FOCUS 2026: Redefining diversification: The case for alternative equity now

Agnes Doherty: [00:00:02] Hi, Dave.

David Way: [00:00:02] How are you?

Agnes Doherty: [00:00:03] Welcome. I'm great. Welcome back to everybody in the room and online. Dave, you describe yourself as a very macro aware portfolio manager. I think I'd like to kick off this conversation just by hearing the world according to Dave Way.

David Way: [00:00:19] Thanks everyone for coming. It's always a privilege to talk to clients. I do try to be macro aware. Really, for me what that means is that you have to understand the environment. We go out to meet companies every day. I had three company meetings this morning. In order to get the context for doing that bottom-up investing you just have to figure out what house or what playground you're operating in. The way that I think about it is that there are five big pillars to the market, what's happening with consumers, what's happening in the industrial economy, what's happening in energy, technology, and the financial world. These are sort of the pillars that sort of make up how I spend my time.

[00:01:03] I think in some ways the more important forces are what's sort of happening under the surface. These pillars exist on the big tectonic plates of things like fiscal spending and tax cuts, the big geopolitical change that we're seeing today. If you can understand how those shifting plates are impacting industries it really helps you understand the context of individual companies and then ultimately having those building blocks of individual companies that come together to build the most important thing, which is a portfolio, which in my case is trying to build strong equity returns with a very attractive volatility profile that keeps people invested through these difficult times. There's always difficult times, there's always headlines, there's always change. I think if I could leave anybody with a message today, and hopefully we'll get into it, the rate of change is really accelerating and it's really important to have a clear view of what's happening now and most importantly, thinking about a year from now what are going to be the dominant themes that seem obvious in hindsight that should inform how we build and manage our portfolios today.

Agnes Doherty: [00:02:14] You are the portfolio manager of the Long/Short Alternative Fund, also one of the underlying portfolio managers in the Multi-Alt Equity Fund, and then we also have the Multi-Alt Balanced coming out in a few weeks. Let's talk about how the Long/Short Alt Fund is ... talk to us about sort of the flexibility that you have within the mandate first and then how is the portfolio set up today.

David Way: [00:02:37] The fund is really designed to bring two portfolios together. The long portfolio which consists of about 50 stocks, higher conviction, higher position sizes, so 2%, 2.5% average position sizes, and really complemented by a short portfolio that is designed to do a few things. The first is to generate alpha from finding companies that are viewed as good today and bad tomorrow, as well as hedging out some risks that might have me excited in some ways in a long opportunity but there's sort of a risk that is really hard to mitigate so I can short out a stock that will manage that risk. Moreover, in periods where the market is volatile and kind of going sideways you can have an opportunity to own a portfolio that's not just trying to capture market returns but also trying to catch the spread between the long portfolio doing well and the short portfolio doing less well.

Agnes Doherty: [00:03:34] When we think about positioning right now top three sectors are financials, materials and tech. I'd like to explore those in a little bit more detail. Let's kick things off with financials. Go Canada has been a big theme of the conference so far this morning. You've got TD in your top 10, you've got RBC in your top 10. Financials were great contributors to performance last year. Tell us a little more about the financial space whether it's Canada or here in the US.

David Way: [00:04:01] The interesting thing about the Canadian financials, for me I had gone many years and I didn't own a Canadian bank. When opportunity presents itself you have to be prepared to change your mind. What I was really looking for was something really misunderstood about these very large banks. If you roll the clock back a year, I think one of my bigger short positions was TD, I was short the company. I have three buckets of shorts, classic financial shorts, sort of ESG detractors or companies where there's some problems with governance or otherwise, and hedges for long. TD was a really great stock within the ESG detractors. There was a well-known anti-money laundering investigation going on. It's funny, when I was at Wharton I was actually a TD customer at Commerce Bank so I was aware, actually, of some of the issues that Commerce Bank had had. You kind of have to go back 20 years to understand them.

[00:05:01] It was really just my position that Canadian investors were underestimating the risk not just to the business  but also to how the company would be perceived in capital markets. The simple thing that I was hoping for in the thesis was that a), there would be a large settlement and b), people would grow concerned, that TD would sort of end up like Wells Fargo which was a company that had similar problems and then went through five years of no growth and meaningful underperformance versus peers. It's kind of what happened. There was a big settlement. TD came out and said we're gonna spend a bunch of money, we're gonna have no growth in the US, things are gonna be really bad. US short sellers really pounced on it and the stock meaningfully declined, meaningfully underperformed peers.

[00:05:52] That's where you sort of marry what you expect to happen in the market with an understanding of how the business actually works. TD management, quite smartly, came out initially and said this was going to be a big issue but TD sort of had a silver bullet that people weren't thinking about which is they have a large Canadian business where they could reallocate their capital and very likely generate a much more positive outcome than what people were using to price TD. It actually went from short to very rapidly my biggest long. It was a very successful trade.

Agnes Doherty: [00:06:26] Has that happened often in the portfolio or before where you've had a sharp position that's then moved to the long book?

David Way: [00:06:34] I talked about how change is accelerating. There's actually a second stock that was in my top 10 that was the same thing. I was short Caterpillar, big yellow trucks, they had gone through a period of COVID where there was a lot of demand, manufacturing was difficult, they raised their prices 50%. It was my perspective that demand would be meaningfully constrained and that their earnings would decline much more than the market expected. I was short the stock on that thesis and it played out. They had meaningful negative earnings revisions, stock underperformed. We had the tariff news last April, the stock declined further. That's when working with our industrials analyst, I was talking with her about is this market turmoil pushing the stock below where it should trade given fundamentals.  I took a long position in Caterpillar, I went from short to long. There was both the thesis that the core business would improve.

[00:07:34] On the side there was this interesting development where they were selling some of their big engines to this new demand area called data centres. They were actually in the process of expanding production. When I tried to talk to people about what that opportunity was people didn't really have a good way of putting numbers around it. I knew it was exciting, I knew it was going to deliver growth and I knew it would beat expectations. Our analyst, Shriji, who is based in London, she actually visited this facility and tried to help me size what the opportunity could be. For a big, stable industrial company it almost tripled off the bottom.

[00:08:12] I think change is pretty constant, the market is volatile and you can either choose to use that as a reason to be cautious and to stay away from these opportunities or you can try to have a level head, understand what's clearly happening and then take action when the market gives you a stock at a 20, 30% discount to have the courage to buy.

Agnes Doherty: [00:08:35] I think these stories really speak to just the flexibility that you have in your portfolio. You can do things that the average investor doesn't have the capability to do and those are good examples of that.

David Way: [00:08:47] I think along the way one of the things that I did was I was short John Deere which was in a similar environment. One of their key end markets, the US farmer, has been in a multi-year recession. While there was tariff noise that was causing people to sell or short Caterpillar I had the ability to go long a very fundamental and constructive thesis and I could short out the risk that tariffs wouldn't end up as positively or less negatively as I was thinking. You have the chance to go in in size early into these exciting opportunities. A long-only manager might struggle to do that because there are these very real risks whereas I can hedge those risks away and really focus on the opportunity.

Agnes Doherty: [00:09:36] I want to talk about your second largest sector in the portfolio, materials. If I had a dollar for every time I've heard the word oil prices in the last little while I'd be pretty rich. There's not a lot of conversations that are happening about the other things that flow through the Strait, or are not flowing through the Strait right now. Are you thinking about those areas of the market and is that somewhere that there's potential opportunity?

David Way: [00:10:03] Yeah, absolutely. Energy, obviously, is the focal point. Interestingly, there was a ship that tried to move through the blockade early on. I think it was called Starry Night or something. It wasn't carrying oil, it was carrying methanol. Methanol is an industrial commodity. Iran is 10% of global production and it's 30% of methanol that eventually floats on water to get to its end market. There are much smaller commodity markets that are also highly disrupted. I used to cover chemicals 15 years ago and I feel like every three years there's a 6 to 12-month window where that experience comes in handy, unlike covering banks or insurance where you're using that knowledge all the time. To be able to see the opportunity and actually understand the companies and make a quick decision is really important. Russia's invasion of Ukraine was a similar example. Taking advantage of that in nitrogen fertilizers and aluminum.

[00:11:09] Also, being a short seller helps you pay attention to markets that are currently not doing well. I talked about the challenges with the US farmer. That was very bad for nitrogen fertilizer producers. I actually generated some alpha on the short side shorting nitrogen producers. The world changes and you change with it. The advantage is you're always paying attention. When fundamentals go from bad to good you're there, you're already there.

Agnes Doherty: [00:11:36] Darren actually mentioned that as well, talking about the deja vu of 15, 20 years ago as a research analyst, just as you alluded to as well, you spend so much time as an analyst getting a really in-depth knowledge of these individual sectors and that then clearly pays off when you are running your own product or running your own portfolio.

David Way: [00:11:56] When I talked earlier about the sort of tectonic changes I think one of the things that people maybe are starting to think about but has not really entered people's base thinking is that the investment environment that really prevailed through the 2010s has changed. I think in the 2010s what it favoured was owning companies that were high quality, generated stable earnings growth. You would benefit from both the earnings growth and the market increasingly appreciating these businesses. I was at an event and I met with the former CEO of the TSX. She was the CEO when it demutualized and went public and I worked in corporate development there. One of the things that we talked about was that whole era of demutualization, these companies going public.

[00:12:44] Visa used to trade at 10 times earnings and over 15 years they grew earnings eightfold and the multiple went from 10 to 30. These were great stocks when they were not expensive but when a stock is 30 times earnings you have to make big assumptions a), about the future and b), about how much people are willing to pay for a stock. I think having experience and a willingness to invest in parts of the market that are not viewed as high quality or capital-lite  I think is an important skill set that you actually didn't need and kind of got punished for if that's the approach you took over the last 15 years. But over the next 10 years I think being able to invest in capital-intense industries is going to be a key strength.

Agnes Doherty: [00:13:29] Now, you're a lover of science fiction. Speaking of the future, you told me once that your love of science fiction helps you to understand the future or think about the future maybe a little bit differently. I wanted to talk about AI, an exposure that you have in the fund. It's such a broad topic of conversation. How are you investing in AI right now? Where are you seeing the opportunities?

David Way: [00:13:53] I have a very unpopular opinion on the investment floor, which is that artists can predict the future much better than investors. Scientists are all about making the future happen and they can go through periods of excitement or not but artists are very good at two things. One is envisioning how our human nature will interact with innovation and number two, kind of what it means for the world we live in. The book I was mentioning, there's a Canadian artist, futurist, his name is Douglas Copeland. I think it was 2018 he wrote a book called Bit Rot. It was about, basically, technology was gonna melt our brains, people were gonna get addicted to short form video and people probably end up working less. It wasn't pessimistic but it was just realistic about what the future would look like.

[00:14:45] There was one chapter that really stuck with me where he visited Google DeepMind in I think 2014, or sorry, 2016. Google bought DeepMind in 2014 which we could talk about as well. He visited it and at the time it was called machine learning. He was very intrigued so he fed the machine his old stories and asked it to produce a short story in his voice. We all have that on our phones now and it's obvious that we can do that but at the time it was about an artist interacting with what technology might be. It's something that actually got me to keep paying attention to technology and understanding what's the human's first impulse about how they're going to use technology. I think there's a lot of excitement right now about what AI can do to augment our lives but we actually tend to think about it like how do I spend my day and how can AI help? I think in 5 to 10 years there's going to be a lot more of given what AI can do how will we spend our lives. We're going to move from augmentation to more invisible AI in our lives. I think that's just very interesting. The technologists can help us understand where the actual machines that are going to help us do that are going but it's really the artists who can paint the picture for you.

Agnes Doherty: [00:16:11] You mentioned Google and DeepMind, that's a holding in your top 10. Google, I mean, last year was really hit hard because the market thought that they really weren't keeping up with all the AI developments. Fast forward to today that's seemingly not the case. Tell us a little bit more about why you like Google and do you see that as emerging as one of the AI winners?

David Way: [00:16:35] It's interesting. As someone who is really attendant to risk in their investment process it is not always easy to hang on to the winners of a major theme all the way through the cycle. Similar to Nvidia where I owned the stock, sold it, and then re-bought it during the DeepSeek crisis, I guess, Google was in a similar boat a year ago where it had this amazing business called Search and AI was going to take away the search business. They were also behind the curve on technology because they kind of had their own technology but there were all of these hyperscalers going up. This was viewed as a weakness not a strength. For me, the opportunity to invest in Google a year ago was that you could invest at a time where people had low expectations. Sentiment was poor. Google Search was priced for failure. It was a real risk.

[00:17:30] If you did the fundamental bottom-up work you could appreciate that a), the fact that they're 12 years into owning a frontier lab, well, like, Anthropic is two years old. It's amazing what they've been able to achieve. Google had deep research expertise forever and they had their own infrastructure. It was my view that even if Search was meaningfully impacted when you were buying it at 14 times earnings it was actually priced for failure. So anything better than failure would be success. In the most recent quarter Google search grew 19% year-over-year. It's actually growing faster than it was a year ago.

[00:18:06] When I went to a big tech conference in September four months after I bought Google all of a sudden Google was the company to model yourself after, to have the big infrastructure layer that models would be open to compete on all different platforms. Google has become sort of the standard for what upstarts or new entrants are trying to grow up to and become. They're scientists who accidentally figure out how to make money, and they're amazing scientists. It's a real success story for the company but also picking your entry point right can really help you earn outsized returns and not be there when they go through these periods of turmoil where everybody expects perfection and lo and behold the world's not perfect for them.

Agnes Doherty: [00:18:51] I wanted to pivot to talk about your short book. You've been shorting now for close to six years, what have you learned? It's a difficult thing to do.  What have you learned along the way?

David Way: [00:19:02] I've learned a couple things. I think the first thing is with the fullness ... you just heard from Brendan Sims, he gives me a lot of data around how the short portfolio has contributed to the fund. I think the first thing is I viewed myself as having a good skill set and a good temperament to being successful in shorting. As an analyst I was very successful at finding sell and strong sell-rated securities that would decline in value. But you don't know what your potential is until you're running a fund. I think the first thing that I learned is that I've actually been pretty successful at it, both accessing the opportunity, and for the many periods where shorting becomes more of a high risk, lower return endeavour I have been able to navigate those periods without taking meaningful losses in the short portfolio. It's really marrying the skill with the opportunistic nature of shorting to achieve success.

[00:20:00] What I care the most about is that the short portfolio delivers what I expect it to to the overall portfolio. I think the third and final thing I've learned is that it is really fun. It's fun being right. It's fun sort of going against the crowd. It's fun to find things that people aren't paying attention to but you know in six months if one or two, three things happen that they will and everyone will be like, how did you figure that out? It's a great feeling and I really enjoy it.

Agnes Doherty: [00:20:30] What would you say is a short that really represents your investment process that's worked out very well for the portfolio?

David Way: [00:20:38] A good short really requires two things. It requires a strong bottom-up company analysis and an understanding of investor behaviour. You need to be right about the economics of the business and you need to be right about the timing where other investors will come around to your view. One of the stocks that was my biggest short for two years, and I covered it because the thesis played out and the stock got cut in half, was BCE. 11 years ago I was meeting with the CEO and I expressed concern about their free cash flow generation. I'm like, you're playing a game of raising your dividend against struggling free cash flow.

[00:21:45] You roll the clock forward, a few years ago we'd had large immigration into Canada which was good for the wireless companies. The first thing you do when you get off a plane to a new country is you get a new SIM card and you get a new phone. It was really good for growth. We reached a point where immigration was going to go the other way and then all of a sudden people started to look at the top line growth which was 1, 2%. I was like, it's gonna go negative in the next year. That's when I shorted the stock and as the growth went from 2 to 1 to 0 to -1 it wasn't a big change to EBITDA and the dividend, which is what people looked at, but if you went down far enough it blew up their free cash flow. All of a sudden people, as they got worried about growth and the stability of the dividend they started looking further and further down and saw what I had seen for 10 years which was that it was broken and they were going to have to cut the dividend.

[00:22:41] When I can find a boring company where a very small change in the business leads to a very big change in the stock price that's something that gets me very excited. One of the risks in shorting is that you wake up in the morning and the company's been acquired at a big premium. No one can buy BCE. It was sort of like there was zero upside and 50% downside. Those are the situations where I get really excited. I can take it to a max short. It went from 60 to 30 and that's when I exited.

Agnes Doherty: [00:23:09] How do you sort of identify that inflection point where it goes from being safe to unsafe?

David Way: [00:23:23] A lot of times these situations evolve from people focusing on the sort of stability and the safety of a certain investment and ignoring things that might be further down in the financial statements that are going to be big. One thing I learned about short selling is that ... I'm a bit of an accounting geek so I would find all of these accounting shorts. Two years ago people got really twisted up around the depreciation policies of Amazon, Google, Microsoft. I never participated in that because some of the other trends were bigger. When it's smaller things like this people don't care. People tend not to do the work on the detailed stuff that I might do. What you need to know is that the things that people are paying attention to will change negatively. When it changes negatively that's when people widen their aperture, look at the total situation and are like, oh, oh, no. I want to be short when people start saying oh, no.

Agnes Doherty: [00:24:30] Last few minutes, I wanted to touch on gold because that's been a big position in the portfolio over the last little while. It's obviously been a great contributor to performance. Tell us a little bit more about your outlook for gold right now. What's the thesis?

David Way: [00:24:44] Every 50 years it seems like some of the foundational pieces of geopolitics and sort of the world financial order, every 50 years those rules get rewritten. The last time was in the '70s with Bretton Woods. When I was talking about the market and there's the five pillars of the investing world and then the tectonic plates, these underlying rules about how the financial world works, that plate is moving. It started moving in 2022 when Russia invaded Ukraine. One of the first things that happened was that all of Russia's assets in the West were seized. One of the most important trading participants in the world is China. The thing that drew my attention to gold, which is a commodity I generally don't like, I don't like investing in, I adhere to the Warren Buffett argument that you should be able to find something more exciting than a yellow rock to invest in. It's something that we all agree is an asset that can retain value during periods of geopolitical turmoil.

[00:25:50] The first place we saw gold start to move was actually in China. There all of a sudden became a very high demand for physical gold. Gold was $2,000 an ounce. If you wanted to buy gold in Shanghai you had to pay an extra almost $300 an ounce just to own gold in China versus New York, Singapore, Switzerland, whatever. That's really where my interest in investment in gold started. It's evolved to include a few different things, whether it's dedollarization or potentially debasement of the dollar. I think one of the key issues facing the market that we haven't gotten to is what happens with inflation and what happens to rates. If the thing that we viewed as sort of top of the pyramid safe investment, the US dollar, everybody's telling you that you probably shouldn't think that way for the next five years. I think if you listen to Scott Bessent, if you listen to really, Howard Lutnick or people in the administration there is an appetite to see a weaker dollar to improve manufacturing jobs in the US.

[00:26:57] It's all being done for reasons that have sort of economic sense but gold is sort of the first asset to wake us all up to it. It's actually the reason why I started buying energy last year which was that as gold did really well and as base metals started to do well, as a former metals analyst I did learn in previous cycles that as these hard commodities start to increase in value you really want to have a good look at energy. Energy typically follows. I didn't expect a geopolitical conflict to really cause it to increase but part of the reason why you'll be there is stuff like this happens. I think that's what my fund's trying to do. Let's try to make sure that investors are exposed to stuff that happens that's good and protect against things that happen that we can't quite figure out that are bad.

Agnes Doherty: [00:27:47] Dave, we have run out of time. That was a wonderful conversation. Thank you for all of your insights. Everyone, that was Dave Way.