Amid Greek crisis, Trimark hedges euro exposure

Currency weakness benefits some European companies, says global team leader Michael Hatcher.

Sonita Horvitch 13 July, 2015 | 5:00PM

Michael Hatcher, head of global equities and director of research at Trimark Investments, says that while Greece's high-profile financial ills are taking a heavy toll domestically, they are likely to have little impact on the globally dominant businesses that he and his team invest in.

"Some of these businesses are headquartered in Europe and they could, in fact, benefit from a weakening euro," he says. "The challenge for Canadian investors in European equities is to insulate themselves from a falling euro." This can be accomplished through currency hedging, he adds.

The European equity market, although it recently pulled back in the wake of this crisis, has done well so far this year, he notes. The European and U.S. equity markets continue to be generally fully valued, he says. "This represents an ongoing challenge to a global value manager like myself." It remains difficult, he says, "to identify high-quality dominant businesses trading at a 30% discount to intrinsic value, and that is what I look for."

Of Greece's latest financial upheaval, Hatcher says that the outcome will be determined by the "political agenda of the key players." The departure of Greece's outspoken finance minister, Yanis Varoufakis, is likely to assist in the ongoing discussions, he says. "Without the political will on all sides, Greece is on the road to exiting the euro."

The eurozone countries are divided in their approach to Greece, he notes. France, he says, has articulated its desire for Greece to remain in the eurozone. Germany has been adopting a harder line. The recent No vote, in the Greek referendum on further austerity measures, caused further rifts among eurozone member countries. But this key vote does, says Hatcher, give Greece's leaders a mandate to take the Grexit route, as it has been dubbed. "It is all tough to call."

The issue of contagion in the eurozone is a consideration, he says. Spain, for example, has seen the rise of anti-austerity political parties. "But overall, the Western European economies that have faced financial difficulties since the global financial crisis of 2008-2009 have done a better job of getting their fiscal houses in order than Greece." The country is an outlier, he adds.

Hatcher notes that he has "not been a fan of eurozone banks for some time." For a start, he says, their financial statements are "opaque." He has remained wary of the major Italian, Spanish, French and German banks, "although they have certainly had sufficient time since the start of the global financial crisis to ring-fence (protect against) their exposure to Greece."

Michael Hatcher
Michael Hatcher

At Trimark Investments, a division of Toronto-based Invesco Canada Ltd., Hatcher's extensive responsibilities include that of lead manager of Trimark Global Fundamental Equity, Trimark Global Dividend Class and the flagship Trimark Fund. Hatcher co-manages Trimark Europlus with Matt Peden, who is the lead manager of that fund.

Hatcher reports that the team has hedged the euro exposure in funds such as Trimark Europlus and Trimark Global Fundamental Equity. In stock selection, he says, the team looks for companies "with strong competitive advantages and moats." The companies must "have a sustainable return on invested capital and generate significant cash flow." The portfolios are fairly concentrated and the investment horizon tends to be longer term.

It has generally been tough, says Hatcher, to add new names to the portfolios, but the team has unearthed a few value opportunities. A recent addition is  Nielsen N.V. (NLSN). This market-research company, which operates in 106 countries, has two principal lines of business, says Hatcher.

Firstly, it provides consumer-packaged-goods manufacturers and retailers with data on what consumers buy and market trends. Secondly, it provides its media and advertising clients with audience-measurement data across all devices -- television, radio, online and mobile. "This helps in the pricing of advertising."

Nielsen has a commanding market share in both of its business segments, says Hatcher. "It has a long history of collecting consumer packaged-goods data and it is the larger of the two providers of this information globally; it is a duopoly."

In its media business, Nielsen essentially has a monopoly, says Hatcher. "This all speaks to our requirement that the businesses we invest in have moats." Nielsen, which is classified as an industrial stock, was added to a number of funds, he says. It is a top-10 holding in Trimark Europlus.

Also in the industrial sector, a company with a similar commanding presence in its field of information services is Experian PLC. "This is one of the world's largest providers of consumer-credit information, with a strong historical database," says Hatcher. It operates mainly in the United States, where there are three major players, and in the United Kingdom and Brazil, where it is also a dominant player. "We have owned the stock for some time and it is held across our funds." The stock is a top-10 holding in Trimark Europlus.

In the consumer-staples sector, Hatcher sold a long-standing position in Heineken Holding N.V. early in the year and deployed part of the proceeds in another long-standing holding -- rival beer giant  Anheuser-Busch Inbev N.V./S.A. This has an ADR and trades on the New York Stock Exchange under the ticker BUD.

"Anheuser-Busch has better management and is in better markets than Heineken," says Hatcher. The former has a "dominant share" of some 50% of the market in the United States. "This is a mature market for beer." In addition, Anheuser-Busch has a large and growing share of the Brazilian and Mexican beer markets, he says. By contrast, "Heineken has a large exposure to the more mature Western European beer market."


Anheuser-Busch InBev N.V./SA Nielsen N.V. McDonald's Corp.
July 9 close $120.40 $44.46 $96.49
52-week high/low $128.35-$102.21 $48.99-$40.56 $101.09-$87.62
Market cap $202.3 billion $16.6 billion $93.5 billion
Total % return 1Y* 8.0 -6.2 -1.2
Total % return 3Y* 18.4 20.4 5.7
Total % return 5Y* 20.2 n/a 9.9
*As of July 9, 2015. All figures in U.S. dollars
Source: Morningstar

Also in the consumer-staples sector, British American Tobacco PLC is a significant holding in a number of the funds under Hatcher's aegis. For example, it is a top-10 holding in Trimark Fund. "As with the beer companies, there is an oligopoly in the global tobacco industry," says Hatcher. "In this industry, the leading players have considerable pricing power and are large cash-flow generators."

A large slice of BAT's business is in emerging markets, says Hatcher. Its tobacco and cigarette business is a mature one in developed countries, with revenue flat to slightly down, while its revenue in developing countries is flat to slightly up. Hatcher reports that select funds that he is responsible for also have holdings in the other major global cigarette player,  Philip Morris International Inc. (PM).

Hatcher and his team have sold a long-standing holding in the global fast-food giant  McDonald's Corp. (MCD), which was held in Trimark Fund and Trimark Global Fundamental Equity.

McDonald's has a new top management team, Hatcher says. The company's same-store sales have been disappointing "as consumers are opting for what they consider to be healthier alternatives." McDonald's appears to be having difficulty addressing this trend, he says. In the light of these headwinds and given the valuation on the stock, "it made sense to exit the position."

The Trimark global equity team also sold its holding in Adidas AG, which makes and sells a range of athletic and sports items globally. It was also a question of valuation on the stock, Hatcher says. Fundamentally, the company is "changing its management structure and altering its business model." Adidas is moving more into the retail end of the business. "This creates uncertainties." In all, says Hatcher, "when equity markets are fully valued, value managers tend to do more selling than buying."

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Anheuser-Busch InBev SA/NV ADR96.32 USD1.41
McDonald's Corp209.39 USD-0.54
Nielsen Holdings PLC22.38 USD-1.10
Philip Morris International Inc71.20 USD-0.71

About Author

Sonita Horvitch

Sonita Horvitch