The weakness in the global equity market has left a number of brand-name companies with commanding franchises trading at discounts, say Bill Kanko, president of Toronto-based Black Creek Investment Management Inc. and Richard Jenkins, managing director.
These two managers invest in such companies. Their well-honed strategy is to focus on those businesses that are market leaders and are increasing market share. Reinforcing this dominance, the companies should have sustainable competitive advantages in their industries, which should be characterized by high barriers to entry.
"Key to our assessment is the development of a proprietary viewpoint about the long-term prospects of the business, which we do by studying the company and the environment in which it operates," says Kanko. "At times, this involves taking a contrarian view to that of the market as a whole."
A veteran money manager, Kanko founded Black Creek in 2004. Jenkins, who also has a long track record in the mutual fund industry, joined the firm last summer. Black Creek manages three mutual fund mandates for Hartford Investments:Hartford Global Leaders,Hartford International Equity and the equity portion ofHartford Global Balanced.
 |
|
| Richard Jenkins and Bill Kanko | |
 |
|
|
|
|
Hartford Global Leaders, which at recent count had assets of $150 million in its various purchase options, has been managed by Black Creek for three years. The portfolio, which is fairly concentrated, currently has 22 names. Individual security weightings range from 3% to 8%.
An essential part of the Black Creek team's discipline is to calculate the intrinsic value of the business, based on its long-term view of its growth potential. "We look for both growth and value when we consider a buy opportunity," says Jenkins.
The two managers have spent a considerable amount of time analyzing the opportunities and impact of the rapid growth of the Internet. A recent addition to Hartford Global Leaders, the U.S. software maker Adobe Systems Inc. ( ADBE/NASDAQ), underscores this. This stock represents some 5% of the portfolio. Adobe's current market capitalization is US$15 billion.
The company develops software for "the creation, management, collaboration and delivery of information over the Internet," Kanko says. This involves both print documents and video images.
On the print side, Adobe, he says, has a dominant market share, "but it does compete with Microsoft ( MSFT/NASDAQ) when it comes to video images." Jenkins notes that Black Creek's investment thesis on Adobe is that there are four strong drivers of its growth.
They are the reduction in the price of flat screens, the collapse of the cost of electronic storage, the disintermediation of newspapers and television where users select their own content, and the origination of Internet content by the users themselves.
Kanko points out that Adobe "has a significant cash holding on its balance sheet, which gives it considerable financial flexibility." On valuation, "although the stock has risen since we bought it, it still trades at around 50% of our estimated intrinsic value," he says.
The two managers have sold their holding in Canon Inc. ( CAJ/NYSE), the Japanese printer, office equipment and camera manufacturer. "Our investment thesis changed," Kanko says. "We had viewed Canon, which has 80% of the global laser printer market, as an Internet company as it benefitted from the trend among computer users to print information from the web."
But, he says, there has been a growing acceptance of electronic documents and Adobe, for one, is the beneficiary of this. Canon, says Jenkins, lost an important distributor of its product. Also, its management is changing direction with an announced focus on flat screen manufacturing, "which indicates to us that it is concerned about the growth prospects of printers."
An "underfollowed U.S. small cap in the education field," which the managers believe offers considerable longer-term promise is Learning Tree International Inc. ( LTRE/NASDAQ). This stock represents 3.5% of the global portfolio.
The company develops and delivers a wide range of instructor-led classroom courses for managers and information technology professionals in both business and government, worldwide.
Learning Tree "has a three-decade brand, which is well-known and trusted," says Kanko. A plus, says Jenkins, is that its founders have "engaged professional management to take it to the next level by, for example, introducing distance learning over the Internet." Learning Tree's market capitalization is US$150 million and "cash on its balance sheet represents roughly half of this, which gives it substantial financial flexibility."
Learning Tree's revenue for the fiscal year ending in September 2009 is likely to be lower than in the previous fiscal year, says Kanko, reflecting a reduction in business spending on education. But he expects this cut back to be short term "as education increases productivity." The stock is inexpensive, says Jenkins, as it trades at 40% of their estimated intrinsic value.
A long-term holding in Hartford Global Leaders, which Kanko and Jenkins believe was excessively beaten down by the market because of concern about the company's exposure to the auto industry, is Johnson Matthey PLC, which is based in London, England. This stock constitutes 5.2% of the fund.
The equity market, says Kanko, overlooked the fact that this company has leading edge technology that reduces emissions in both diesel and gasoline-fuelled vehicles. Johnson Matthey is also working on fuel cells/batteries. "There is increasing regulation on emission control worldwide."
Jenkins says the company is also developing technologies to convert natural gas and coal into diesel fuel. "This aspect of their business has good potential and the market is ignoring this." The stock, says Kanko, currently trades at roughly 65% of their estimated intrinsic value.
:quality(80)/cloudfront-us-east-1.images.arcpublishing.com/morningstar/54RIEB5NTVG73FNGCTH6TGQMWU.png)
