Kim Shannon: Inflation, Value Investing & Canada Now

Kim Shannon, CFA, Founder & Co-CIO, Sionna Investment Managers joined us for deep dive of a fireside chat on her career and perspective as a value manager, investing, inflation, the reflation trade, and why the current leg in the economic cycle is a favourable backdrop for Canadian equities.

Read the transcript

[00:00:01] Pierre Daillie: Hello, and welcome to the Insight is Capital Podcast. I’m Pierre Daillie, managing editor of My very special guest is Kim Shannon, founder and co-CIO of Sionna Investment Managers. Since joining the industry in 1983, Kim has won numerous awards, including Morningstar Fund Manager of the Year in 2005, the RBC Canadian Woman Entrepreneur Award in 2007, and Canada’s Most Powerful Women: Top 100 in both 2007 and 2017. She sits on the board of the Brandes Institute, the Ontario Arts council, and United Corporation. Last year, Kim was among a select few to present at the Columbia Business School’s From Graham to Buffett, Omaha Panel. And in 2019, co-hosted the female-led Variant Perspectives Value Investing Conference in 2019, featuring Warren Buffett as keynote speaker.

[00:00:58] Speaker 3: This is the Insight is Capital podcast.

[00:01:03] Speaker 4: The views and opinions expressed in this broadcast are those of the individual guests and do not necessarily reflect the official policy or position of or of our guests. This broadcast is meant to be for informational purposes only. Nothing discussed in this broadcast is intended to be considered as advice.

[00:01:17] Pierre Daillie: Kim, welcome to the show. It’s really great to have you.

[00:01:20] Kim Shannon: Terrific. Thanks. I’m glad to be here, Pierre.

[00:01:23] Pierre Daillie: Kim, to kick things off before we get to talking, please tell us about your background, what inspired you to get into the business the arc of your career what it was like to start your own firm and what’s new?

[00:01:37] Kim Shannon: [laughs] [inaudible 00:01:38].

[00:01:37] Pierre Daillie: That’s a lot to unpack to that.

[00:01:39] Kim Shannon: Let’s keep going. I started a off in university studying anthropology zoology but in the meantime I did a lot of volunteer work. And at the end of my degree, I realized it was time for a change and had a, in a casual conversation with a friend had an epiphany that this organizing thing that I love to do, running all these student organizations was business.

So I went back and I did an undergrad in Economics and Commerce. I graduated with distinction. I realized I was onto something. I looked for a job. It was way back in early ’93 and it was economic recession. And I found, I was lucky enough to find a job in a really small trucking fleet insurance company, managing insurance reserves-

… and basically rolling T-bills. And it was, in a contrary way, one of the best jobs to get at the time, because I ended up managing equity reserves. But at that moment in time, I was rolling T-bills at 14%. [laughs] Equities were trading at a nine P/E multiple. Excuse me, it was, this was in the early ’80s, not the early ’90s.

[00:03:00] Pierre Daillie: Yeah.

[00:03:00] Kim Shannon: And nobody in their right mind had any desire to go into equity investing. And that I wanted to-

[00:03:09] Pierre Daillie: Yeah. This is just shortly after the death of equities, right? [laughs]



[00:03:14] Kim Shannon: We had this peak in interest rates and we were constantly looking over our back for inflation to come back again. And I end up deciding I need to work in an investment department and land at Royal & Sun Alliance in the investment department, which I worked at for a decade.

I was fortunate enough to work under a very brilliant value investor called John Di Tomasso. And he was a philosophy major and he he was a ‘Cigar Butt’ value guy. And he came at business from the perspec- from a very philosophical perspective. And I learned that the stock market reflects human nature as much as it does underlying fundamental values. And that human beings have a tendency [inaudible 00:03:59] and then gets embedded into stock prices in multiple ways.

And value managers try and take advantage of that excess embedded by searching the landscape, looking for stocks, trading below a crazy value and then patiently waiting for them to come back. So I learned at the feet of someone, very good, watched it happen over several years. When he left, I got the top job and did very well. I moved to a real investment counselor to learn the trade, connected up with an old mutual fund company Spectrum United.

Managed one of, and was took over one of the oldest Canadian mutual funds in Canada, the Canadian Investment Fund dating back to 1932.


[00:04:47] Kim Shannon: And it was down to 40 million, which is basically you take it open to the back shed and you kill it. [laughs] and we, I applied it, my techniques of value investing with low risk, ’cause I’d modified from John being a cigar by value manager a bit. Do you know, how you re- you reflect your own personality in the way that you invest?


[00:05:11] Kim Shannon: And we improved the track record dramatically. And by the time I, I separated from that fund, it had become like once again, the largest Canadian equity mutual fund in Canada. And along the way back in 2002, after, I’d moved to Spectrum, I’d moved to Merrill Lynch. And then I had a chance to launch Sionna with a new holder of the mutual fund company, CI Funds. And we were had a very good a relationship for four years until we decided to disconnect. And so my assets were very variable. They grow very dramatically and-

[00:05:53] Pierre Daillie: Yeah.

[00:05:54] Kim Shannon: … and then shrunk. So from basically 9 billion in the EUM down to 900 million. So in this essence made us, we started all over again. And then we’ve been building up ever since. So that’s the history of the firm overall, how I started the firm, with a major client, which made it a lot easier.


[00:06:17] Kim Shannon: And carry, carrying on, but as you can imagine, it hasn’t been the best decade. It hasn’t been the best two years for value overall. You’re catching a value manager, on their back legs, so to speak. We’ve had a good move in value, it’s, but it’s coming guard. But it’s very similar to what you saw in prior, prior cycles of the-

… of the big switch from growth back to value.

[00:06:45] Pierre Daillie: Yeah. I was gonna say, it’s been a very tough go for value managers in general this last decade, but touching on what you’re just saying that, that’s, historically, that’s what’s separated the wheat from the chaff. It’s having and maintaining the fortitude and the conviction to stick to your style and to stick at to stay with your convictions as a value investor and not be tempted to stray away from your style or to drift.

And many value investors have come and gone that way, have caved into the pressure to change style. And so I think when, everything gets ironed out in the long run we’ll see, [laughs] who the purists were and who wasn’t.


[00:07:40] Pierre Daillie: And I think that says a lot about, says a lot for you in terms of being true to your philosophy of investing. Which, in, in the very long term sense is not really strictly value investing. It’s just investing, isn’t it? Is just good investing. And because I think a lot of people have been perplexed over the last decade by fundamentals being completely disregarded as a reason for investing and just focusing on momentum or just focusing on growth, but especially momentum. So having said that has, has-

[00:08:21] Kim Shannon: Should I just jump in and add to some of that-

[00:08:23] Pierre Daillie: Yeah. By all means.

[00:08:23] Kim Shannon: … the items you’ve-

[00:08:24] Pierre Daillie: By all means.

[00:08:25] Kim Shannon: … that you put out there. What’s really interesting about the last decade, actually the last 12 years is when you look back historically, the data comparison between value and growths goes back to 1926. The data banks just aren’t granular enough prior to that to be able to sketch out the details. People, you just can’t get your hands on old financial statements to really disaggregate.

And when you get back to that timeframe, you have less than you basically only have monthly data. You don’t have daily trades, you certainly don’t have hourly trades documented. So you are, you’re dealing with a lot of really sketchy information. And in that history of somewhat 90 years, this has been the deepest and the longest period of under performance of value.

So last year I wrote a piece called Waiting for Dawn [laughs] because it and we also ended it when we came out of that, that, that big correction in the spring of 2020. It was the first time in financial market history for value versus growth, where value you actually underperformed in a bad market.

[00:09:39] Pierre Daillie: Yeah.

[00:09:39] Kim Shannon: So that really affected client psyche about value because a lot of clients had held in with value because it always defended in a down market. And this was the first time that it didn’t. Now, did come rolling back with the overall market and value did fall in ultimately, but it was very brutal. The deeper value you were, the more brutal the pain was in that time period.

So that was that really caused a big risk for value investing, but, I’ve been in the markets since ’83 and, and all also my mentors all lived through the ’70s. And in the mid ’70s, when nobody was re- you know, you had the whole nifty 50 phenomena, which we’d never seen stocks in aggregate go to a 25 P/E multiple before in financial market history, that was considered [inaudible 00:10:38]. And then we know how that unfolded.

And so we, value managers has, have been challenged in the past. There was a big ugly period in ’30s. Then there was notably the mid 1970s. Then I got to witness the 18, the ’87 crash. But that whole period leading up to that ’87 crash was very brutal for value managers. And then there was of course, 2000 which for me personally was worse than what’s been happening today in a lot of ways. It was just briefer for Canadian investors. But, in the summer of 2000 underperforming the benchmark by 20%.


[00:11:22] Kim Shannon: It was just a brutal under performance. And I wondered how long it would take to earn back relative outperformance. We, we earned back so much by the end of that year and the next two years was huge, relative outperformance for value. But when you look at those past challenges, you, it tends to come and leaves and I think a lot of people forget it. Bernstein wrote a fabulous piece about the 2000 unwinding of valued gross. And the first phase is very similar to what’s happened this cycle, the first phase, the companies that earned no earnings got hit first.

Then if you recall in Canada, there was that painful period where Nortel had gone all the way up to $90 a share and then had corrected all the way down to $60.

[00:12:17] Pierre Daillie: Yeah.

[00:12:18] Kim Shannon: Only over the summer in Canada, and, gross peaked in large in the us, it peaked September one in Canada because we had the optical stops Nortel and JDS, and they shot to the move on pulse through the summer. And we had Nortel go to $124 a share. It was and became 36% of the benchmark.

[00:12:44] Pierre Daillie: Yeah.

[00:12:44] Kim Shannon: Making it very hard for anyone who was trying to avoid an out outrageously overpriced stock like that. So I think we’re now potentially beginning the second phase of the unwinding, which is that you have legitimate tax stocks that have excessive implied growth embedded in their valuation and implied growth rates that are unlikely to be sustained. And for me, the poster child of that in the marketplace today, you don’t have to be Tesla and Shopify. They’re both trading at extraordinary multiples. And, even if you’re trying to find like a forward multiple that makes it make sense-

… You maybe get them down to 150 P/E multiple. And at that level, as you, it means it’s 150 years for the current earnings to pay for this stock.

So the applied gross rate is so significant. And when you look back at history, how many stocks have had phenomenal, implied gross rates and for such a long time [inaudible 00:13:57] meaning the average tenure of the publicly listed stock today is somewhere around 20 years. And when you look back at what were the biggest stocks over a hundred years ago, not many of them still exist in any significant today.

[00:14:13] Pierre Daillie: Absolutely. Yeah.

[00:14:15] Kim Shannon: And when you look at the darlings of prior stocks, stock markets, like the 1970s, and like 2000, like back in the ’70s, part, you had stocks like that, that went on to do extremely well like McDonald’s and like Disney but you made no money at all in these stocks for 15 to 20 years.

[00:14:40] Pierre Daillie: Yeah. And what was the likelihood that you stayed in an ownership position with those stocks? Regardless of, the following 20 years, what was the, what was, what’s the, what are the odds that you stayed there, in a lost position-

Yeah. Exactly.

[00:14:56] Kim Shannon: … overall total return and you, even, when you look back in 2000, of the Bernstein report that looked at the top nine in the top 12, only two of those stocks ever came back to the same market cap heights, all the rest did not.


[00:15:14] Kim Shannon: Nortel is gone, Sun Microsystems is gone, Cisco is around, not so exciting, Lucid is around, Intel is around. Nobody talks about those stocks to the same degree anymore. They’re no longer exciting stocks. And you have a number of people thinking that the top stocks of today will walk on water for a very long period of time. Some might-

[00:15:41] Pierre Daillie: Yeah.

[00:15:42] Kim Shannon: … but, some probably will not. I’m value managers think, and I, I’ve seen it happen over and over again, you’re safer buying good quality firms, where you understand the earnings machine capability of the firm. You look at those normalized earnings, you meet, theory, simplistic assumptions about where it’s gonna go in the next couple of years, and then you try and buy those stocks with the nice fat margin of safety, so that if anything goes wrong in the fullness of time, you really should make some money on those names.

And you’re starting to see some opportunity once again, out there in the marketplace for value. Perhaps we’ll have the revenge of contrarian investors but the full story hasn’t been told. We are in the middle of it, and there’s still a lot of downloads here.

[00:16:38] Pierre Daillie: Yeah. I it reminds me of the listening to you it’s it, it’s really, when you look at for example, the ’60, the 1966 to ’81 period a few people… I guess what I’m gonna get at is that I think today’s, a lot of today’s market participants are not in touch with history anymore.

Of course there are those there’s always exceptions to that. So I don’t want to include every, I wanna say, I don’t wanna say everybody’s not in touch with market history, but a lot of that perspective is being shared by a minority of people. And the majority seem to be locked into what’s going on in markets the last 10 years, the last 12, 10 or 12 years.

[00:17:32] Kim Shannon: And that’s the age, the average age of participants.

[00:17:35] Pierre Daillie: Yeah.

[00:17:36] Kim Shannon: Like when you think about the stock market and investing, is the average investor comes into the market, maybe they start dabbling a little bit in their 20s, but they don’t have a lot of money. So it’s not until you’re almost 30 that you have a little bit of money and then you start playing around and you try to learn the craft of investing. And then you start in a certain environment. I happen to start with, short term interest rates were 14% and equity P/E multiples were not. And so you’re trying to learn the lessons.

The lessons that were being taught back then is you look at the last boogeyman or the last excitement in the market. And the last boogeyman back in the early ’80s was inflation. We spent over a decade looking for inflation to come back. We didn’t believe that it had gone away. My entire CFA was all about how to operate in inflationary environment. I finally think I might get a chance to use that knowledge.

[00:18:34] Pierre Daillie: Yeah.

[00:18:35] Kim Shannon: It hasn’t been useful to me for my whole career. So you, the window that you learn in, so people start investing and typically most investors make a lot of mistakes before they decide they need to find a professional to help them because at the rate they’re going, they’re not gonna have money for their retirement. And then you only get to this investment time horizon of making wealth for about 40 years, unless we change longevity for human beings. And then you have to spend the rest of your life eating your cooking. And that’s why you eventually go find a professional to help you manage it.

And ideally your professional helper will know a lot about the sweep of financial market history, because you’re, I mentioned earlier, markets are equal parts, rationality and human emotions, and you can’t forget the other [inaudible 00:19:31]. And so the markets go to euphoric highs and press lows well above and well below long term true net worth. And it, behooves investors understand that. And we have this unique environment today as in old markets where you have a lot of young participants who haven’t been in the market that long. Even the profile of professionals. When you look at the profile of the Toronto Society Financial has, which has to be a microcosm for the entire CFA organization globally-

… If you look at the number of participants over the age of 50, it’s 10% or less of the population. You start doing the math and you slice down that age group. How many participants have even witnessed a bear market like ’08?


[00:20:25] Kim Shannon: Very few. And then to actually have, and witnessed 2000 and or ’87. And, or, you have to be a, of a certain age, mostly in retirement to have remembered what it was like to operate in the ’70s. So there’s not a lot of participants around sharing those experiences and education and no, no big surprise, the data is showing we have one of the most speculative markets out there. A lot of people playing in a very speculative way. We also have a lot of lending in terms of investing, which has always talked about the excessiveness of markets. And we have one of the most expensive markets in the world, particularly centered in the US, in financial market history.

It’s been rare to see a market this expensive. I, I saw a recent quote that said, when you add both public and private companies together as a percentage of GDP, the number is 290 today. It was 190 and 2000 when the market blew up. This is a risky, overpriced market, particularly in the US, which is the leading market in the world. And the us market is a significant part of the global benchmark, which people are clustering into.

This is a market to be care carefully and cautious in and protect, and I will argue is that the excellent market to begin to move more of your ex- your investing into value to protect your wealth.

And in particular I think Canada is a more reasonably but highest market in aggregate with a better yield, which is also affirming how inexpensive our market is overall. And in the aftermath of 2000 Canada was cheaper and it outperformed the US market for six years solid after that. And the relative cheapness of Canada against the US compared to 2000, we are cheaper today than the, than we were relative to the US of 2000. So there is that opportunity for the history to repeat itself [inaudible 00:22:42].

[00:22:43] Pierre Daillie: So we, we’re gonna get to Canada. I want to ask you about that, but [laughs] first I’m just curious to know has your value investing style evolved and if so, how?

[00:22:56] Kim Shannon: Yes. It’s an excellent question because, obviously you have to change with the types and you have to change with the data and you also have to change with the change in the accounting rules. And they’ve changed fairly, dramatically throughout my career. And most of us would argue that right now book value is not as compelling or a ratio to look at as in the past. It may become more compelling in the future, but, the movement to sphere value accounting has broken down some of those signals in certain industry groups in particular. And so you’ve had to lean more heavily on other ratios and attributes. Again, you have, so that has happened.

The other thing is in the early part of my career, it was very hard to download information. Literally at my job early on was to call each company I’ve been asked for their annual reports. Refer to, write in the mail and record the data in our model. And we would price it once a week off a modem and turn it on overnight. [laughs] and charting took, you did overnight on a dot matrix system. So technology has dramatically improved and the quality of information and the overload of information. Early in my career, we sought information. We wanted to get an information advantage. Now it’s about editing the voluminous information that’s coming at people.

So that’s been a big sea change, but more information isn’t always useful. And I, one of the CEOs of a major corporation in the past said, you want more information, we’ll give you a telephone book of information, and that’s a bit of what you’re getting now. It’s definitely stronger and stronger cups of coffee to read through the notes of financial statements today. They’re so complicated and complex and voluminous. So you’ve had to adjust to all of those changes, but the core principles of value investing have still remained there. And they’re still the principle of looking at aggressive accounting practices. We’ve, we’ve always looked at governance, but today governance has been expanded to E and S.


[00:25:28] Kim Shannon: And they’ve always been there. You always would have the risk of a liability if you invested in a company that was, not being good on E and S as well, eventually those liabilities will come back and bite you. So were always focusing on quality, but the the demands have certainly cranked up on that. But data makes that easy to handle those extra, easier to handle those extra loads in terms of the research.

[00:26:03] Pierre Daillie: Yeah. Speaking of ESG I, what we’ve seen, I think from our, from our side, in terms of our audience being advisors we’ve seen I think what we would deem to be a lot of ambivalence about ESG. And I think it goes to what you just said, which is that, a lot of people in the business feel like this is not new. Why do I have to act like it is, [laughs] right?

Why do I have to, why do I have to identify it as something new when it’s not actually new? It’s something that’s always been there. We’ve always been worried about, whether or not we should invest in tobacco stocks or fossil fuels or polluters, or, Union Carbide as a historical example of a company that, that, created an incredible amount of risk for investors and losses.

And I think people, a lot of advisors maybe shrug off ESG thinking what’s all the fuss? What’s the big deal about ESG? And really all that’s changed is that it’s become more defined. It’s not something that’s esoteric anymore or something that, that you on a one off basis consider, as you’re picking stocks, but it just-

[00:27:26] Kim Shannon: But, you have to keep in mind that environmental issues are probably best dealt with at a government level.

[00:27:35] Pierre Daillie: Yes.

[00:27:35] Kim Shannon: And because the government talked the big talk, it didn’t act very much, frustrated people thought let’s take another tact.” And they went after publicly listed firms. And so we’re bearing the brunt of the public’s desire to change something that should have been handled by governments. And so that’s part of why there is a certain element of frustration. This isn’t probably being best dealt with at the right level. And there’s a lot of debate about, should we be forcing major corporations that by and large are, the better organizations out there have tried to be good in the major nations, good corporate citizens on environmentalism. And, but, they’re getting tar and feathered for having some of the some some operations let’s say like coal.

And so there’s this whole divestment urge that’s gone out there and firms have had to sell these assets to, to [crosstalk 00:28:45] cleaner and better, but, who are they selling them to? And that’s one of the issues. And then once it’s gone dark, in terms of a public ability to force behavior, will they be managed in a responsible way? And one of the shocking [inaudible 00:29:06], results of this year is that the underinvestment in a lot of energy has had numerous flash down effects such that, you’re now seeing parts of Europe and Asia having to turn to coal in order to supply enough energy-

… To run businesses and heat homes because we relied on renewables as your staple source and there isn’t enough of them. I, I understand one of the issues in England this year is that there wasn’t enough sun in the summer and enough wind to run the turbines [laughs]. And so they were, had to rely on natural gas and there was a lack of supply. And the price of energy’s gone up very rapidly. So that’s an unintended consequence of trying to move a little too fast. Renewables only represent currently 12% of the total energy picture.


[00:30:12] Kim Shannon: And we’re trying, the world’s trying rapidly to change it, but that’s the reality to which we face right at the moment.

[00:30:20] Pierre Daillie: Yeah. I’m, it reminds me of the the foibles of what’s going on in Germany with nuclear power and coal or nuclear power versus coal. Last decade Germany phased out half of its nuclear reactors because of Fukushima and because of, German sort of resistance to nuclear power in general because of Chernobyl. And so in the course of doing that they had to replace nuclear with coal. And there’s this great movie. I don’t know if you’ve seen it, this Ed Burtynsky movie called Anthropocene and it’s on, Yeah.

… it’s on Crave or HBO or one of those stations. And one of the segments details what’s going on in Germany with coal excavation. And they’re literally, they’ve got these coal excavators that are the size of buildings, and they are carving up the German countryside for lignite. And in the course of doing this they’re erasing villages and towns that are in the way. And the people in those villages and towns have to be relocated. And they’re tearing down historical monuments in in, in an effort to feed the coal machine in Germany.

And so they’re not able they haven’t been able to keep up with the demand for coal. And because of that, so now not only is Germany a huge emitter because of their power demands that are being fed by coal instead of nuclear, they now have to buy excess power from France’s nuclear power. And so they’ve defeated themselves on both fronts. They’re not only a larger emitter for their power demands, because they tried to meet with this governance demand of closing down nuclear but they’re now buying nuclear power anyway.

And so they’ve got this double problem of pollution and governance that they’re grappling with. And [laughs] it’s ironic because again they’re again it’s an unintended consequence of, let’s say bad governance decisions and or mis- misdirected government, gov- governance decisions on the ESG side in order to meet with social demands of the people. And and then at the same time-

[00:32:58] Kim Shannon: All well intended.

[00:32:58] Pierre Daillie: At the same time-

[00:32:59] Kim Shannon: It’s all well intended.

[00:33:01] Pierre Daillie: … On the other side of the nuclear, on the other side of the nuclear question is now that, people are starting to re-identify nuclear as clean energy. And the recognition or starting of new nuclear power plant properties, in particular by China’s Belt and Road Initiative is placing huge demands on the future for uranium, right? So uranium prices have skyrocketed.

[00:33:32] Kim Shannon: Yeah.

[00:33:32] Pierre Daillie: And so I, I look at that and I think it’s ironic that, in the course of trying to decarbonize the world in order to try to decarbonize supply, they’ve been decarbonizing supply at a faster rate than demand, than decarbonizing demand. And for-

[00:33:50] Kim Shannon: There’s a book written five years ago or so-


[00:33:54] Kim Shannon: … I think it got great reviews in business our, Financial Times for example, and it was called The Moral Case for Oil. And in a lot of ways that book foretold the situation that we’re in today. And they talked about the, yes, we’re trying very hard on technological innovation, but if we move too fast it, it increases the cost of energy which is what we’re seeing.

And in a sense we’re, ES- environmentalism today is part of this picture of what looks like growing persistent inflation, because, we’re seeing fuel prices around the world going up dramatically. And that it spills over into so many goods and products and services and it’s forcing prices up. And that’s why I think we’re starting to see the word transient getting removed from this whole inflation argument overall.

And we’re also seeing now, fairly persistent movements in wage inflation. And in particular, I’m finding it interesting, I’d say it was about a month ago John Deere company, I understand their union turned down at 10% wage height. We have not had unions have a lot of power and push back against business-

[00:35:30] Pierre Daillie: Yeah.

[00:35:30] Kim Shannon: … in several decades. So the world is, seems to be changing [inaudible 00:35:34].

[00:35:34] Pierre Daillie: It’s starting to happen though, right?


[00:35:36] Pierre Daillie: Just I think, I think-

[00:35:37] Kim Shannon: This is part of that whole-


[00:35:38] Kim Shannon: … [crosstalk 00:35:39], business world is, it’s this major ecosystem and when you move one element of that ecosystem, it has impacts all over that ecosystem.

[00:35:52] Pierre Daillie: Labor, labor is starting to get a foothold. And yesterday there was the news about the the Starbucks, the the Starbucks outlet that unionized, [laughs], I can’t remember where it was. I, it was in somewhere in, in-

[00:36:08] Kim Shannon: Detroit or Buffalo.

[00:36:09] Pierre Daillie: Yeah.

[00:36:10] Kim Shannon: Buffalo?

[00:36:10] Pierre Daillie: Buffalo. Buffalo, Western New York. Yeah. [laughs] wow, where did that come from? Unionizing a store, that’s where it starts, obviously is unionizing a store. Next thing is unionizing the whole state. And then a movement gets started and but the labor movement I think is slated for a comeback. And and those are the sticky parts of inflation, right? Those are-

[00:36:38] Kim Shannon: Yes.

[00:36:39] Pierre Daillie: … the aspects of inflation that you can’t, that you can’t do away with or go back to, go, revert back to the mean. You can’t put people back on a lower wage after you’ve given them a higher one. And-

[00:36:51] Kim Shannon: We haven’t had wage pressure-


[00:36:54] Kim Shannon: … To any significant degree for quite some time. And that was, I think, part of why people were willing to accept that inflation was transient, but it’s, but now that you’re seeing difficulty filling positions you are seeing a lot of movement of labor of, at all levels. And employers are starting to realize that it’s very difficult to replace your best employees if they leave. And so they’re willing to give them offer them more money, more incentives to stay with the employer. And that is really creating that push on inflation, which is ultimately, it’s another element of adding to that inflationary story.

And it’s coming in a sense almost just on, in time. You were trying to talk a bit about the sweeps of history when you were talking about the ’66 to ’81 time period.


[00:37:50] Kim Shannon: Because that was the sideways market in equities, ’81 is symbolic. We had interest rates peak in 1981. So the last low, the last inflationary low in interest rates was in 1941. And the US fell to what was considered then an all time record low interest rate of 1.95%. That sounds almost [inaudible 00:38:14]. And then it started to, it had a long, low U had it went sideways for a long, lengthy period of time and then it slowly started increasing. And then we eventually had runaway inflation leading into 1981 where it peaked and Reagan and Volcker broke the back of inflation expectations by ramming rates very high and was successful and rates started to come down. And we have been in a deflationary. So that was a 40 year up cycled-

[00:38:46] Pierre Daillie: Yeah.

[00:38:47] Kim Shannon: … for rates. And then now we’ve just arguably completed a 40 year cycle down. In fact, it ended up being a little less than four years. And if you look back in history, rate cycles tend to be roughly 20 years. 20 years, they go up-


… and then 20 years, they go down. If you look back in history, except for this extremely lengthy period from ’41 to ’81. And you tend to find that these cycles are somewhat symmetrical, but Jeremy Grantham has talked about when you get three standard deviation events, when something’s really off the charts, he said, when you have this incredible, he talked about this a lot in the 2000 period, you have something go up dramatically.

[00:39:39] Pierre Daillie: Yeah.

[00:39:40] Kim Shannon: And he did it, for markets, for segments of the markets, for commodities, any kind of investible asset he did it for.

[00:39:47] Pierre Daillie: Yeah. The analysis was amazing.

[00:39:49] Kim Shannon: When, if it went up, it came back down pretty much to where it began.

[00:39:55] Pierre Daillie: Yeah.

[00:39:55] Kim Shannon: But he said they, it all often comes back down a little shorter. [laughs] two months shorter.

[00:39:59] Pierre Daillie: Yep.

[00:40:02] Kim Shannon: So I would argue that probably the low in rates if history repeats itself and time will tell the answer to this, it was probably the spring of two 2020. Because we had, because of COVID shock, a synchronous drop in rates to new lows. And synchronous is symbolic in a lot of ways in my mind. And so we had this drop in rates to new lows and and we’ve had it rise since then in, stepwise factions, but we’re up off those lows. And now we seem to have inflation that’s no longer transient, but potentially permanent.

So are we now finally in that paradigm pricing shift of rising interest rates? And looking back at history, it seems probable. Now you can argue that’s not correct because Japan is in a different cycle and its dropping rates has lasted even longer. So is that our guide or is history again?

[00:41:14] Pierre Daillie: Yeah. The Japan example is a wonderful sort of history lesson, isn’t it? it, in terms of looking at, the fact that Japan has never recovered back to its ’89 high it reminds me like I, just to change gears a little bit, because I’m just curious to know we’re now talking about these two 40 year trends, ’41 to ’81 and ’82 to ’22. And do you think that this deflationary cycle that we’ve been in, this long 40 year deflationary or disinflationary cycle that we’ve been in with rates falling from historical highs to, 5,000 year lows-


[00:42:02] Pierre Daillie: … [laughs] do you think that, is it possible that the rise of passive investing has corresponded along with it, in terms of the rise and the adoption from ’81 beginning with passive investing in the early days to what is now this passive behemoth? And the reason I’m asking that is that Mike Green from Simplify has really has come out in the last year and a half or so with his, with what’s now called the, Inelastic Markets Hypothesis. And it runs counter to the Fama Efficient Markets Hypothesis. So it’s the Contra argument.


[00:42:50] Pierre Daillie: And in it, the argument is that the shift from historically active management to the present of passive indexing, passive investing has created a substantial in inelasticity in the market.

[00:43:10] Kim Shannon: Yes.

I haven’t read his material, but it sounds pretty fascinating. The history of passive of investing, it starts in the ’60s-

[00:43:19] Pierre Daillie: Yeah.

[00:43:19] Kim Shannon: … with the development of the Efficient Markets Hypothesis, ’cause you had to start with that. That belief that the market, incorporates all known information into the market rapidly and instantly gets priced in. Now this reminds me-

[00:43:35] Pierre Daillie: And so the theory, Kim, is that the Efficient Markets Hypothesis, which led to passive investing has caused the market to become inelastic.

[00:43:50] Kim Shannon: Yeah. No, I get the point.

[00:43:50] Pierre Daillie: Sorry. Sorry. Yeah. No I was just, I wasn’t, But it’s, there’s an element, throughout human history, philosophers have always tried to forecast human behavior and it’s impossible to do because humans are essentially irrational. And so when you look at philosophers trying to forecast human behavior and now economists, or, financial, academics trying to forecast human behavior, they have to make some assumptions to come up with their theories. And their, the first assumption, assumptions they always make is assuming humans are rational [laughs], which we know is not true.


[00:44:37] Kim Shannon: And so that’s the first step. So what’s wrong with the Efficient Markets Hypothesis? Does the market instantly price all know the information into a stock immediately? Is there no obstacles to true net worth being priced into stocks immediately? Examples like the ’87 stock market crash are good examples of that because-

… We had a market that declined very rapidly in a day and then bounced back pretty rapidly too. Did the values really drop 25% in a day or was it too high one day and too low the next? I don’t, so I’m, most of all value managers by belief in value do not agree with the Efficient Markets Hypothesis.

We’re all contrarian investors. We do not believe that stock, every single stock in the marketplace is efficiently priced. Now when you move to passive investing. So that gets written, and by 1971, you had a Random Walk Down Wall Street written which supposed that, what if you were able to buy an index cheaply instead of paying expensive active manager fees, if you were able to do just buy the index, wouldn’t that be cool? You wouldn’t, you could get the free rider effect of, free rider-

[00:46:04] Pierre Daillie: Yeah.

[00:46:04] Kim Shannon: … common law. Like you could ride off the backs of there’s enough institutional investors, more or less making the market efficient that you could now free ride on what they’ve done to the market and not pay them and get the benefits of an efficient market. What, so the great experiment that we’re doing today is when are we at the point that there’s so much passive management going on in the marketplace overall that the market might not be efficiently priced anywhere?

And we don’t know that until we hit it. And-

[00:46:43] Pierre Daillie: Yeah, exactly.

[00:46:44] Kim Shannon: … and that’s, we and when you look at markets, we rely so heavily now on benchmarking and benchmark indexes. And we’ve collectively decided that the best benchmarks are cap weighted benchmarks, but they do have flaws.

[00:47:02] Pierre Daillie: Yeah.

[00:47:03] Kim Shannon: And they’re based on the most liquid names in the market. And Robert Arnott in his book Fundamental Index, in the, he built his firm largely off the theory of fundamental indexing, is that this, that cap, cap weighted benchmarks are essentially, somewhat inefficient. And that if you reweight the benchmark in any rational way, because, cap weighting captures the popularity contest in a market.

Everybody loves Tesla, they’re paying a crazy price. Tesla represents a very large percentage of the benchmark. And therefore, if Tesla comes back down to earth that benchmark’s gonna get hit really hard. And then when you expand that to people falling in love with global benchmarks, right now the US is I believe around 60% of the global benchmark. It was as high, I believe as 70%. No market in the world has ever represented that high a weight in the benchmark. And the only one that did, you mentioned earlier, Japan.

[00:48:11] Pierre Daillie: Yeah.

[00:48:14] Kim Shannon: Japan back in 1989 was 44% of the global benchmark, was just crazy on weight.

[00:48:20] Pierre Daillie: Yeah. And the us is currently a third, right?

[00:48:23] Kim Shannon: And right now, what weight in the global benchmarks is Japan. I believe the last time I looked at 6.5%. [laughs] So we’re all believing that the US must and should represent 60% of the global benchmark because of this cap of weighting. And what you are mentioning is right now today, there’s different ways of slicing a benchmark. And one rational way might be what’s the GDP. And GDP for the us would be 25%, for China would be 25%. China has a very small weight of the global benchmark because of this cap benchmark weighting. So maybe the better number for the US is somewhere between 25% and 60%-


… But where?

[00:49:11] Kim Shannon: And and we also know that after a market has become too expensive in a global benchmark, its weight can fall back down to earth. And Japan, in a cap- in a capitalization only basis is still below its prior higher of ’89.

And interestingly enough, I know, I don’t know about other markets, but right now London is still below it’s 2005. So when markets get overpriced it takes a long time for investors to get their wealth back. And so passive investing or this enormous focus on global benchmarks could end up be a challenge for investors going forward in the future.

[00:50:02] Pierre Daillie: Yeah. I guess the, the observation is that, this very substantial segment of market participants is locked into this idea of, just buy the index, just keep buying it. And as long as that sort of juggernaut of buying is going on, whether it’s, 401ks in the US that are buying the market every two weeks this is I think what looks very worrisome is the fact that every single one of those names whether it’s Apple or Tesla or, they’re just being bought indiscriminately and being valued higher indiscriminately, as long as the buying is going on. But as soon as the tide reverses for any reason-


[00:50:50] Pierre Daillie: … There’s very little support for those prices on the-

[00:50:54] Kim Shannon: Yeah.

[00:50:54] Pierre Daillie: …on the reverse, on the reversal.

[00:50:55] Kim Shannon: Yeah. And when you look back in history and you can go back and look at, And conversely, there’s more support for the lower cap value names in the market because of structural support in the market.


[00:51:11] Pierre Daillie: The market makers have more support for the, the 10, 20, 30 billion cap companies than they do for the 3 trillion cap Apple, because they simply can’t support, they can’t support the market for Apple-

[00:51:27] Kim Shannon: Yeah.

[00:51:27] Pierre Daillie: … versus the way they can at the market for a lower cap name.

[00:51:31] Kim Shannon: What ends up happening is almost every active manager to a greater or lesser degree is a risk manager and will take some risk off the table in a hot frothy speculative market. And it happened in the past. And so what is, when that market collapses, the value managers tend to do well because, or-

[00:51:58] Pierre Daillie: Yeah.

[00:51:58] Kim Shannon: … and the active managers tend to start to outperform. So you actually have data going back in history, looking at active managers when they outperform the benchmark and when they underperform. And at a very hot frothy expensive market, active managers as a group under performer. And so people comment on that, look at how few active managers are outperforming this benchmark. Therefore you should be in passive investing, but this is, arguably in a lot of ways, not the time to be owning, this expensive market in an index way, that by being with active managers who are managing risk more-

[00:52:41] Pierre Daillie: Yeah.

[00:52:42] Kim Shannon: … are likely to be more defensive on the way down. And that’s what history suggests and what, rationality suggest as well.

[00:52:53] Pierre Daillie: Yeah. And that’s assuming rationality comes back to, reverts back to the mean [laughs] a little higher.

[00:53:01] Kim Shannon: That the market is actually rational to some degree.


[00:53:04] Kim Shannon: But right now we’re, we value managers are gonna argue the market’s very irrational at the moment, that when it comes back down a little bit, it’ll be more rational.

[00:53:14] Pierre Daillie: Absolutely. So Kim, before we run out of time [laughs] because I do want to give it the time that it deserves, let’s talk about Canada. All right. You-

[00:53:25] Kim Shannon: Sure.

[00:53:25] Pierre Daillie: … you’ve been talking, you’ve been talking a lot about Canada. We’ve talked about inflation today.


[00:53:29] Pierre Daillie: We’ve talked about, about, we’ve even, we’ve talked about the market dynamics of inflation. We’ve talked about the fact that reflation is a value trade. I think we’ve laid a pretty good groundwork to talk about why Canada is really attractive today.

[00:53:46] Kim Shannon: Canada is trading at a much lower multiple. The US overall is trading at a 21 P/E multiple and historically we’ve got good databases going back to 1870. And whenever you’ve had the market trading north of 21 P/E multiple the [inaudible 00:54:08] P/E multiple will suggest that over the next decade, your average return to investing should be 1%. Now, there’s a swath of what has happened in the past and it’s been as juicy as in an 8.5% annualized return over 10 years to, to a negative 6% annualized 10 year return to investing-

… with an average of one. In the aftermath of 2000, the market was above a 21 P/E multiple, 10 years later in 2010, the average return ended up being right on that financial market history dataset right on 1% total return. But did anyone in buying in 2000 expect that their annualized return would be a mere 1%?

No. When you think of the median, the amount of money that it’s thrown into the market back then is at is happening today. And that’s where we are sitting in the marketplace today and that’s the US. And meanwhile, we have Canada trading at 15.


[00:55:15] Kim Shannon: And we’re, our market is fairly priced, it’s priced at financial market history. Now, underneath the surface Canada, again, like in 2000 is fairly bifurcated. We’ve got a very expensive Shopify in some other stocks in our market.

But right now, as at November, we have 70% of Canadian stocks are trading 10% below their 52 week highs. And 41% of Canadian stocks are trading 20% below their 52 week highs. And if you had the market overall trading 20% below your your your prior period, like that, that, that is that’s a bear market.

[00:56:01] Pierre Daillie: Yeah.

[00:56:01] Kim Shannon: But what’s TSX doing over the last year, with up 21%. That is, now, if you look at history and [inaudible 00:56:09] did the global benchmark survey of all major markets in the world, going back 118 years. And they’re, they’ve shown that the average expected return to investing in Canada is 7%. Now, to put that into context, the world index-


[00:56:30] Kim Shannon: … Is 6.5%. US has tended to be a little bit richer than Canada but Canada’s a little bit richer than the global benchmark overall in aggregate. And so we’re not a bad long, we’re actually a pretty decent return market. So 21% return over the last year is three times the historical average. That’s a really amazing return for the market overall. And now I’ve lost my train of thought of where [inaudible 00:56:57].

[00:56:58] Pierre Daillie: The index the index, Kim is really acting as a curtain for what’s really going on underneath the index, right? I’ve been hearing from different commentaries that we’ve actually been in a bear market of sorts since February.


[00:57:18] Pierre Daillie: And it’s only these market leaders that are driving the entire market higher. So if you just follow the indices, you’re getting the illusion that we’re in this raging bear market, sorry, raging bull market but in reality there’s this entire layer, of the market that’s already in, already been in a bear market from as long, from as far back as February, since the turn in the market in February and-

[00:57:47] Kim Shannon: Yeah.

[00:57:47] Pierre Daillie: … since the turning the economy in February. And I guess the point I’ll make there is that given that the markets are actually in a bear market in terms of the layer that we’re talking about beyond the top 10 or 20 names that actually bodes extremely well for forward expected returns.

[00:58:17] Kim Shannon: Yes. And then in the context of if you wanna-

[00:58:21] Pierre Daillie: Not of the indices. Not of the index but of the individual names.

[00:58:29] Kim Shannon: And you’re now seeing that the earnings growth expectations for value stocks are looking much better than the expected returns for growth stocks overall. But if you, but I think that it’s very difficult to market time the market consistently well. At the extremes, maybe it’s a little easier to do, but that’s a debatable point too. But if you wanna stay fully invested, it behooves investors and we know that investors had moved away from domestic investing globally. That has been a worldwide trend.

[00:59:04] Pierre Daillie: Yeah.

[00:59:04] Kim Shannon: Canada is no different where we’re hearing that the largest Canadian pension funds at Canada have a weighting and an allocation to Canada of a mere 4% these days. And it’s they’ve basically moved to the cap weighted global benchmark weight for Canada overall. And so this shrinking of interest in our domestic market also, I believe has created this incredibly cheap market relative to a lot of other markets in the world.

Now, European markets are fairly reasonable as well, but Canada is that much cheaper than them as well. And so on a P/E multiple basis, we’re a 50. We have a richer dividend yield than most. We actually have a dividend yield that’s far superior to our tenure government bond yield.

[00:59:53] Pierre Daillie: Yeah.

[00:59:53] Kim Shannon: So a lot of reasons to be embedded in Canadian equities. And now we also have an exposure to commodities. And there’s some fact out there showing that when inflation is north of 4%, which it is today, that Canada tends to outperform the US market. And we also see Canada so significantly cheap relative to the US, historically Canada then tends to under, outperform. So people have been not that excited about Canada because you tend to look at what the most recent past has held. And Canada has been fairly weak in the world seat, but now we’ve, we’re so cheap. It’s our turn. This is the contrarian investments. It’s a bit like buying energy last spring at my minus $35 a barrel.

It was almost a signal. This has gotten so low. There’s an opportunity here and we now know what’s happened over the next year. That we’re at, such a cheap level for the Canadian market overall, is it potentially the time for this market to move ahead of other major markets and start outperform? We’ve had good returns year today to Canada, relative to a lot of major markets speaking to your argument earlier-

[01:01:10] Pierre Daillie: Yeah.

[01:01:10] Kim Shannon: … that it’s already happening. And like I’ve mentioned earlier, I think we’ve gone through the first phase of value investing. Bernstein identified three phases back in 2000. And, I think we’re about to, hopefully in, in a reasonable time period, it’s very hard to forecast the turns in markets, that are we about to enter that second phase of value investing. And and if you, just to tie in that whole inflation argument professor Athanassakos here in Canada-

[01:01:50] Pierre Daillie: Yeah.

[01:01:50] Kim Shannon: … at the Ben Graham School of Business, he did a study with a colleague going back to 1930. And he pointed out when inflation is above 2.5% that value outperforms growth by 11%.


And so he, [inaudible 01:02:11].

[01:02:10] Pierre Daillie: Do you have the, yeah, do you have the paper, Kim?

[01:02:15] Kim Shannon: Yeah. And he actually wrote it up in The Globe and Mail.


[01:02:18] Kim Shannon: I can send it to you. Yeah.

[01:02:20] Pierre Daillie: Yeah. I’d love to add it to the show notes.


[01:02:23] Pierre Daillie: It that, that brings us to really the big que- one, one very big question, which is, do you want to passively own all of the market risk or actively manage the market risk? And, like when you’re looking at Canada, we our economy is very narrowly divided into a few sectors.

And it’s just strikes me that, financials ought to do substantially better in a period going forward as would commodities and energy. Do you have any particular segments or names that you like Canadian names that you like right now that, that are glaring opportunities as far as your consent?

[01:03:24] Kim Shannon: Yeah. Of course. And by the way, I’ve taken my stand on active versus passive because I run an active management firm.

[01:03:34] Pierre Daillie: Yeah.

[01:03:34] Kim Shannon: So I’ve I, and I’ve decided to stay in business. I, some of the points when you’re at the greatest moment of pessimism, it’s actually the greatest moment for opportunity. There’s an opportunity for a massive change. And so I made my decision on that already, but I think there’s some really interesting segments in the Canadian marketplace because of valuation. And and you’ve taught, talked about some of the larger segments in the Canadian market, but I don’t wanna, I don’t think Canada is a distorted market. A lot of people try and say that we’re too overweight in a few sectors, but if you look around the whole world-

[01:04:17] Pierre Daillie: Yeah.

[01:04:18] Kim Shannon: … there is no perfect market that has 10% weighting in every single segment of the market. Ricardo’s law of comparative advantage from 200 years ago states, if you are on economic at making something, stop making it an import and what you are economic at making, make a lot of it and export it and you are wealthier in the world’s wealthier. So there benefits to concentrating and and every market in the world has some level of concentration. Even the US market typically is 60% weighted in the top three sectors.

Canada’s a little more concentrated than most, but not significantly but the areas of opportunity that we see in the marketplace right now is in the energy space, but we’re, we manage risks. We’re not gonna take too huge bet there and we’re gonna focus in on the quality names, the financial services sector, still pipelines within the energy space-

… Look extremely attractive as well. And then smatterings throughout the the other, there’s always stocks out there that are attractive overall. So like the examples of great opportunities in the marketplace would be, let’s say a Manulife.

Manulife is trading at a seven P/E multiple, it’s almost a 5% dividend yield. It’s over capitalized to the tune of arguably $7 billion. It’s one, it has a greater growth profile because it has a big exposure to Asia. I think people have always been a little worried about that. And they’ve been worried about the history of Manulife because it had problems with its annuity business. It’s been shrinking that annuity business, it’s been selling that annuity business. And that company has been under enormous scrutiny from their board of directors for over a decade-


… for the challenge they faced in 2008. And so I think it’s a better business than it was before. And it’s very inexpensive today. But, you can also look at almost any Canadian bank and, certainly I, we have our favorites, but in aggregate the Canadian banks are trading at 11, 12 P/E multiple they’re, they have dividend yields in the high threes, into the fours. They’re over capitalized. They were limited-

… in, in increasing their dividends and doing buybacks they’re creeping back into it now that’s that prevention has been pulled off. They have access capital of significant amounts across the franchise. They’re so well capitalized, they’re so much better capitalized, better managed than they were in 2008. The risks of really started, are not as apparent as they were back then. They should be able to weather any storm that are, out there-

[01:07:21] Pierre Daillie: Yeah.

[01:07:21] Kim Shannon: … in a fairly comprehensive way. So they look attractive, but underneath that, like asset managers in aggregate are still cheap. So there’s a lot of opportunity in that space. I think the pipelines they’re trading at six dividend yields. They, they have contracted businesses, not a lot of commodity price exposure, but yet they’ve been priced as [inaudible 01:07:48]. They have a lot of commodity price exposure.

And because of this long term contracted business, they’re very stable. I think that they’re very inexpensive and selected energy stocks in Canada are very reasonably priced. And I think part of it is this whole divestment issue. It’s put this big pressure. We’ve, historically Canadian energy stocks traded a premium multiple to US stocks. Today they’re trading at a discount. And they’re really inexpensive relative to history even today. And certainly compared to the commodity price that’s out there at the moment.

And there’s an opportunity for, still today for contrarian trade in that space overall. So those are the highlights that I would say are very attractive in the Canadian space. And I also think that the we think that selectively some of what we call the value tech the ones with real earnings-

[01:08:55] Pierre Daillie: Yeah.

[01:08:56] Kim Shannon: … or in the software space don’t have crazy multiples at all. And and yet have really good, have had true and visible earnings grows over a long period of time and they are inexpensive in a lot of cases today [inaudible 01:09:12].

[01:09:12] Pierre Daillie: Are you talking about companies like Constellation Brands or?

[01:09:17] Kim Shannon: We quite OpenText at the moment for [inaudible 01:09:20].

[01:09:21] Pierre Daillie: Oh, OpenText. Okay.



[01:09:22] Kim Shannon: And it’s been off a little bit, and so it’s creating a real opportunity for investors. It’s P/E is like 14. And it’s debt burden is, 0.9 it’s, acceptable. It’s a real business. It’s, and it’s possible to come up with normalized earnings in a business like this.

[01:09:43] Pierre Daillie: Yeah. Yeah. There’s also, Canadian, outside of financials and commodities, there are, there is this other segment of Canadian companies that have been very good at aggregating for example, Couche-Tard and, That’s another stock, that’s an, that’s-


[01:10:03] Kim Shannon: … that’s a reasonably priced stock in Canada today. And may well be a little bit misunderstood because people are aware that it’s it’s connected to gas stations through-

… the ownership of convenience stores and they’re globally orientated. And I think, what we tend to get in history is that when people get excited about a trend, they tend to wanna bring the future in a lot faster than it’s likely to emerge. And so people, right now, I think there’s four, four million electric vehicle sales against 70 million [laughs] sales of, … ICE engines, an internal com- combustion engines and that’s changing and it’s changing very fast. But when you look at a place like Norway where Couche-Tard operates as well, 70% of all new car sales are are electric vehicles.

[01:11:09] Pierre Daillie: Yeah.

[01:11:09] Kim Shannon: And yet they, when you look at the sales of oil in Norway, it hasn’t changed. [laughs] because there’s still such an amount of existing vehicles out there demanding oil. And so that’s what our it’s, ahead of us and people still need gas stations, but they’ve gone one step further. They also have, fast charge, they can-

[01:11:40] Pierre Daillie: Yeah.

[01:11:40] Kim Shannon: … they can fill up your car to 80% capacity on electric in 20 minutes.

So they’re making the convenience store very pleasant. You go in, you do a little bit of shopping, have a nice cappuccino, rest your legs on that long journey and then get back into your vehicle and you’ve had a lovely experience. And and apparently like something like 65% of the sales at at Couche-Tard are people coming to the convenience store.

[01:12:11] Pierre Daillie: Yeah.

[01:12:12] Kim Shannon: They didn’t even buy gasoline. [laughs] They are there to buy their-

[01:12:15] Pierre Daillie: To do shopping.

[01:12:15] Kim Shannon: .. lottery ticket.

[01:12:15] Pierre Daillie: Yeah. Yeah. Yeah.

[01:12:16] Kim Shannon: Want their cigarettes, they want a cup of coffee and this just happens to be so conveniently located. This is a business model that will survive. It has some of the best locations around the world. It’s incredibly well managed. And because people top of their mind, say gas stations, we don’t need-

[01:12:37] Pierre Daillie: Yeah.

[01:12:37] Kim Shannon: … those convenient stores in the future. We’re gonna need them for a long time in the future and we’ll still need them with the new vehicles.

[01:12:46] Pierre Daillie: Yeah. And they’re not thinking stealthy brick-and-mortar retailer, right? [laughs] [affirmative].

[01:12:53] Pierre Daillie: It’s it’s very, it’s it’s the same thing here, right? We have Circle K that’s all, the, and then of course, historically, I just remember, I always remember, Mac’s Milk, right? That was the big retailer when I was a kid, right? [laughs] That was the big convenience store retailer, but-

… But when when you stop in for for gas, at a Circle K base station Esso there’s all kinds of things you can stop in and buy when you’re there. It’s not just a gas station and cigarettes. There’s, there’s goods, there’s snacks, there’s drinks. There’s, [laughs] there’s usually like an A&W or something attached to it, and so it’s like an all in one convenient stop to, to, if you’re hungry or anything. So it’s-


… it’s really an amazing business model when you when you add it up. And when you look at the added convenience now of being able to plug your EV in at the station while you get a coffee it’s brilliant. But it’s something I find it’s that’s the innovativeness and creativity of Canadians, ’cause it’s being done, it’s being done by Couche-Tard, it’s being done by other by other companies as well here. We’re really good at taking something-

[01:14:14] Kim Shannon: Yes.

[01:14:14] Pierre Daillie: … that already exists and making it better.


[01:14:17] Pierre Daillie: And adding, adding creativity and innovation to run it better. And the fact that a, a Canadian company is all over the world. I was blown away by the attempt to acquire Carrefour-


[01:14:34] Pierre Daillie: … Which, being the largest French retailer was mind blowing that a Canadian, that a Canadian company was in the market to acquire the biggest retailer in France was, that’s just, it just makes you proud, you just, [laughs]

[01:14:52] Kim Shannon: But it also created an enormous opportunity.

[01:14:55] Pierre Daillie: Yeah.

[01:14:56] Kim Shannon: Because a lot of people weren’t happy with them doing that, that that change in strategy.

[01:15:02] Pierre Daillie: Because it was a dive- it was like a diversion from their core, yeah.

[01:15:06] Kim Shannon: But it was one way of getting a lot of guest, convenience stores-

[01:15:10] Pierre Daillie: Yeah.

[01:15:10] Kim Shannon: … around the world, very cheaply. But there, that stock price came down dramatically if you recall at that time.

[01:15:18] Pierre Daillie: Yeah.

[01:15:18] Kim Shannon: And that we actually added more to our position because it was, it, was so inexpensive. And of course that came up after the deal was not consummated.

The French government wouldn’t let the deal.

[01:15:33] Pierre Daillie: Yeah. They took an antitrust stance against it, right?

[01:15:36] Kim Shannon: Yes.

[01:15:36] Pierre Daillie: They didn’t want a foreigner owning one of their biggest enterprises, that’s right.


[01:15:42] Kim Shannon: ‘Cause they’re very-

[01:15:43] Pierre Daillie: Yeah.

[01:15:43] Kim Shannon: … cost conscious and it was a very-

[01:15:45] Pierre Daillie: Yeah.

[01:15:45] Kim Shannon: … inexpensive way of buying [laughs] gas stations and they could try their hand at some retailing or they could let it go. They could have spun that part off.

[01:15:57] Pierre Daillie: Yeah. That was what they were afraid of in France, which is what, once they acquire this, what are they gonna do with it? Are they gonna take it apart? They’re always afraid of north American corporate raiders [laughs] coming along and undoing their, [laughs] undoing their social fabric. [laughs] So Kim this has been an amazing conversation.

[01:16:25] Kim Shannon: Yes. It is.

[01:16:25] Pierre Daillie: I wanna thank you very much for your time and your incredibly valuable insight. And it’s I’m excited for the opportunities that, that we’ve talked about today. I think it’s, I feel like Canada is, we’re, because we’ve talked about Canada, I feel like, this really is the greatest country in the world.

Yes, it is.

[01:16:51] Pierre Daillie: I think this is for so many reasons, but I think this is a country where, so many people want to come and live here. And when I think about when I contemplate the immigration drive that’s happening in this country and the amount of capital that’s flowing to Canada, it’s hard not to be very optimistic in the near term, but also the long term for what the future holds for Canada as well.

[01:17:22] Kim Shannon: Awesome.

[01:17:23] Pierre Daillie: Thank you so much and I hope we’ll have you again, and we’ll be, next year we’ll be to talking with you about, about, getting an update from you about what’s going on and what coming.


[01:17:37] Pierre Daillie: But Kim, once again, thank you. It’s been an honor and it’s been great to have you.

[01:17:42] Kim Shannon: Thank you. It was great questions. It was a lot of fun. I’d love to do it again.

[01:17:46] Pierre Daillie: Thank you.

[01:17:47] Kim Shannon: Bye.

[01:17:47] Pierre Daillie: I look forward to it.


Kim reflects on her career history – her beginnings as a value manager under the wing of her early mentor at Royal and Sun Alliance, investing legend, John Di Tomasso, in the early 80s. She describes her investing journey, the application of her knowledge and her own proprietary take on value investing, and how she and her associates subsequently turned an old then $40-million AUM fund into Canada’s largest equity mutual fund, which earned her the reputation as one of Canada’s preeminent value investors.

The last ten years however have seen the hollowing out of value fund AUMs against growth and momentum, and Kim Shannon, no stranger to the challenges of competing against the market, candidly admits that it’s been a tough go, maintaining her integrity and conviction through the period. Until last year, that is, when value stocks, in the context of a comeback in inflation, began to show the meaningful glimmer of reverting back to historical trend. That glimmer of a reversion to mean in investing styles emerged during last year’s re-opening in the context of reflation following the COVID-19 growth shock of 2020.

She points out that, “The last 12 years have been the longest period of underperformance of Value, and when Value failed to outperform following the March 2020 bear market, that really affected the psyche of investors about Value.” Kim Shannon goes on to add that, “So that really affected client psyche about value because a lot of clients had held in with value because it always defended at a down market.”

We then discuss valuations on several the last decade’s market leaders, and even with a reversion in P/E multiples, Shannon points out that even if P/Es come down to 150 times earnings, their valuations imply that it will take 150 years for those stocks to pay investors back. Most of the darlings of the 1990s run up no longer exist, such as Sun Microsystems, and companies like Cisco and Intel have failed to inspire investors since the tech-wreck.

“The average tenure of stocks today is 20 years,” explains Shannon. That means that investors are paying up for valuations that will take, in some cases many generations to collect on for companies, that, in most cases, won’t be around in 20 years.

Our conversation winds through the topics of inflation, value as a reflation trade, value investing, and culminates with her bull case for Canadian stocks. We discuss some of her favoured areas of opportunity and get into some of the names she likes. Her over-arching thesis is that she believes and expects that Canadian stocks are set to outperform U.S. stocks in the period ahead, and we discuss her pro-Canada investment case.

Listen on The Move


Kim Shannon's reference to George Athanassakos' (Professor at Ivey School of Business - Benjamin Graham School of Value Investing) research findings from last year:

What if inflation is here to stay? Think value stocks

We also examined the annual inflation rate above which the value premium became decidedly positive. This inflation rate was approximately 2.5 per cent. Once inflation started to exceed 2.5 per cent, value stocks started to outperform, while growth stocks, in general, did better when inflation was below 2.5 per cent. Between 1930 and 2020, there were 50 years when annual inflation was at or above 2.5 per cent and 40 years when it was below 2.5 per cent. The median value premium in the first period was 11.04 per cent and in the second 2.34 per cent. It’s worth noting that it is primarily small-cap value stocks that drive these relationships.


Where to find Kim Shannon, Founder & Co-CIO, Sionna Investments:

Kim Shannon on Linkedin -
Sionna Investments -


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