Grayson Witcher

Mawer manager takes a "very long view" on U.S. equities.

Michael Ryval 15 April, 2011 | 6:00PM
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Grayson Witcher maintains that there are many good U.S. investment opportunities, given a longer-term horizon.

"We'll be looking back five years from now, saying we got some solid returns and saw how it was going to happen," says Witcher, a portfolio manager at Calgary-based Mawer Investment Management Ltd., who oversees the $236-million Mawer U.S. Equity. "We had a strong earnings yield, and an attractive monetary policy. A number of factors propelled the U.S economy."

Besides, he says, many U.S. companies are global in nature and benefit from growth in emerging markets. "About 40% of our companies' underlying revenues are generated outside the U.S. It's not entirely a bet on the U.S. economy," Witcher says, pointing to companies such as Nike Inc. NKE and PepsiCo Inc. PEP.

"There are a lot of reasons to be optimistic," says Witcher. "In some ways, it's a bit safer to invest in these kinds of firms. We're more familiar with the U.S. markets and these companies have to meet high disclosure standards."

A bottom-up stock picker, Witcher looks for companies with a track record of generating wealth for shareholders, solid business models and strong management teams.

Sometimes, the process is serendipitous. After Witcher had done some preliminary research on Illinois Tool Works ITW, the company came up in conversations other firms had with Paul Moroz, manager of Mawer Global Small Cap. "It's always good when you hear these kinds of stories."

With a market cap of US$27 billion, Illinois Tool Works is a highly diversified company that has about 700 business units, making products ranging from industrial fluids and adhesives to measurement equipment and systems. "It's almost like a collection of private equity companies," says Witcher. "The CEOs operate independently, under the ITW umbrella. That creates a lot of incentive for the managers of these business units."

Acquired in late 2009, the stock is about 20% higher than what Witcher paid. Based on his discounted cash-flow analysis, the stock has more upside. "It's still attractive," says Witcher, declining to offer a target price.

"We take a very long view on stocks," Witcher says, adding that single holdings are limited to about 5%. "Our average holding period is eight to 12 years." In 2010, portfolio turnover was 10.6%.

A Calgary native, Witcher turned to finance after graduating from Harvard University with a bachelor in engineering sciences degree in 2001. His first job was in Morgan Stanley's investment-management division in Philadelphia.

"I was always more interested in the business side of things," says Witcher, whose curiosity was piqued in a summer job at an investment bank. "Both engineering and investment banking are interesting. But finance was a better fit."

Witcher spent four years at Morgan Stanley, and covered corporate bonds. Then he joined Blair Franklin Capital Partners, in Toronto, where he was an associate on the company's hedge-fund side.

In 2006, Witcher returned to Calgary and joined Mawer. He worked alongside Darrell Anderson on the U.S. equity fund. By 2009, he was co-manager. In early 2010, when Anderson retired, he assumed the portfolio.

The Morningstar 4-star rated fund returned 6.4% for the 12 months ended March 31, lagging the 9.7% median return in the U.S. Equity category. Over the last two years, it returned an annualized 8.6%, well below the 14.4% median.

Mawer U.S. Equity lags in bullish periods, Witcher admits, but outperforms in bear markets. In 2008, for example, it lost 14.3%, far less than the median calendar-year loss of 25.2%.

The recent weaker performance is attributable to the type of companies Witcher prefers to own. "It's hard to make an investment thesis for a company that is not creating wealth over a business cycle," says Witcher, adding that stocks of beaten up automakers may have done well lately, but have a poor long-term history.

Since the fund is not hedged against currency fluctuations, it has also been hurt by the weak U.S. dollar. "Hedging costs money. Over the long term, currency movements even out."

Witcher emphasizes that the longer-term perspective will ultimately prove successful. "We look at companies over a cycle, not just a quarter or a year."

As a consequence, Witcher is favouring companies such as Wright Express Corp. WXS, a firm that provides payment-processing services for U.S. commercial and government vehicle fleets. "It's less sensitive to the economy than you'd think," says Witcher. "You have to keep filling up your gas tanks, if you want to look after your customers."

The small-cap firm has a 20% return on capital over the last five years and its stock trades at about 16 times forward earnings. "It's closer to its intrinsic value," says Witcher, noting that the stock is up about 75% since he bought it a year ago. "But there is value left in it."

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Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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