Top-performing Mawer U.S. Equity Fund sticks to basics
FundGrade A+® Award winner
The Mawer U.S. Equity Fund is proof positive that if you stick to the basics and execute consistently well, you’ll be amply rewarded. For this high-performing fund from Calgary-based Mawer Investment Management, the rewards, for almost every time frame ended June 30, 2019, from one to 10 years, have been average annual compounded rates of return exceeding 15%. It’s why the fund has garnered the FundGrade A+ Award for every year since 2014.
“We’re bottom-up investors, and we basically look for three things,” says Colin Wong, the fund’s portfolio manager. “Firstly, we only buy value-creating companies, companies that have been around for a long time and generate a return on capital that is higher than the cost of capital.
“Secondly, there needs to be capable and honest managers,” Wong continues. “The world is ever-changing, and even the best businesses can deteriorate if they don’t change with the times. Management needs to reallocate capital and be able to change too. And thirdly, we look for companies that are trading at a discount.”
Three simple criteria, but of course the reality is more complicated. While the approach is 100% bottom-up in theory, Wong acknowledges that in practice there always is an element of top-down analysis involved. “It’s really about 80/20 [for bottom-up versus top-down],” he says. “We do have an overlay that we use to increase the resiliency of the portfolio.
“We don’t look at just the economy, but a whole gamut of factors,” Wong adds. “But we don’t try to forecast where oil or interest rates or the economy are going. It’s tough to predict, so we try to be resilient, whatever happens. We’re always cautious and try to play both sides of the ball.”
Nor is cap size a consideration, although the portfolio is predominantly large caps (by Wong’s definition, companies with market capitalization over US$15 billion). “We’re an all-cap fund, but about 80% to 85% of the portfolio is large caps,” he says. “There is some bias towards bigger companies, although another way to look at it is on a weighted average basis, and ours is smaller than the S&P500 Index. Capitalization is an outcome for us, rather than an input.”
Given the size of the U.S. investment universe, the fund uses a number of methods for pinpointing opportunities. “We look first at investment attractiveness, and we do some screening,” Wong says. “We also did a global search where we split the whole U.S. market – 6,000 companies – from A to Z, and went through each one looking at financial metrics and business models.
“We also use internal and internal networks,” Wong adds. “For example, we may hear of a competitor who is doing a good job, so we’ll look at that. Or, for example, someone might talk to a friendly physician who says ‘Hey, this product really rocks.’ We also have an automated tracking system that sends alerts if, for example, the stock price moves.”
Wong cites the recent purchase of Milwaukee, WI-based A.O. Smith, a maker of water heaters, as an example. “We’d been tracking it for some time, and the price went to where it made sense, so we bought it,” he explains. “They have the biggest market share and 80% of their sales are replacements, so it’s strong recurring income, and it isn’t a discretionary expense that can be deferred. Management has done a good job, and they now have a thriving business in China.”
Another favorite (the fund’s top holding) is Jersey City, NJ-based Verisk Analytics Inc., which provides data analysis to the insurance and more recently other industries. Wong explains that what started as an insurance industry group assembled in response to government demands for data was turned into a for-profit corporation. “They collect data and sell it to companies to help them price products better,” says Wong, adding: “It’s a very difficult business to replicate, and management has been very good at expanding and making acquisitions.”
As for the notion that a more defensive position might be appropriate now given the length of the U.S. bull market, Wong says: “I don’t want to sound over-optimistic but just because the bull market has been going for a long time, that doesn’t mean there has to be a correction. If you look at Australia, for example, they haven’t had a recession in 23 years.”
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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