VISION 2026: Value investing today: Discipline through disruption - Dan Dupont

Kathryn Black: [00:00:00] Thoughts on your NFL-style video.

Dan Dupont: [00:00:03] Yeah, I don't know. I don't know what I think about it. Very professional.

Kathryn Black: [00:00:05] Fixing the cuff, looking sharp. I love it. Well, thank you for being here today and everyone, thank you for being engaged over the course of this last day with us. Dan, 2025 was quite the year for active management which is what you were born and bred to do. Let's start there. Let's talk about Canadian Large Cap, you had the defensive on, defensive off, defensive on. It was a busy year, a really busy year. Walk us through 2025 before we dive into this year.

Dan Dupont: [00:00:38] I think there was one too many iterations there. We were very defensive at the beginning and then April came around so we can thank Mr. Trump for that with Liberation Day. It allowed us a lot of leeway in terms of readjusting the portfolio. The rest of the year was a bit more boring. I think everything kind of revalued up. We started with more defensive positioning, a bit more cash, a bit more arbitrage and then April 7th, we had an internal call planned in advance with the sales team and I just announced that I was fully invested across the board. Everything was fully invested, no arbitrage, no cash. I sounded like one of the most bullish people in the firm, basically, 'cause it seemed like everybody was starting to think about a recession. Fast forward the next few months, everything kind of percolated up and we had to readjust again. Unfortunately, or fortunately, we had to harvest some of these positions already. Some we made smaller, some we got rid of over the next few quarters.

[00:01:43] As we're standing here today we're back to as defensive positioning, or even more than we were 12 months ago at this point. I'd say one of the things that has changed in the last 12, 18 months is the number of opportunities around the world has shrunk a little bit. 2025 was really a year of great performance everywhere which from a bottom-up perspective makes it harder for a valuation-centric investor like me to find opportunities.

Kathryn Black: [00:02:10] Excellent. Back in that April call that was an exciting time for you because we know that when things are happening in the markets or when things are happening in the media that's when you tend to get really excited and have a lot of fun. Hopefully, more fun to come in 2026.

Dan Dupont: [00:02:23] Hopefully, hopefully, yes. Recession if possible, that would be great.

Kathryn Black: [00:02:28] Well, I don't know if everyone feels the same way but maybe. That being said, '25 through all that active management you did a great job for your investors. We've had great returns specifically in Canadian Large Cap. It's never had a negative year since you took it over in 2011. First Series F I should mention. That being said, the downside capture rate, over 27% now. Something you do very, very well is making sure you're protecting investors' capital first and foremost. Let's talk about today's market. What feels similar, what feels different to those periods where you've been finding those best opportunities?

Dan Dupont: [00:03:08] I've realized over those last 15 years that it is very easy for me to feel comfortable in the fog of war. When there's a lot of volatility, a lot of uncertainty, a lot of liquidations happening, people being very nervous, questioning their positioning, for us and for me it becomes kind of second nature to redeploy. The hardest part about it all for me is to be patient enough to wait for these opportunities. The weeks and the months can get pretty long and lonely. Sometimes it can be quarters like 2017, 2018, we had a lot of low volatility months, very few opportunities. We're kind of in the middle of that right now. I don't think I've ever been this defensively positioned. We've found a few new ideas in the last few weeks but I'd say November, December looking at Canadian Large Cap Fund, we were the most defensive we'd ever been positioned because I couldn't find any opportunities that were cheap enough. When we get to that point we have to be creative and be more defensively positioned and have more arbitrage.

Kathryn Black: [00:04:16] Absolutely. As everyone can see there, there's that slide, great slide to see. The defensive positioning we're going into now, I'm guessing that may have a lot to do with this whole theme of AI that we've been hearing, a very frothy area of the market, as I think you've called it in the past. Let's talk about the durability of the AI trade from your perspective. What are your views and how are your views influencing your portfolio with this being such a theme?

Dan Dupont: [00:04:42] You guys should compare and contrast that with what Mark Schmehl is going to say after me because this is going to be absolutely ridiculous.

Kathryn Black: [00:04:46] This is going to be two interesting sessions.

Dan Dupont: [00:04:48] But it's okay. We all have very different investment processes. For me, it's all about protecting capital, minimizing downside, minimizing that number. That downside capture is what truly creates the outperformance long term because we lose less and therefore we start from a higher level to compound money. That's what we did in April. That's what we do every time there's a correction. When I look around the world, yes, obviously, a lot of the market cap right now is centred on AI. Obviously, as I've been saying for years now what's outperformed is large versus small, US versus the rest and growth versus value. There seems to be a few more divergences in the last few quarters but generally for me bottom-up from a valuation perspective the opportunities are elsewhere and they're mostly outside the US and they are certainly a whole lot outside of large-cap tech.

[00:05:43] Now, that being said, AI is, obviously, changing a lot of things. We have to analyze things very profoundly. If I buy a cheap stock it has to be resistant for the most part to any significant change from the impact of AI, obviously. I'd say in the long/short product that I manage AI does come in in the sense that the central ones are really large-cap cash flowing businesses that are way too expensive for me to own but they're not necessarily in an area where I want to short. There are a lot of companies out there who kind of attach their wagon to the AI bandwagon so there's a lot of shorting possible there, businesses that really don't have a prayer of making money for the next 10 years trading for billions of dollars in market cap. Those are interesting areas to short but not necessarily the core of the AI thesis. It's more companies that are kind of around it.

[00:06:39] There's also, if we want to stay on the shorting side of things, there's a lot of interesting ideas around cryptocurrencies, a lot of companies there that have been really kind of selling the dream without really any kind of possibility of doing anything good. So there's that. There's a few financial companies as well who are promising some really good results trading for really high multiples. Some of them even will finance a lot of really more complicated things than mortgages 15 years ago. You can finance your delivery of a burrito over six instalments. I think if you--

Kathryn Black: [00:07:16] Financials today.

Dan Dupont: [00:07:17] --take those receivables and securitize them, which is actually something that's happening, there might be in the future some possibility of a loss there.

Kathryn Black: [00:07:26] Isn't it crazy how the world has changed?

Dan Dupont: [00:07:28] It has changed massively, yeah.

Kathryn Black: [00:07:29] That's the interesting thing about your process with the Global Value Long/Short. You can look at these long opportunities but also see perhaps where there's pockets that the short side of the book could benefit.

Dan Dupont: [00:07:38] It has been extremely helpful, forcing me to look more closely at areas of the market that are exaggerated. It helped me a lot in 2020, 2021 through the electric car phenomenon and how the demand for oil and gas was going to be impacted and realize very quickly that it was massively overestimated in terms of demand for electric cars so made my bullish bet on oil way bigger than otherwise would have. Now today it's really helpful as well, forcing me into analyzing what's happening in the world of AI, how are all of these companies impacted, how are they priced and what are they going to impact? It really forces me to look at both sides of the ledger and that's very helpful as well for Canadian Large Cap Fund

Kathryn Black: [00:08:20] Sticking with Canadian Large Cap and maybe the long side of the book, let's turn to Canada and look at the domestic backdrop evolving over the course of this year. Do you think the market is mispricing any Canadian companies? Are you excited about what you're seeing on the Canadian side today?

Dan Dupont: [00:08:37] There's a few opportunities in Canada. Obviously, if we want to go by deduction where am I not interested.

Kathryn Black: [00:08:44] We can start there.

Dan Dupont: [00:08:45] We can start there, I guess. I guess that's where I always start. In terms of the big sectors, obviously, financials. I covered banks in '07, '08. Maybe I'm a bit biassed but I look at where they're trading at today. You can buy most of them 1.8 to 2 times books. For my particular process  that's a little too expensive. Mostly after 15 years of no credit cycle whatsoever, we had two and a half weeks during COVID but, obviously, nobody went bankrupt. That's certainly not a place where I'm very interested. That being said, Canadian Large Cap Fund made a lot of money investing in TD last year through the controversy of their US exposure and the fines that they would have to pay. I felt comfortable with that position. Curing the bottom in March, first week of March we bought a decent amount of Scotiabank in Canadian Large Cap Fund which I don't think showed up in the third quarter numbers in terms of holdings.

[00:09:42] If the price is right and there's enough uncertainty and people are a bit concerned about what may or may not happen then I'll get more interested, and it was the case for those two. We, unfortunately, had to let go of Fairfax during the year which was one of my quasi-core holdings. It just got a little too expensive. We got rid of TMX Group because it got too expensive. Valuation for me is important. I'm trying to get better at keeping stocks longer if they're higher quality, and I think I've gotten better at that. It's just that I stretch it and stretch and at some point I just can't hold on to some securities when they get too expensive. Financials, banks is not a place I love. The other side would be insurers and as we know they're really levered to two things. On the liability side they are levered to interest rates because if rates go down the liability explodes, and on the other side, on the asset side, if your assets go down then it's really tough to actually compound money to pay the other side.

[00:10:39] Japan is the best example of how things can go absolutely completely wrong. In the '90s rates went to zero, asset prices were going down so practically all insurance companies, every one of them in Japan, went practically bankrupt or were insolvent in the '90s. So it's a tough gig to have P&C while we had Fairfax. We're really not there in Canadian Large Cap. Commodities, we did own a few that were more core still in oil and gas directly or indirectly. I owned some gold stocks earlier last year. If you look at the holdings later in the year a lot of that had been shrinking and shrinking. Where does that leave us? Staples is a place that I really like. There's some interesting companies doing pretty well. Outside of that we have some idiosyncratic ideas. I'd say I'm open to anything. We have a little bit of commodities left in West Fraser Timber, for example. The K-shaped economy has been quite impactful to a lot of sectors, movement of goods but also housing. Lumber has been really, really tough as a business for the last two, three years after having been really good during the COVID years. A West Fraser Timber would have made a lot of money which created a balance sheet that's really, really strong. They kept all this cash, were not stupid with it, did not make any acquisition and now they're waiting for times to come back. A lot of competitors are closing mills. When things turn around, whether it's this year or next year, they're going to make profits that are probably going to surprise a lot of people. So that's one area.

[00:12:19] Nutrien, chemicals, we find our spots. The basic ones, the core ones, the Metros and the Couche-Tards are still there. We also own a little bit of telecom. The balance sheets are not great, we've gone from a three to four player market, just that some of them got to a price that was interesting enough for us. We keep analyzing that every day, every week. These positions can move in size depending on whether I find opportunities somewhere else or whether I think that opportunity has gotten better or worse on an absolute basis. We're still there, we still have some telecoms, we still have a lot of staples. There might be some new ideas coming up as well.

Kathryn Black: [00:13:01] Exciting, so really just trying to find those pockets wherever the fundamentals make sense, it's at a price point that you're looking for but really sounds like you're turning over every rock amongst every sector that you possibly can be. You did mention that commodities aren't your favourite. You touched on West Timber [audio cuts out] businesses such as Emera that are in the portfolio. How do you think about that role that it plays when you're putting a stock like that in there?

Dan Dupont: [00:13:30] I have to be somewhere in Canada. I need to be over 50% Canada. I always almost maximize the 49% foreign content but I still need to have some interesting ideas in Canada. I'd say some of these interest rate sensitive companies that are not too economically sensitive are decent places to hide when you're waiting for better opportunities. If we have an economic slowdown businesses that have been contracted for a long, long time with fixed rates of return, with lower rates they tend to do very, very well, if not on an absolute basis at the very least on a relative basis. There's worse ideas, let's just say.

Kathryn Black: [00:14:09] It's a good bar to set. I will just remind everyone, please feel free to send your questions in to Dan and I'd be happy to ask them for you. We focused on Canada. You did just mention the fund can go 49% global. Talk to us about where you're seeing the opportunities set right now. You have been around the globe, I'd call it, over the last several years, moving in and out of different countries. What's piquing your interest and where are you feeling you're getting the best return?

Dan Dupont: [00:14:38] I'm always positioned in a way that seems to create the most controversy or people arguing with me the most. I'd say 15 years ago I was heavily invested in the US when every investment conversation was around China and commodities and the growth of emerging markets. I owned a lot of Microsoft at 12 times earnings and Walmart at 11 times earnings. That was a great place to be. A year and a half ago there were a lot of opportunities in emerging markets, Europe, Asia, we took advantage of that. China was 5, 6%, we had stocks in Brazil, Japan, South Korea, we were in Germany. Fast forward to today, last year was a great year. A lot of stocks did really well, the international markets did really well. We culled a lot of that, we reduced a lot of these positions, sold out of a lot of them. Today Europe is still interesting because there's a lot of opportunities in a few sectors, whether it's spirits or tobacco, and a few hodgepodge of other stocks out there. The US is still very small relative to 15 years ago. I've been low for many years. It's about 2 1/2, 3% right now.

[00:15:58] I keep looking, keep turning rocks and I would say in the last six weeks the market has adjusted even more to the AI threat and we're seeing a lot of software names being pressured massively. Before, let's say, a month and a half ago you were seeing pressure but in very specific companies that had potentially very direct impacts from AI. In Canadian Large Cap Fund we own a company in France called Teleperformance which is call centres, back office support. Obviously, eventually there might be a threat there. Company is trading for below four times earnings and has a pretty decent balance sheet for cash flow yield over 30%. What's really interesting here is that we really haven't seen any impact yet. They've actually taken advantage of AI to reduce their costs so their margins have gone up and the top line's actually accelerated a little bit. The AI impact has to happen really soon otherwise that stock is going to double or more. I might be completely wrong here but I think that has a good chance of happening.

[00:17:08] Fast forward to two months ago, now we're seeing software names that are under a lot of pressure. I'm doing a lot of work. There's going to be a new company in the top 10 in Canadian Large Cap that popped up which I bought all over the last two and a half weeks, over a billion dollars and I'm very, very excited about it. The beauty is fantastic balance sheet like a lot of software names, great return on capital like a lot of software names and the top line growing very rapidly relative to everything else I own. I'm very excited there. You never know when these opportunities are gonna pop up. Two, three years ago if you had told me I'd be heavily invested in spirits I woulda kinda laughed in your face because spirits were so expensive, they're great businesses. Now everybody looks at spirits and sees, well, young people don't drink anymore and then the COVID overhang was horrible and everybody's on Ozempic so nobody drinks anymore. They're easy arguments to bring up but if you actually look at the numbers and kind of see where we're at I think we're seeing a big impact from the COVID overhang, and we're seeing an impact from people who don't have the discretionary income to spend a little bit more on alcohol. Generally, I think the trends are a little bit overdone from the numbers I've seen.

[00:18:26] Software is a little bit the same. That's what I'm trying to figure out, how low is low, how much of a discount can we get to the actual value of the company. If you populate a fund like Large Cap with 15 to 20 names, core names in Canada, 15 to 20 core names globally you can be really, really patient on price. Once in a while you'll see a stock appear as a pretty sizable holding but there's 25 other companies that I've looked at, got maybe close, or not that close to a price, some got incredibly close, never got to that price I want to pay for them. You'll never hear about them. I've looked at them every month. I've met with them four times a year for the last 15 years. Maybe I'll retire in 25 years and I'll never own these companies but some of them hit that price and it's rarely the ones you actually think. It's just sometimes from left field.

Kathryn Black: [00:19:18] You tend to draw that line in the sand and make sure that if it doesn't hit your price it does not go in the portfolio, but if it does things move around to accompany that.

Dan Dupont: [00:19:26] Exactly. What really helps, obviously, is the analyst team on the ground who know their company incredibly well and they know my process so you can interact with them and ask them specifically, what do we think at this point is kind of the range of impacts we can see. The beauty is it doesn't have to be exact. I just need to know exactly what the range is so that we can prepare. We adjust over time and if you pay a cheap enough price good things happen to cheap stocks. I like to say I'm an expert at jumping out of basement windows. I mean, you can't really hurt yourself too much if the price that you pay is...

Kathryn Black: [00:20:02] This is a future of Olympic sport.

Dan Dupont: [00:20:04] Well, I would love that. I'd be pretty good at it.

Kathryn Black: [00:20:08] We have a question from the app here. What fundamental qualities do you look for in a defensive company?

Dan Dupont: [00:20:13] That's a good question. It's always a balance. One of my four core tenants in my investment process is investing in quality companies. That can mean a lot of different things. What we're trying to balance is great business with great management team with great balance sheet with something that's not too cyclical.

Kathryn Black: [00:20:31] Can you ever have them all?

Dan Dupont: [00:20:33] It's very, very rare. You need a really incredible set of circumstances but practically never. I'd say unless it's forced selling, I mean, in the middle of COVID craziness, third week of March, there was forced selling in financials in Canada. I would say fundamentals, the quality of the business was there, I'd say, because the price was cheap enough. I'm not saying, I'm interested in financials right now because fundamentally they're bad businesses. It's just not the point in the cycle for me to own them. Back then it was forced selling, basically, some levered product blew up and they needed to sell it because it was a margin call. There was a billion dollars of securities. Nobody else in Canada could buy it. I'd say that's kind of the only examples of times when that happens. Generally speaking, we're trying to balance all of these things, good balance sheet, good management team with business management and balance sheet and valuation eventually gets to a price you want to pay for it. It's all these things aligning. It doesn't happen often. Sometimes it happens all at once for a lot of companies.  April 4th was a time when it was crunch time. I set up a chat with the analysts internally just to keep track of everything so they could interact as well.

Kathryn Black: [00:21:55] That was the who's tired of winning chat, right?

Dan Dupont: [00:21:57] That's exactly right. The name of the chat was tired of winning chat based on, obviously, Donald Trump's saying. Unfortunately, some of our analysts thought I was talking about me but let's just...

Kathryn Black: [00:22:10] Well, I mean, the calendar returns, maybe.

Dan Dupont: [00:22:13] Yeah, if you're in this business long enough the market will destroy your ego enough that you'll never come up with a name like that. That was really, really useful. It was a good exercise because they realized how much I trust them because very rapidly when they said, well, this company, you might have missed it, but today it's 1:00 p.m. on the Friday before it's at this price, I think it's perfect for you. Some of them I chatted for two minutes on it and bought $100 million, $200 million, $500 million of a particular security. Some of them I didn't even talk to them. We had talked about this company enough when they said, I think it's the price, let's do this.

Kathryn Black: [00:22:52] That's where the research plus the timing just all comes together for execution.

Dan Dupont: [00:22:56] Exactly. All of the resources come together and then the trading. If you're trying to sell a billion dollars of arbitrage securities down 1% over the week you still need to have the relationship built over months and quarters. I remember sending to the trading team just this order for two blocks of $250 million of arbitrage securities and five minutes later it was done because we've built these relationships. When you do all these trades from distressed sellers they get to trust you 100%. I think sometimes as portfolio managers we forget all of this support we have from, what we call PSG, the portfolio services group, and the traders because all of these works so perfectly. There was not one, even close to one mistake during that day. I traded over a billion dollars in securities on the buy side. All that came together. I guess I want another one of those.

Kathryn Black: [00:23:55] I was going to say we hope for more days like that.

Dan Dupont: [00:23:58] That would be fantastic. I live for those days and they're incredibly fun. For me it's just the patience to get there and to have the liquidity to deploy on those events.

Kathryn Black: [00:24:09] You do currently have the liquidity to deploy because merger arbitrage is one of, I would say, one of the main things that you do in the sense that you're extremely active and hoping that your cash isn't just sitting. Just talk to us maybe around currently being active in that positioning, being ready to move and maybe give an example just for those that aren't as involved in that space. I'd say you're one of the leading experts in Canada when it comes to arbitrage.

Dan Dupont: [00:24:35] It sounds cool and it sounds a little dangerous but it's actually pretty simple. It's just when company A announces that they're gonna buy company B for a fixed cash price, then you can buy company B because it's not trading for that price yet. One example in Canada last year, Telus bought Telus International. When they do that they announce it and that publicly traded company, which at that point was Telus International, does not trade at the $10, let's say, it was announced at. It trades at $9.80. Why? Because there's a few risks left. You can have a regulatory requirement that they can't get through, you can have trouble financing the transaction from the acquirer side. There's a vote possibly on one side from minority shareholders, or the majority of the minority, different jurisdictions might get involved in terms of accepting the transaction. This is stuff that I've over time gotten very good at. I've been involved in over 500 of those transactions over the last 15 years because there's been time when I needed to be there.

[00:25:41] I'd love to be fully invested at all times because, honestly, it's a lot of work to look at all of those but I think it's worth it while you're waiting for opportunities. We can make 6 to 8% annualized in those because they close pretty quickly, it's like a three to six month window and then you get the cash from the acquirer and then you roll that into something else. We have a lot of those on right now. I try to minimize these positions as much as possible so there's not one that is risky, does not come through, it goes down 20%. I don't want that to be overwhelming. I want this to be kind of an average out to 6 to 9% annualized if we can.

Kathryn Black: [00:26:19] And always be nimble in case there's an exciting day around the corner.

Dan Dupont: [00:26:20] Yes, absolutely.

Kathryn Black: [00:26:22] Excellent. We have another question coming in from the app and three minutes left. My goodness, this has flown by. Are you seeing any parallels to today's market with previous market cycles?

Dan Dupont: [00:26:34] There's a lot of parallels in different directions. AI, we can kind of compare it to 2000 in terms of the enthusiasm/euphoria around it, the volatility of the companies that are involved in it, the concentration and performance that I think has never been seen before but it's certainly there as well. It's forcing me elsewhere. I'd say in 2000, obviously, small-cap was a bit more interesting and then International was also interesting. I'd say now we just have to be nimble and see where the opportunities are going to come up. I'd say you know software is one of them, staples, spirits, specifically, is another one. We stay nimble and we look at where we think the opportunities are. There's a lot of froth on the short side, I look at it a lot. I think this is the best shorting environment of the last 50 years in the US. I think it's better than 2000, I think it's better than 2021. There's a lot of parallels.

[00:27:32] We keep our head down. I keep looking for opportunities. I think it worked well last year. We have a lot of securities who gave us some really good returns, whether it's the banks in Canada, whether it Ambev in Brazil, whether it's Bayer in Germany, Samsung in South Korea. We just keep pushing, keep finding new ones. Hopefully, the one I bought in the last few weeks is going to do well. I bought one in December in pretty decent size as well. We keep planting the seeds of future performance and also harvesting the ones that work.

Kathryn Black: [00:28:04] Maybe with the last two minutes left, as the professional basement jumper what's the best way to protect yourself in this current environment?

Dan Dupont: [00:28:12] That's a complicated question. We could go in all kinds of directions.

Kathryn Black: [00:28:16] Other than buying Canadian Large Cap.

Dan Dupont: [00:28:17] People might bring up precious metals because historically it's been kind of uncorrelated. I think it's become way more correlated. The more it's being financialized the more it's been, I think, correlated with the rest of the market. There used to be traditionally four currencies to really kind of invest in to protect yourself. There was the US dollar, there was the Swiss franc, Japanese yen and gold which is effectively a currency. It trades like one, the forward interest rate curve is, basically, the interest rate differential. I'd say the Swiss franc has kind of lost its status since the central bank sold all of its gold and the budget deficits have been pretty big. I'd say the US dollar, it's a little bit less clear now given what happened last April. It actually didn't go up when we had a lot of volatility so that's a bit more questionable, although I would argue it still has reserve status so it should do okay. Like I said, gold I think is ... another reason why it's so correlated is also it's being used in stablecoins in the cryptocurrency world. Tether owns $23 billion of gold so if ever the crypto world becomes a little bit more volatile and to the downside then there could be a little less demand there. Central banks are aggressive buyers. They were aggressive sellers 25 years ago. I think they're impacting the price a lot.

[00:29:35] All that takes us to Japan. I think the Japanese yen is under a lot of pressure from people borrowing it and investing elsewhere around the world. It's been the carry trade that's been done a lot over the last 20, 25 years. If you are really out there, you want to look at something that's very different I would say the Japanese yen is certainly an interesting area. Maybe don't go too far out on the bond curve. If you want to buy something there, want to buy the 5-year bond in Japan, who knows, that might end up somewhere in Canadian Large Cap Fund at some point.

Kathryn Black: [00:30:09] Or they could just buy your mandate and you take care of it for them.

Dan Dupont: [00:30:13] That's the idea. Go on vacation and buy Canadian Large Cap Fund and I'll have the fun if there's a tweet from Trump that creates havoc.

Kathryn Black: [00:30:21] Absolutely. With that, Dan, thank you very much. Dan Dupont, everyone.