Invesco Insights, December 2014

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Insights
Being different
makes a difference
Trimark portfolio managers Jeff Hyrich and Erin Greenﬁeld are
renowned for their unique approach to global investing. In this
candid interview they take us inside their tried-and-true method
of portfolio construction; discuss the beneﬁts of running a ﬂexible,
predominantly mid-cap fund; and explain how investing in
under-followed companies with the potential for above-average
growth helps drive long-term performance on Trimark Global
Endeavour Fund.
Where are you ﬁnding opportunities currently,
and what are your general thoughts about the
market environment?
Jeff Hyrich:
At present, we’re ﬁnding it harder to ﬁnd the kinds of
bargains we like as a lot of stocks have been bid up with
the market. We’ve found some ideas this year in smallersized companies that are off a typical investor’s radar and
that tend to be under-covered. Where we’ve been able to
ﬁnd ideas are in the “cracks” of the market. What I mean
by this is these are really good companies, but they’re
under-followed and obscure.
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Erin Greenﬁeld:
Some of the places we’re ﬁnding
opportunities are in sectors that are
out of favour right now. Financials
is one such sector, and we’ve picked
away a little bit at energy, which is
an area we’ve been underweight in.
Automotive is one of our biggest
holdings, with Hyundai Mobis Co.,
Ltd. A number of the ideas we’ve
worked on in the past year or two
have been in the emerging markets,
an area many other portfolio
managers have shied away from,
allowing us to ﬁnd some more
reasonable valuations.
“The emerging markets aren’t as advanced as their developedmarket counterparts … but that’s usually offset by the higher
growth potential and lower valuations.”
— Jeff Hyrich, Portfolio Manager
How do you approach the
increased risk typically
associated with investing
in emerging markets?
Jeff:
We’re high-quality investors. The
quality of the emerging-markets
companies we’re buying is
generally in line with the other
companies we own. I would say
that the lower valuation you get
is offsetting the potential for
greater currency volatility. The
emerging markets aren’t as
advanced as their developedmarket counterparts, so they
tend to be more volatile in terms
of the economy and the markets
in general, but that’s usually
offset by the higher growth
potential and lower valuations.
Erin:
With the emerging markets you
might get somewhat more risk
around politics and currency
ﬂuctuations. But many emerging
markets are actually in better
ﬁscal shape than some developed
markets because their debt
loads aren’t as high. As a result,
although the currencies can be
volatile, I think over the long term,
an allocation to equities in the
emerging or developed markets
should even out. Regardless, we
hedge half of Trimark Global
Endeavour Fund’s currency
exposure in emerging markets.
Jeff Hyrich
Portfolio Manager
Like Jeff mentioned, with the emerging markets you’re getting
a better valuation with higher growth, but admittedly are
trading some macro risk for that.
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You’re currently at the high end of
your names range in Trimark Global
Endeavour Fund. Is that a function
of the fact markets have risen so
much that it’s harder to ﬁnd ideas?
Jeff:
The Fund held as few as 25 names in the past.
It’s now around 30 names. One reason the
holdings have crept up is we’ve struggled to ﬁnd
new ideas at the right price. And where we have
found new ideas, often we haven’t been able to
get a full position. If we could ﬁnd companies
we want to buy, we’d scale out of some of the
holdings that have done well and have less
compelling valuations. We already have a sizable
cash position, which means selling existing
holdings isn’t as paramount to free up capital.
Erin:
When your conviction is high, you want to have
big weights, and that’s usually when valuations
are low. In the past, when we’ve had a lot of
conviction around some of our best ideas, we’ve
made them 4%, 5% or even 6% weights in the
Fund. That was because valuations were much
more reasonable. Over the past ﬁve or six years,
as valuations have risen, we’ve been slow to
sell some of our winners, and when we add
something, we often don’t have the same level
of conviction we had when valuations were lower
and we were able to ﬁnd bargains more easily.
Tell us about a new idea you’ve
recently added to the portfolio.
Jeff:
Sa Sa International Holdings Ltd. is a major
cosmetics retailer in Asia. The majority of its
business is in Hong Kong, where it’s based, but
it also has businesses in Singapore, Taiwan and
Malaysia. A big part of its business comes from
Chinese mainlanders, who travel to Hong Kong
to buy cosmetics, where they aren’t taxed as
Trimark Global Endeavour Fund
Relative geographic weights (%) vs. benchmark* (as at November 30, 2014)
Cash
12.5
Africa/Middle East
9.9
Asia Paciﬁc ex-Japan
9.3
Europe ex-U.K.
6.5
Latin America
2.5
United Kingdom
-3.2
Canada
-3.3
Japan
-10.7
United States
-23.5
-25
-20
-15
-10
-5
0
5
10
15
Sources: Invesco and FactSet Research Systems Inc. * The benchmark is the MSCI World Mid Cap Index (Net – C$). An investment cannot be made directly into an index.
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heavily and tend to be far less
expensive. It’s a well-run company
that dominates the Hong Kong
cosmetics market and has high
returns on invested capital, good
growth and a great balance sheet.
I’ve followed Sa Sa for about six
years now, but we’ve only recently
bought it as the stock sold off
due to concerns over a slowdown
in China. I’m conﬁdent company
growth will continue to be strong.
As of 2013, cosmetics consumption
in Japan and South Korea are
around $307 and $195 per capita,
respectively. In China it’s about
$30. There are 1.3 billion people
in China, half of them women,
meaning there’s huge growth
potential for the company there.
other investors’ radar screens – meaning that the companies
are not covered by sell-side analysts, and they don’t attend
investor conferences or do road shows.
Erin:
Regardless of where we meet management, we’re conscious
of the fact they’re inclined to put a positive spin on things.
We use these meetings as a way to better understand the
overall business as there aren’t many people who know it as
well as the management team. We’re not looking for advice.
We’re not looking for how the business is doing at that
You recently visited
South Africa. Do you
ﬁnd management is more
forthcoming about their
businesses when you’re
in their ofﬁces rather
than at a conference
or in Toronto?
Jeff:
The trip was a combination of retail
site visits, meeting management
teams and visiting companies at
their headquarters. I wouldn’t say
management are more forthcoming,
but you can gain insights that
simply aren’t apparent in an annual
report or income statement. For
example, are the headquarters
very frugal or are they opulent?
There are also advantages to being
on the ground and seeing ﬁrsthand
the business and economic
environment a company may
be dealing with. I would also say
that sometimes we’re meeting
companies that really aren’t on
Erin Greenﬁeld
Portfolio Manager
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“Trimark Global Endeavour Fund is a predominantly mid-cap
fund, but we take full advantage of the ﬂexibility afforded
by our mandate to help position it for outperformance in the
long term.”
— Erin Greenfield, Portfolio Manager
particular point in time or what the next quarter’s going
to be like, or anything like that. We’re really just trying
to increase our overall understanding of the industry and
the business, of its competitors and some of the risks the
company might be facing.
Our initial investment in Microsoft
has more than doubled, and we
still own it.
As a mid-cap fund, Trimark Global Endeavour
Fund is quite unique. How is it managed, and
why are there some large-cap names, such
as Microsoft Corp., in the portfolio?
Jeff:
As per our mandate, two-thirds of the Fund is to be allocated
in the mid-cap universe, which we deﬁne as the minimumand maximum-sized stocks in the MSCI World Mid Cap Index.
That currently varies from approximately US$300 million to
US$18 billion.
Why Trimark Global Endeavour Fund?
A high-quality portfolio
P/E Price to
Return Debt/
(FY1)1 cash ﬂow on equity capital
Trimark Global Endeavour Fund
MSCI World Mid Cap Index2
14x
19x
13x
15x
22%
15%
24%
35%
Source: FactSet Research Systems Inc., as at November 30, 2014.
1
P/E (FY1) refers to the price-to-earnings ratio using consensus ﬁscal year forward
earnings expectations.
2
You cannot invest directly in an index.
Essentially, with the one-third that can be outside those
parameters we go where the value is. A few years ago, some
of the larger-cap tech stocks, including Microsoft and Cisco
Systems, Inc., were trading at single-digit free cash ﬂow
multiples. Microsoft was around six-and-a-half times earnings
at one point. We realized, however, that it was still a strong
and growing global franchise with a monopolistic position.
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In a perfect world, we like owning
relatively small, undervalued
companies that can grow 1,000%.
But it’s been harder to ﬁnd those
ideas. A few years ago, we found
much better value in larger caps.
Conversely, up until recently,
we’ve found better value in the
under-covered, smaller end of
the market. The ﬂexible one-third
of the portfolio allows us to take
advantage of market conditions
or opportunities as they arise.
Erin:
Several years ago, Jeff was a
co-manager on Trimark Fund and
also the lead manager on Trimark
Global Balanced Fund, meaning
we were looking at lots of largecap companies. When those were
trading at bargain valuations,
it was painful not to be able
to take advantage of them in
Trimark Global Endeavour Fund.
Eventually, after many conversations
internally and with clients, we
decided to invest in what we
considered the best of the
undervalued larger-cap names.
I think the Fund is better off for it.
Trimark Global Endeavour Fund
is a predominantly mid-cap fund,
but we take full advantage of
the ﬂexibility afforded by our
mandate to help position it for
outperformance in the long term.
Is there an advantage
to having the Fund
positioned predominantly
in mid-caps?
management (AUM) is somewhere in the vicinity of $45 billion –
ﬁve times the size of Trimark Global Endeavour Fund’s AUM.
Generally, smaller-sized companies do better in the market
long term because their size allows them to grow faster for
a longer period of time. A lot of times these companies are
less expensive than the slower-growing large caps.
Jeff:
Trimark Global Endeavour Fund
has an average market cap of
about $8 billion or $9 billion.
The average market cap of the
10 largest global equity funds
in Canada by assets under
We’re unique in that most global equity funds are concentrated
on the largest 200 companies globally. There’s a huge part of
the market they don’t really invest in. That’s where we come
in. In terms of concentration, Trimark Global Endeavour Fund
holds about 30 companies. The average holdings of the top
10 global equity funds is about 110, meaning each owns
almost four times the number of stocks. Our turnover is also
far lower than that of our peer group. Being different from
the crowd and buying smaller, faster-growing companies has
allowed us to do well over the long term.
A decade ago, I compared one of our holdings, Ross Stores,
Inc., to Wal-Mart Stores, Inc., noting that Ross Stores was
smaller, growing faster and trading at a much lower valuation.
Ten years later, Wal-Mart’s grown 50% while Ross Stores is
up 600%. That’s why we invest the way we do, to get a better
potential return longer term. We ﬁnd small growth businesses
trading at bargain prices because few have heard of them.
Sometimes they’re in a foreign market where they might not
even put out ﬁnancials in English. There might be no sell-side
brokers covering them. But it’s those “undiscovered gems”
that our investors can make a lot of money on.
How do you avoid “value traps” – companies
that look like good bargains but end up
losing value?
Jeff:
We’ve always tried to buy quality companies – ones with the
ability to grow. Your typical value trap is a company that
might trade at a low valuation, but it’s in a declining business
or has a number of negatives affecting it. So, we try to buy
the higher-quality companies with strong growth prospects.
We don’t always get it right, but the potential for strong
growth is key, rather than just buying something that’s
statistically cheap but isn’t a good business.
Jeff Hyrich and Erin Greenﬁeld
run a concentrated, high-quality
portfolio of typically smaller, underfollowed companies.
Erin:
The risk of buying into a value trap is always there for value
investors, as we’re attracted to low valuation. One of the best
ways to avoid the serious value traps is to invest in companies
with low ﬁnancial leverage. If you’re buying something with
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“Our long-term performance has been driven by the fact we
buy undervalued, high-quality companies, and own them
for a long period of time.”
— Jeff Hyrich, Portfolio Manager
a lot of debt, then the probability of it going bankrupt is higher.
But Jeff and I tend to steer away from highly leveraged
companies. You can’t go bankrupt if you don’t have debt.
On occasion, we might lose a portion of the investment if
we’ve made some misjudgements, but if we stay away from
companies with a lot of ﬁnancial debt, the chances of losing
all of it are low.
What has contributed most to Trimark Global
Endeavour Fund’s impressive long-term returns?
Jeff:
Our long-term performance has been driven by the fact we
buy undervalued, high-quality companies, and own them for
a long period of time. I think that’s done it. Of course, there
are other positives; we work with a great group of people.
Trimark Investments has a very
investment-centric culture.
Erin:
I would add that many of the
companies we’ve owned in the
Fund that have done really well
are the ones that can continue
to grow over time. In some cases
we’ve bought some good companies
with solid management teams and
good valuations, but they struggled
to grow. Without question, we
made some money off them.
But it’s the ones that were able
to return to a growth path over
a long period of time that really
led to big results.
Historical outperformance of mid-cap stocks
(growth of US$10,000)
•
S&P 400 Mid Cap Index
Jan. 1991
•
S&P 100 Large Cap Index
Jan. 1996
Jan. 2001
Jan. 2006
Jan. 2011
($)
$134,000
130,000
Mid-caps
outperformed by
2.4x
90,000
$56,000
50,000
10,000
Source: Bloomberg L.P., for the period January 1991 to November 2014. Returns are in U.S. dollars.
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Trimark Global Endeavour Fund returns vs. benchmark
As at November 30, 2014 (not annualized if less than 1 year)
YTD 3-month 6-month
Trimark Global Endeavour Fund, Series A
MSCI World Mid Cap Index (Net)†
10.63%
13.66%
3.30%
3.73%
1-year
3-year
5-year 10-year
5.31% 12.05% 17.47% 15.88%
5.98% 16.95% 20.52% 14.46%
7.51%
7.11%
Source: StyleADVISOR.
†
You cannot invest directly in an index.
What are the most important
metrics for measuring the quality
of a company?
Jeff:
Return on capital would be one. Two would be
competitive position; does the company have
some kind of advantage over the competition?
I’d say the long-term growth potential of the
business is crucial. So, it’s basically return on
capital, strong competitive position, good growth
and a good balance sheet. One other factor is
the ability to reinvest capital at a high rate of
return, because that’s what really keeps growth
going. A business that can reinvest its cash
ﬂows at a 50% rate of return is bound to be a
phenomenal investment. A business that can
reinvest it back at only 3% may be an okay
business, but you’re unlikely to get a great
deal of growth.
Jeff:
Make no mistake, when a real bargain presents
itself, we can move quickly. But, I’d say the same.
When I started in my career, I too was eager to
take a full position on day one. Now I’ve become
a bit more cautious. Maybe it’s just age. Generally,
as you get older, you become a little bit more
risk-averse.
Erin:
This style of investing has helped on both ends.
Because we scale in slowly, when an idea has
turned out not to live up to our expectations,
it’s meant the downside has been lower. On the
other hand, as the market gets irrational and
valuations get stretched, we’ve been slow to trim,
and that’s certainly helped Fund returns as well.
Rather than buying or selling large
positions outright, you often favour
investing in smaller increments
over time. Why is this the case?
Erin:
Working with Jeff for the past seven years,
I’ve learned to have more restraint and slow
down to some extent. At ﬁrst I used to wonder
why we were moving in these small increments,
trimming and adding to positions rather than
selling or buying them in full. I have a much
better appreciation now for moving a little
slower so that you can follow and thereby
understand the company better over a longer
period of time to make more informed
investment decisions.
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Contact
Invesco Canada Ltd.
5140 Yonge Street, Suite 800
Toronto, Ontario M2N 6X7
Telephone: 416.590.9855 or 1.800.874.6275
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[email protected]
www.invesco.ca
These are the personal views of the portfolio managers as at December 2014 indicated and not necessarily the views of
Invesco Canada Ltd. The portfolio managers’ comments are for information purposes only and should not be considered a
recommendation to buy or sell any security. The portfolio managers’ views may have changed since the date indicated and are
not intended to convey any speciﬁc investment advice.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based
on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from
expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward
looking statements, investors should carefully consider the areas of risk described in the most recent simpliﬁed prospectus.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments.
The indicated rates of return are the historical annual compounded total returns, including changes in security values and
reinvestment of all distributions, and do not take into account sales, redemption, distribution or optional charges, or income
taxes payable by any securityholder, which would have reduced returns. Mutual funds are not guaranteed, their values change
frequently and past performance may not be repeated. Please read the simpliﬁed prospectus before investing. Copies are
available from your advisor or Invesco Canada Ltd.
The companies mentioned were selected for illustrative purposes only and are not intended to convey speciﬁc investment advice.
* Invesco® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence. PowerShares®, Leading the Intelligent ETF
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© Invesco Canada Ltd., 2014
Published December 31, 2014
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