Christian Charest: For Morningstar, I'm Christian Charest. It's Global Equities Week on Morningstar.ca and today I'm happy to have Mr. Nadim Rizk. He is Vice President and Senior Portfolio Manager at Fiera Capital and he is among other things Lead Manager of National Bank Global Equity.
Mr. Rizk, thank you very much for being with us today.
Nadim Rizk: Thank you.
Charest: Can you start by describing your investment style a little bit? What principles do you follow? What methodology do you follow?
Rizk: So we focus effectively on what we consider to be very high quality companies. These are companies that typically dominate their industries and generate very high and stable returns on capital. We also prefer to be relatively concentrated in fewer companies. So typically the average fund that we manage holds between 30 to 40 companies, depending on the product we are running. We also tend to be very long-term in nature, meaning we typically trade less than 10% of the fund on an annual basis or, in other words, the average holding for us is 5, 10 or 15 years, the average about 10 years. So highly concentrated, buy and hold, very high quality is the way we do it, and obviously we mostly focus on bottom-up stock picking. So because we focus on specific companies, we do very limited top-down macro sector or global research. It's really company-by-company specific.
Charest: Now one of your main criteria is the need for a company to have a sustainable competitive advantage. Now that’s a concept that's also a very large component of the process that Morningstar equity analysts follow. How do you define a competitive advantage and how do you determine whether it's significant enough to include the stock in your portfolio?
Rizk: We believe a business generates value when it can generate a return on capital that’s above and beyond its cost of capital. The bigger that gap and the more stable that gap is the more value the company creates over longer periods. For a business or a company to generate a high return on capital sustainably, it needs a competitive advantage. Usually companies that do not have a special competitive advantage tend to eventually lose margins, profits and return on capital. A sustainable competitive advantage comes from many factors, could be things like global brand, could be access to distribution, could be special technological know-how, could be legal patent protection, like in the case of pharmaceutical companies. It can be a combination of many factors that make the product or the service that the company is doing really unique and special to them, and that they can defend that business as much as possible. Obviously very few companies can defend businesses forever, but usually companies with high competitive and barriers to entry typically can protect themselves for many, many years.
Charest: Now your investment universe is very vast, but you prefer to have concentrated portfolios. Why do you think that’s better than having a more diversified approach or even an index fund?
Rizk: So there is obviously value for diversification in terms of optimization of funds. We think most diversification value happens between 20 to 30 or 40 names. Beyond that, we find the benefit of diversification is very small. But the dilution to the quality and the potential for returns on the investment are actually high. So effectively what I am saying is beyond 40 names, the value of adding names is very small. We also often say that there is no reason for you to put money in your 60th, or 70th, or 80th or 100th best idea. You are better off putting most of your money in your top 30 or top 40 best ideas effectively. So we think 30 to 40 names is diversified enough by country, by geography, by sector, by industry, by end markets, by client, yet concentrated enough to keep the integrity and the quality of the investment.
Charest: Your portfolio turnover is very low. But you do sell some stocks every now and then. What are the motivating factors for liquidating position?
Rizk: So selling an entire position happens for two reasons and two reasons only. The first one is the initial investment thesis for which we bought the company is no longer valid. That happens because either we frankly made a mistake, or we misunderstood the business, or because the business has changed throughout the years that we've owned it and it went in a different direction, or that new investment thesis is no longer interesting to us. We would walk away from it. The other reason is maybe there is sometimes nothing wrong with the thesis, but we happen to come across something that’s much more attractive. You mentioned the universe is so large that there is always potential, very attractive companies that we didn’t know existed before, and we may find something that's better than what we own. Because we like to stay concentrated, we typically would actually switch one for the other and that would be the other reason to make a complete exit out of the position. No other reasons other than those two would actually trigger a complete sell out of a position.
Charest: Mr. Rizk, thank you very much for sharing your views with us today. And for more on Morningstar's Global Equities topic week, please click on the links right below the video player. For Morningstar, I'm Christian Charest. Thanks for watching.