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A worthy option for complementary global equity exposure

Trimark Global Endeavour offers stable management and a proven process.

Shehryar Khan, CFA 15 January, 2018 | 6:00PM
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Over a 16-year period managing Trimark Global Endeavour, Jeff Hyrich has done an admirable job of picking stocks of quality firms trading at attractive valuations. With Hyrich and co-manager Erin Greenfield since 2008, investors in can count on stable management and a proven process borne out by a strong long-term track record. As such, this fund is worth consideration for complementary global equity exposure.

Despite their long tenure, both managers are relatively young and have meaningful investments in the fund, and they are supported by a large, global corporate parent, so they can continue to serve their unitholders for years to come.

Hyrich and Greenfield perform all the research on the stocks they own themselves, rather than relying on analysts. Normally, this might put fund managers at a disadvantage versus their peers, but in this case given the pair's rigorous process, only a handful of investment candidates meet their criteria each year. The fund tends to be concentrated, with about 35 stocks and a low turnover of less than 20%. The managers are willing to be patient with holdings, as long as they continue to compound returns, but they will trim or sell if valuations get out of whack.

True to Trimark's overall investment philosophy, this fund's process seeks quality businesses trading at attractive valuations. That in itself is not unique, but this strategy's seasoned managers gain an advantage through fundamental research and an ability to look past short-term market fluctuations and focus on the long-term prospects of the firms they own.

The managers use elementary screening methods to identify companies with high returns on invested capital, clean balance sheets and good free-cash-flow conversion. They'll then do a deeper dive on a company from this list when its stock price slips for short-term reasons, giving them an opportunity to buy the business at an attractive valuation. Ideally, they want to buy a company that trades at 10 times normalized free cash flow, but will pay up for quality if ideas are scarce, such as in today's low-interest-rate environment. The managers do scenario analysis on holdings to assess their downside risks. They aim to build a portfolio that, on average, is cheaper but showing more quality characteristics than the benchmark.

As a true all-cap fund, it is different from its benchmark, the MSCI AC Mid Cap World Index, and peers. It invests in household names such as  Microsoft (MSFT), as well as lesser-known small-cap firms such as Australian quick-service food franchiser Retail Food Group. The portfolio management duo diversifies holdings across the market-capitalization range; the fund's 35 holdings sprawl across the Morningstar Style Box, resulting in a distinct portfolio.

The managers let stock selection drive sector allocation, which can lead to notable overweights, such as the strategy's current helping of consumer discretionary stocks, including South Korean automotive supplier Hyundai Mobis and German luxury brand Hugo Boss. By diversifying the fund's exposures, even within sectors, Hyrich has built a portfolio that provides true stock-specific risk, instead of bland market exposure. For example, South African furniture retailer Lewis Group has faced headwinds from increased regulatory scrutiny that limits the interest it can charge on its credit sales, and from the economic struggles of the country. Hyrich believes the firm has enough pricing power to offset the regulatory effects it faces, and believes that as the South African economy recovers the stock will as well.

Since Hyrich took over in October 2001 through November 2017, this fund ranks among the top performers in the Global Equity category while also handily beating the MSCI World Index -- a more appropriate benchmark given management’s go-anywhere approach. The fund's risk-adjusted results also rank at the top among its peers, despite a higher volatility of returns, especially during Hyrich's early years on the fund. Despite shorter-term volatility, the fund's returns look more consistent over longer periods, beating the category average in more than 80% of five-year rolling periods. Given the fund's emphasis on quality and valuation, investors should expect the strategy to provide reasonable downside protection in market corrections, but to lag reasonably when markets run hot. Additionally, investors should be prepared for returns that look very different from the index, and be patient through any potential troughs in relative performance against the benchmark.

Trimark Global Endeavour's management-expense ratio is 2.62% for its commission-based share class and 1.27% for its fee-based share class. Given the Global Equity category medians of 2.59% and 1.37% for the commission and fee-based distribution channels, respectively, this puts the fund's MER in the third and second quartiles for each series, respectively. Fortunately for investors, the manager's low-turnover approach results in a low trading-expense ratio, which, when taken into consideration, improves the rank of the F-series to the first quartile, and the commission-based series to the second quartile.

The information contained in this article is the proprietary material of Morningstar Associates. Opinions expressed are as of the current date; such opinions are subject to change without notice. The information, data, analyses, and opinions presented therein do not constitute investment advice, are provided solely for informational purposes and therefore do not constitute an offer to buy or sell specific securities mentioned within this document or any other investment options. Past performance does not guarantee future results. Morningstar Associates, its affiliates, officers, directors and employees shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use. Please read our Terms of Use for more detail.

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Shehryar Khan, CFA

Shehryar Khan, CFA  Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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