companies. However, we focus on
free cash flow because free cash flow is tangible—it’s real, concrete and, unlike earnings,
can’t be distorted by accounting differences. Most companies have multiple uses for free cash
flow, including reinvesting in the business, paying dividends, buying back shares and making
strategic accretive acquisitions. We do not have a natural bias toward one of these initiatives
over another and trust tenured, proven management teams to determine the most appropriate
company-specific use of free cash flow to benefit shareholders.
“
One of the things we’re proudest of is that the Disciplined Equity Strategy
tends to do its best work during difficult market environments.”
David L. Donabedian, CFA Chief Investment Officer
CIBC Atlantic Trust
In terms of a baseball analogy, we are not swinging for the fences and trying to hit home runs,
but instead, we are trying to hit singles and doubles with lower odds of striking out. Our goal
with each portfolio holding is to earn at least a low double-digit compound annualized return
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DISCIPLINED EQUITY STRATEGY | DISCOVERING QUALITY THROUGH A DIFFERENT LENS
The Significance of Free Cash Flow
Free cash flow is a better gauge of a company’s profitability than earnings and allows
us to make apples-to-apples comparisons of companies that use different accounting
methods or operate in different industries with different capital structures.
Using a proprietary calculation, we measure how much cash flow a company can
produce if it only invests what is needed to sustain—but not grow—its business.
Our measure of free cash flow tells us how much cash is left over for management
to allocate to various initiatives designed to create shareholder value.
These examples illustrate the benefits of using free cash flow to evaluate companies:
n
Managed Care Company A reports its earnings based on generally accepted
accounting principles (GAAP), but Managed Care Company B reports nonGAAP earnings. As a result, we can’t use earnings to compare their profitability.
We can use free cash flow because it is not subject to the whims of accounting.
n
Industrial Company A invests 20% of its revenues in capital equipment every
year to sustain its business; Software Company B invests only 2%. Since capital
investments do not flow through the income statement, both companies could
show similar earnings-based valuations. However, earnings don’t reflect the
fact that Industrial Company A has to plow a much higher percentage of its
revenues back into its business, year after year, while Software Company B is a
much less capital-intensive business. Free cash flow accounts for this, facilitating
cross-industry comparisons.
over a three- to five-year period. Using free cash flow to value stocks helps us identify those that
should be able to hit this target using conservative assumptions. A healthy free cash flow yield
in a high-quality company can also provide a margin of safety, potentially limiting downside in a
weak market environment or in the case of a transitory fundamental issue or change.
3. Opportunistic Buying and Disciplined Selling
We will go “against the grain” of the market to buy stocks of quality companies
that are trading at a discount based on our assessment of their fair value, and we
will sell stocks of quality companies when they become less attractively valued.
We will only buy a stock if we have conviction that it can outperform the market over a
cycle with return potential greater than downside risk, using our free cash flow valuation
methodology described above. Through our rigorous, bottom-up research process, we
identify companies that meet our fundamental requirements but recognize it is critical for
a company’s stock to be valued such that we can expect it to outperform. We, as most
investors, monitor news and events that may impact a company’s stock prices. Where we are
differentiated is that we will step up to buy on weakness when other investors are panicking
cibcatlantictrust.com | 5
DISCIPLINED EQUITY STRATEGY | DISCOVERING QUALITY THROUGH A DIFFERENT LENS
related to information that we do not believe will impact the company’s ability to generate
free cash flow. We use these opportunities to add new stocks to the portfolio or increase
existing positions—even when other investors are heading for the exits. The success of
this contrarian element of the Disciplined Equity Strategy requires patience to wait for the
appropriate valuation and agility to take advantage of the opportunity quickly.
Conversely, we will trim or eliminate stocks of companies whose fundamentals remain solid
but whose valuations have become less attractive due to their strong performance. It may
seem counterintuitive to lighten up on our biggest winners or sell them entirely; however,
the big gains in these stocks often leave less room for additional upside.
“
We are certainly cognizant of our benchmark and where we are overweight
or underweight. However, we’re not afraid to deviate substantially from the
benchmark if that’s where the opportunities lead us.”
W. Brant Houston, CFA
Managing Director
Disciplined Equity Strategy Co-Manager
CIBC Atlantic Trust
4. A Right-Sized Team, Committed to the Strategy—and to Clients
The investment team is nimble without being dependent on a single person, and
decisions are made within the discipline for the benefit of our clients.
A dedicated team of seven investment professionals manages the Disciplined Equity Strategy.
The team includes CIBC Atlantic Trust Co-portfolio Managers Patricia A. Bannan, CFA, and
W. Brant Houston, CFA—who have 35 and 19 years of industry experience, respectively—
plus three investment research analysts and two quantitative analysts managing trade
operations and risk management. They receive additional support from a group of seven
CIBC Atlantic Trust research analysts averaging 26 years of industry experience.1 With an
investment process that narrows down the universe of candidates fairly quickly, there is
ample capacity to vet new candidates while staying on top of current positions.
Bannan and Houston are jointly responsible for all investment decisions, with significant input
from the broader team. Every decision is made in the context of the Strategy’s well-defined
investment philosophy and discipline. We view the co-manager structure as a significant
strength compared to the two extreme approaches many firms use. At one extreme is the
“star system,” where one person makes all of the decisions; this is a riskier model as it relies
on one individual who could leave. At the other extreme, with a much larger investment
committee making the decisions, the risk is a heightened level of bureaucracy, time and
“consensus thinking” before decisions are implemented. In our view, the Disciplined Equity
Strategy’s co-portfolio management structure offers the best of both worlds: nimble, but
shared decision-making within a conservative, quality- and valuation-driven strategy with an
attractive performance record in both up and down markets.
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DISCIPLINED EQUITY STRATEGY | DISCOVERING QUALITY THROUGH A DIFFERENT LENS
RESULTS POWERED BY STOCK SELECTION
160
Cumulative , Active Returns (Annualized %)
140
Selection and Interaction
Selection & Interaction
Allocation
Allocation
120
100
Allocation,
33.4%
80
60
Selection and
Interaction,
66.6%
40
20
Since Inception
Disciplined Equity Attribution (%Total)
0
-20
Trailing 1
Trailing 3
Trailing 5
Trailing 7
Trailing 10
Since Inception
Source: FactSet Portfolio Analytics, data as of 12.31.2016.
These charts illustrate the effect of sector allocation and stock selection and do not show actual client returns.
“
We believe a lot of our outperformance in down markets has been due not
only to owning quality companies but also owning quality companies with
significant free cash flow that management could utilize to defend their
stock price.
There is a difference between a great company and a great stock. Yes, we
buy what we believe are high-quality companies. But it’s also critical that we
are buying them at valuations that we are confident will lead to long-term
outperformance.” n
Patricia A. Bannan, CFA Managing Director Disciplined Equity Strategy Co-Manager
CIBC Atlantic Trust
1 Years of experience as of January 2017.
cibcatlantictrust.com | 7
Composite Assets
Year
Ending
Dollars
(millions)
Percentage
of Firm
Assets (%)
Composite
Accounts at
Year-End
Gross
Annual
Return (%)
Net
Annual
Return (%)
Benchmark
Return
(%) A
Three-year
Standard
Deviation of
Composite (%) B
Three-year
Standard
Deviation of
Benchmark
(%) A,B
Composite
Dispersion
Total Firm
Assets
(millions)
12/31/2016
3,472.9
11.95
1,076
10.53
9.43
11.96
10.83
10.74
0.26
29,057.0
12/31/2015
3,333.3
12.41
1297
2.92
1.83
1.38
10.53
10.62
0.27
26,869.1
12/31/2014
3,082.2
11.77
1209
15.52
14.31
13.69
9.10
9.10
0.23
26,194.6
12/31/2013
2,528.4
10.55
1057
32.30
30.95
32.39
11.80
12.11
0.48
23,970.0
12/31/2012
1,623.2
8.15
785
16.50
15.32
16.00
14.97
15.09
0.22
19,911.8
12/31/2011
1,175.6
6.56
635
5.04
3.99
2.11
18.13
18.71
0.18
17,929.8
12/31/2010
900.1
5.31
463
14.58
13.49
15.06
-
-
0.18
16,964.4
12/31/2009
696.9
4.58
350
28.08
26.90
26.46
-
-
0.55
15,215.4
12/31/2008
173.1
1.30
23
-31.81
-32.37
-36.98
-
-
0.22
13,392.4
12/31/2007
466.7
2.68
89
7.82
6.87
5.50
-
-
0.26
17,397.4
A. Not covered by the Independent Accountant’s Report.
B. The three-year, annualized ex-post standard deviation of monthly composite and benchmark returns represents a measure of total investment risk (volatility) and calculates the variance of a distribution of
returns. This calculation has been adopted effective with the period ended December 31, 2011.
CIBC Atlantic Trust claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. CIBC Atlantic Trust
has been independently verified for the periods ended December 31, 2004 to December 31, 2015 by Ernst & Young LLP. Prior to January 1, 2004, CIBC Atlantic Trust was verified by another Independent
Accountant for the periods from January 1, 1998 to December 31, 2003. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards
on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Atlantic Trust Taxable Disciplined Equity
Strategy Composite has been examined for the periods ended December 31, 2010 to December 31, 2015 by Ernst & Young LLP. The verification and performance examination reports are available upon
request.
1. The Firm referred to in this document as “CIBC Atlantic Trust” comprises three wholly-owned subsidiaries of Atlantic Trust Group, LLC (“ATG”): Atlantic Trust Company, N.A. (“ATC”), Atlantic Trust Company of
Delaware (“ATCD”) and AT Investment Advisers, Inc. (“ATIA”). All of these entities are indirectly wholly owned by Canadian Imperial Bank of Commerce, a Canadian-based financial institution whose shares are
publicly traded. ATIA, formerly known as “Stein Roe Investment Counsel, Inc.,” became a subsidiary of ATG on March 1, 2004. ATIA is the successor organization to the Private Capital Management Division
of Stein Roe & Farnham Incorporated. Prior to January 1, 2006, ATC and ATIA were two different firms for performance reporting purposes. Subsequent to January 1, 2006, the two firms were merged, their
portfolios were aligned and the firm was redefined as “Atlantic Trust.” Total firm assets reflect the integration of the investment management platforms at CIBC Atlantic Trust, which includes ATC, ATCD and ATIA.
2. Composite Description: This Composite is a collection of all taxable discretionary and fee paying accounts that are managed in CIBC Atlantic Trust’s Taxable Disciplined Equity Strategy. The objective of this
strategy is to provide growth with lower expected volatility than a typical equity portfolio. We seek to accomplish this through a broadly diversified portfolio, primarily invested in common stocks that generate
strong cash flow and are available at attractive valuations. The portfolio is not restricted to investing in particular sectors or in stocks within a market capitalization range, but will tend toward large-cap companies
with positions of market leadership. The Composite creation date is December 31, 2009 and inception date is October 1, 2003. The Composite inception date is the initial date in which performance data was
available and the creation date reflects the date accounts were first grouped to create the Composite.
3. The benchmark for this Composite is the Standard & Poor’s 500® Index. The benchmark is used for comparative purposes only and generally reflects the risk or investment style of the product. Investments
made by the Firm for the portfolios it manages according to respective strategies may differ significantly in terms of security holdings, industry weightings and asset allocation from those of the benchmark.
4. Beginning December 1, 2009, all account returns are calculated daily using the current day ending market values excluding cash flows but including income, and prior day ending market values including
cash flows. Prior to December 1, 2009, account returns were calculated monthly using the Modified Dietz method. Monthly composite returns are calculated by weighting individual account returns by their
beginning of month market values as a percentage of the composite’s beginning of month market value. Prior to January 1, 2006, composite returns were calculated quarterly rather than the monthly basis as
previously discussed. Annual composite returns are calculated by linking the monthly or quarterly composite returns through compounded multiplication. All realized and unrealized gains and losses as well as all
dividends and interest from investments and their accruals and cash balances are included in the ending market value. Investment transactions are accounted for on a trade-date basis. Accounts are included in
the composite beginning with the first full month of performance to the present or to the last full month prior to the cessation of the client’s relationship with CIBC Atlantic Trust. Composite performance results
are presented in United States dollars. Additional information regarding the Firm’s policies and procedures for valuing portfolios, calculating performance, and preparing compliant presentations is available upon
request.
5. The dispersion of gross annual returns is measured by the standard deviation across asset weighted portfolio returns beginning in January 2005 and equal weighted for years prior to 2005 represented within
the composite for the full year. Composite dispersion is shown for those years when there were five or more portfolios in the composite for the full year.
6. The gross returns for the Composite are calculated net of brokerage commissions, but do not reflect any deduction for investment advisory fees, custodial charges or other costs, which a client might bear in
connection with the management of the account. The returns realized by an investment advisory client would be reduced by these costs. Monthly net of fee performance is calculated by subtracting one twelfth
of the actual fee or one twelfth of the firm’s highest annual fee from the monthly gross return for each account. This Composite has historically included one or more pooled vehicles for which there was no
fund-level fee. In these cases, the firm’s highest level of fees was applied to calculate net of fee returns. Annual net of fee performance is calculated by geometrically linking the monthly net of fee performance
returns. The investment advisory fees typically charged by CIBC Atlantic Trust to clients are as follows: Up to $5,000,000 - 1.20%, Above $5,000,000 to $10,000,000 - 0.80%, Above $10,000,000 - 0.60%.
7. Effective January 1, 2009, the minimum portfolio asset size for the Atlantic Trust Taxable Disciplined Equity Strategy Composite was reduced to $500,000. Prior to January 1, 2009, the portfolio minimum
asset size was $1,000,000.
8. A complete list and descriptions of all CIBC Atlantic Trust composites are available upon request.
9. Past performance, as shown in the composite presentation report, should not be construed as a guarantee of future results.
10. Doug Rogers, former co-portfolio manager, left the firm in May 2010.
CIBC Atlantic Trust Private Wealth Management includes Atlantic Trust Company, N.A. (a limited-purpose national trust company), Atlantic Trust Company of Delaware (a Delaware limited-purpose trust company),
and AT Investment Advisers, Inc. (a registered investment adviser), all of which are wholly-owned subsidiaries of Atlantic Trust Group, LLC.
This document is intended for informational purposes only, and the material presented should not be construed as an offer or recommendation to buy or sell any security. Concepts expressed are current as of
the date of this document only and may change without notice. Such concepts are the opinions of our investment professionals, many of whom are Chartered Financial Analyst® (CFA®) charterholders or CFP®
professionals. Chartered Financial Analyst® and CFA® are trademarks owned by CFA Institute. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL
PLANNER™ in the U.S.
The CIBC logo is a registered trademark of CIBC, used under license, and “Atlantic Trust” is a registered trademark of Atlantic Trust Group, LLC.
There is no guarantee that these views will come to pass. Past performance does not guarantee future comparable results. The tax information contained herein is general and for informational purposes only.
CIBC Atlantic Trust does not provide legal or tax advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisers. To the extent that information
contained herein is derived from third-party sources, although we believe the sources to be reliable, we cannot guarantee their accuracy. Approved 1171-17. For Public Use. Investment Products Offered are Not
FDIC-Insured, May Lose Value and are Not Bank Guaranteed.
cibcatlantictrust.com