Kim Shannon - I’ve Long Believed That The Market Reflects Human Nature As Much As It Does Underlying Fundamental Value | #153

Episode Summary

Executive Summary: Kim Shannon of Siona Investment Managers explains a disciplined, relative-value investing approach grounded in market history, human behavior, and mean reversion. She argues value remains effective despite long periods of underperformance, highlights Canada’s relative attractiveness versus the U.S., discusses opportunities in Canadian energy and pipelines, warns about housing-related risks, and advocates for greater female representation in asset management.

Main Topics: Value investing as a behavioral, historical discipline (Priority: 5/5): Shannon argues markets are shaped by human emotion and irrationality, making mispricings persistent and exploitable over long cycles. She emphasizes buying cheaply and waiting for mean reversion. Relative value process and portfolio construction (Priority: 5/5): Her firm starts with quantitative screens, then performs deep fundamental and risk analysis, building diversified but still benchmark-aware portfolios, often with 35 names or more concentrated 25-name versions. Value vs. growth and market efficiency debates (Priority: 5/5): Shannon pushes back against claims that value is obsolete, citing long-run research and past market eras where value underperformed before rebounding. She views today’s growth market as potentially overhyped. Canada as an attractive investment market (Priority: 4/5): She defends Canada’s market characteristics, noting its long-term returns and low volatility history, and argues it is cheaper than the U.S. and may outperform over the next several years. Sector opportunities in Canadian energy and pipelines (Priority: 4/5): She sees select value in quality energy names and pipelines, believing stock prices have not fully reflected improved fundamentals and valuation resets. Housing and financial-system risks in Canada (Priority: 3/5): Shannon describes pockets of Canadian real-estate overvaluation, especially Toronto and Vancouver, and suggests mortgage tightening may lead to a cyclical slowdown and possible bank credit losses. Women in asset management and industry inclusion (Priority: 4/5): She promotes a women-focused conference in Omaha and argues the industry remains underrepresented by women, calling for proactive hiring, development, and allocator pressure.

Key Arguments: Market prices reflect human behavior as much as fundamentals; emotional excess creates recurring mispricings. Buying securities at attractive prices is the core driver of long-term returns because cheap assets tend to mean-revert. Relative value investing helps manage Canada-specific sector distortions, especially in resource-heavy markets. A structured process combining quantitative screens and fundamental analysis reduces value traps and accounting distortions. Book value is less useful than it once was, but still has some relevance; valuation discipline remains essential. Value has underperformed recently, but historical research suggests it outperforms growth most of the time and recovers after cyclical stretches. Canada is not a weak market; its long-run returns have been strong and volatility comparatively low. The U.S. looks expensive versus Canada on measures like Shiller P/E, implying better forward returns for Canada. Energy and pipelines in Canada look attractive because fundamentals have improved faster than stock prices. Market-cap-weighted global benchmarks can lead to overconcentration in the U.S. and may be suboptimal for investors. Canadian housing looks vulnerable in some cities due to tighter mortgage standards and affordability pressure, though banks are better capitalized than in past cycles. The asset management industry should intentionally grow and support women managers rather than waiting for experienced candidates to appear. A concentrated portfolio can work, but investors must have the temperament to endure benchmark divergence. Current market enthusiasm for unprofitable growth and monopoly-like business models echoes late-1990s excesses.

Data Points: Years since inflation was last a major focus: 38 years - Shannon notes inflation was the major concern when she started in 1983 and says it had not been seen for 38 years. Stocks reverting to mean: 80% - She cites Andrew Smithers’ work indicating about 80% of stocks revert to their mean. Typical portfolio size: 35 names - Her traditional method uses about 35 stocks in a portfolio. More concentrated portfolio size: 25 names - Siona also runs more concentrated 25-stock portfolios. Value vs growth outperformance frequency: 86% of the time - She cites Fama and French research showing value outperforms growth most of the time. Canada's share of the MSCI All World benchmark: 2–3% - She says Canada represents only about 2 or 3 percent of the global benchmark. U.S. benchmark weighting: 60–70% - She says the market-cap-weighted world benchmark assigns roughly 60 to 70 percent to the U.S. Largest non-U.S. country weight in benchmark: 8.5–9% - She notes the next-largest country in the global benchmark is about 8.5 to 9 percent. Canada-U.S. trade share: 75% - She says roughly 75% of Canadian trade is with the U.S. Women-owned U.S. investment firms: 3% - She states about 3% of U.S. investment firms are owned by women. Assets controlled by women-owned firms: 1.3% - She says women-owned firms control 1.3% of assets under management. Siona AUM: under $5 billion - She describes Siona’s assets under management as under $5 billion. Women on Siona investment team: half - She says half the investment team are women. Women on executive team: three-quarters - She says three-quarters of the executive team are women. Gold sector weight in benchmark at times: more than 10% - She notes that in Canada gold has at times been more than 10% of the benchmark. Gold sector weight in U.S. benchmark: never more than 1% - She contrasts Canada’s gold weighting with the U.S., where it has never exceeded 1%. Gold sector return in 1993: up 150% / 100% - She cites 1993 as a period when Canadian gold stocks were up as much as 150% mid-year and 100% by year-end. Conference date: May 3 - She invites listeners to the Omaha conference on Friday afternoon, May 3. Conference time: 3 to 6 PM - The Omaha Variant Perspectives event is scheduled for 3 to 6 PM.

Pivotal Quotes: "the price you pay when you enter an investment has a significant impact on your long-term results" — Kim Shannon: Core statement of her value-investing philosophy. "Despite technological advances, the humanness of markets has continually created exploitable inefficiencies." — MEB Faber / show quote: From the 2018 paper discussed to support the argument that inefficiencies persist. "we are in a very hyped market today, and you need to look no further than some of the valuations of cannabis and technology stocks" — Kim Shannon: Her warning that growth enthusiasm has likely gone too far.

Implications: Listeners should expect value to remain cyclical rather than dead, with opportunities in cheaper markets and sectors like Canadian energy. Investors also need patience, discipline, and a realistic benchmark mindset—and the industry should do more to expand women’s participation.