In managing the award-winning Mawer Global Small Cap, Paul Moroz focuses on wealth creators that earn a high return on capital.
Moroz and his colleagues at Calgary-based Mawer Investment Management Ltd. seek to identify quality companies with a competitive advantage. Secondly, they favour management who will allocate capital at high rates of return. Thirdly, the valuations – which are based on a discounted-cash-flow model – must make sense.
"We're taking a lot of the risk out of the asset class," says Moroz. Over the nearly five years of the fund's history through very difficult economic times, he adds, the emphasis on high-quality companies has paid off.
Moroz says Mawer is often characterized as a GARP -- growth at a reasonable price -- manager. He prefers to describe the firm's discipline by another acronym -- QUARP -- which stands for "quality at a reasonable price."
As of April 1, Moroz became the deputy chief investment officer at Mawer, and is also a director and portfolio manager. He has led the global small-cap mandate since its inception in October 2007. The fund won the Best Global Small/Mid Cap Equity award at the Morningstar Canadian Investment Awards in 2011.
Moroz also co-manages Mawer Global Equity with Jim Hall. The Calgary-based firm is responsible for approximately $11.5 billion in total assets under management.
 |
|
 |
|
| Paul Moroz | |
|
|
|
|
|
In Mawer Global Small Cap, Moroz and his teammates will invest in companies with stock-market capitalizations of up to US$3 billion. There's no minimum market cap for holdings of the fund, which includes a few companies that are only in the US$30-million range.
Though the portfolio is diversified by geographic region, approximately 90% of the investment process consists of bottom-up securities selection. This is complemented by quarterly outlook meetings to assess longer-term macroeconomic themes. Regional risks, political risks and currency risks are taken into account.
The very "index-agnostic" strategy is illustrated by the fact that the energy weight in the fund "is approximately nothing," says Moroz. The managers, who ironically are located in the heart of Canada's energy patch, have chosen securities from other sectors that they believe will provide high enough returns and better diversification.
Individual holdings are limited to no more than 6% of the overall portfolio of 50 to 100 names. Another risk constraint is to limit any industry group within a sector to a maximum of 20% of the portfolio. For example, they could hold more than 20% in the financial-services sector. But if they did, no more than 20% of the fund could be invested in banks.
More than 90% of the companies held in Mawer Global Small Cap pay dividends. This is not a requirement. But as Moroz explains, since these businesses have competitive advantages and recurring revenue most of the time, they'll often have cash left over to pay out as dividends. "The dividend yield on the portfolio, at the end of the last quarter, was actually 3.5%," says Moroz, "and I think that might be a surprise for a lot of people who look at small-cap securities."
Mawer managers are buy-and-hold investors. Moroz estimates that his annual portfolio turnover is in the 10% to 20% range. Typically, companies will be held in the portfolio for five to 10 years.
Among the top holdings is Retail Food Group Ltd., an Australian-based franchisor of quick-service brand, such as coffee and snack items. "This is a recurring business," says Moroz, "and usually when there's an economic downturn, you can still go window shopping and buy a cup of coffee."
Furthermore, there are not a lot of fixed assets associated with Retail Food Group., and the capital they have to put into the business is obtained from the franchisees. "Here's a business that trades at nine times earnings, with over a 5% dividend yield," Moroz says.
Moroz, 32, received a B.Commerce degree in 2003 from the Haskayne School of Business at the University of Calgary. He worked as a co-op student at Merrill Lynch Canada Inc. as an associate analyst in the energy-research department. He joined Alberta Investment Management in May 2003 and left in May 2004 to join Mawer. He received the CFA designation in 2006.
Under Moroz's tenure, the Morningstar 5-star rated Mawer Global Small Cap has an annualized three-year return of 12%, compared with the median 3.5% in the Global Small/Mid-cap Equity category, as of Aug. 31.
Despite the focus on quality companies and risk metrics, the managers are well aware of the liquidity risks with small caps. "I think if we get into a real risk-on environment," says Moroz, "we certainly can't expect to do as well as we've done. If the market goes straight up, we're going to lag our peers to some extent. But when the market gets tough and the economy gets tough, we manage risk to the downside and that's what counts for our clients."
