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  5. BEPORT: Can you please describe how you approach "swaps" in a portfolio? [Balanced Equity Portfolio]
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Q: Can you please describe how you approach "swaps" in a portfolio? By that I mean swapping out one company for a very similar company in the same industry. You did this somewhat recently in removing Sun Life from the BE portfolio for Intact. (In that case I recall it was due to a better growth profile.)

My general sense is you have liked CNQ better than SU for a while now, for example. And TD better than BNS. Feel free to correct if this is not how you see it.

Appreciate there is a benefit to a certain amount of stability in the portfolio, so you won't bouncing stocks out every time the wind changes. But I'd interested in your thoughts on how you think of this aspect of portfolio construction. For example, in what circumstances might precipitate a swap in these or other cases? When would you hold still even if you like an alternative stock slightly better?

Thanks very much.
Asked by Chris on March 07, 2025
5i Research Answer:

In some cases, stocks within a sector (such as Canadian financials) are very similar in their makeup and drivers. So, to replace a name, you want a higher bar or obvious reason for why that switch is worthwhile (to account for potential tax impacts, timing issues and simply the fact that the switch may not work out as planned). However, if a name has continually underperformed, it essentially enters into a 'watch list' for if/when better opportunities arise. 

Outside of industries that are more similar in nature, it comes down to bottom up analysis. If/when we find a company that we like, we look at the portfolio and see if it makes sense to swap it in place of a current holding or add it outright as a new one, which depends on sector allocations at the time and to some degree tax implications (triggering a loss vs a gain, etc).