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January 15, 2021

2021 Outlook – Small-Cap Equities



Recent months have seen a reversal of the outperformance in large caps versus small caps from the last few years. We have been calling for this and believe we are still in the very early days of this rotation.


Going into 2021, we expect more of the same from markets, that is, very significant volatility and a bifurcated stock market for small caps. This scenario will continue to drive a wedge between the durable high-returning business models we covet, and companies with low returns on capital and high leverage who could suffer if we don't see a rapidly improved economic and health environment early in the year.


As bottom-up investors, our team does not try to predict the future, but we are always trying to be prepared for the worst. A big reason for the resilient performance in 2020 across our small-cap strategies was simply that we didn't have any major negative impairments in the portfolio, which gave us more time to hunt for opportunity.


We already have our shopping list for 2021 and are meeting with about 100 companies a quarter to make sure we are keeping up to date on the businesses we own and finding ideas that are better than what we own today. This was our approach entering 2020 and it served us well.


We have long said volatility creates opportunity and we have been capitalizing on that volatility when it presents for close to 10 years. This is one of the foundational elements of our investment approach – be prepared to act.


Portfolio positioning


From a positioning standpoint, we are underweight materials, energy, utilities, cyclical financials, and industrials and real estate where we think the risk reward isn't attractive, generally speaking. We are very open to the idea that travel and economies will open (permanently) in 2021, but we are being very disciplined in owning companies that will do well even if we are wrong on the timing. Companies like Middleby Corp., Revolve Group Inc. and Stitch Fix Inc. should see improving fundamentals in 2021.


We still have healthy weights in some companies we expect will prove in 2021 that they were more than “stay/work-at-home” beneficiaries. Companies like Breville Group Ltd., who make innovative small home appliances, Ambu A/S, who sell single-use scopes that help prevent patient contamination in endoscopy procedures, and Etsy Inc. may not see the momentum in their underlying growth. However, we believe these companies will compound their revenue at 10-15% for the next decade and remain strong long- term compounders.


Source: CI Global Asset Management as at December 23, 2020.


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Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.


Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Global Asset Management and the portfolio manager believe to be reasonable assumptions, neither CI Global Asset Management nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.


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Published December 31, 2020.