A solid global-equities offering for patient investors

Managers of this CI fund look for stocks where their view is unique among their peers before they buy.

Achilleas Taxildaris 31 October, 2016 | 5:00PM
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CI Black Creek Global Leaders uses bottom-up research to look for companies leading and gaining share in their markets. The fund's strong record, as well as its experienced management and proven contrarian process, earn it a Morningstar Analyst Rating of Silver.

The fund's managers follow a process that has served them well both here and at previous funds at Trimark. They think like long-term business owners and study individual stock fundamentals to identify leading companies gaining share in their markets.

The cornerstone of their philosophy is independent thinking. The managers read sell-side research, among other things, in order to understand the market’s view on a stock, buying that stock only if they have a unique view of the underlying company. This also helps them maintain a strong selling discipline, getting out of a position when their view is eventually shared by the market.

As they build a portfolio of 25-35 holdings, they meet with companies’ management teams, as well as their customers, suppliers, and competitors. They look for firms with sustainable competitive advantages, such as markets with large barriers to entry.

Black Creek’s managers, who try to stay fully invested, don’t equate volatility of returns or stock prices with risk. Instead, they try to control risk at the business level, examining a firm’s vulnerability to disruption, such as currency fluctuations, labour unrest, raw material price changes, and technological advancements. The portfolio’s concentration courts volatility, but also helps them to control risk at the holding level by allowing them to more deeply understand the businesses and earnings drivers of each company. They will add a new name in the portfolio only if the valuation is more compelling than those of the current holdings. This discipline helps protect against valuation risk.

The managers have a fair amount of flexibility and are not afraid to use it. Through individual stock selection, the fund can move up and down the market-cap spectrum, over- or underweight sectors or countries, and invest up to 10% on any individual name. Despite a gradual increase in the number of holdings in the last couple of years, the fund remains concentrated with 30 stocks as of September 2016.

The fund’s biggest active position is an underweighting to U.S. companies versus its benchmark and peers. The U.S. stock market has outpaced most developed markets in recent years and the U.S. dollar has strengthened, making it hard for the management team to find attractive investment ideas. Europe, where valuations are lower, remains more fertile ground for contrarians like this fund’s managers, who believe some of the fund’s non-U.S. names still have sufficient exposure to the U.S. economy.

The fund currently does not exhibit all the quality characteristics one would expect given its focus on market leaders. That’s because of its preference for firms that are profitably reinvesting their cash flow to take market share, rather than companies that pad their margins by underinvesting in their businesses. The returns of the latter can be artificially inflated or unsustainable.

Stock-picking drives sector allocation and can lead to big bets for or against certain areas in this concentrated portfolio. As of 2015, it was more diversified across sectors than it has been in the past except for utilities and telecom stocks, which it has avoided. On the other hand, the largest sector overweightings are in industrial and consumer discretionary stocks, such as Swiss-based Oerlikon (OERLY) and French luxury goods company Christian Dior (CHDRY).

The team hedged a small portion of the fund’s foreign-currency exposure at the start of 2016 when the Canadian dollar dropped to what the managers considered too low a level versus most developed currencies.

Since the July 2006 start of manager Bill Kanko’s tenure, this fund has posted attractive returns. As of September 2016, the fund’s F series gained 9% annualized, versus 6.5% for the MSCI World Index, while the A series’ 7.9% beats the 4.7% of the Global Equity category average. Volatility has been higher than the benchmark and peers but has been mostly on the upside. The fund's Sortino ratio--a measure that takes into account only downside volatility--is better than its benchmark’s and in the peer group’s top decile during the same period.

This contrarian strategy can lead the fund's performance to diverge significantly from its benchmark sometimes. In 2014, for example, its U.S. equity underweighting contributed to the A series’ 11-percentage-point underperformance versus the MSCI World Index. The fund has rewarded patient investors: 88% of 88 rolling three-year periods since July 2006 have landed in the first or second quartile of the fund’s peer group, while 2.3% have landed in the bottom fourth.

The fund has benefited during the manager’s tenure from a much lower average market cap than its peers’ and benchmark’s, but that alone doesn’t explain all of the outperformance. Attribution analysis shows the manager has added value during his tenure through a combination of security selection and sector allocation. His decision to underweight banks because of their uncertainty during the financial crisis accounts for much of that sector-allocation benefit.

The fund's management-expense ratio (MER) of 2.48% falls below the category median of 2.54%. That is good enough to rank in the second-cheapest quintile among peers in the commission-based distribution channel. Despite below-average turnover--40% in the past three years--it added on average a trading equity ratio (TER) of 0.14% that pushes it into the middle quintile on a total expense basis.

Unfortunately, the 1.36% MER of the fund’s F series is higher than the 1.34% category median. Taking TER into account, the fund’s total expenses rank in the second-most-expensive quintile.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Christian Dior SE ADR186.55 USD2.64
OC Oerlikon Corp AG, Pfaffikon ADR9.90 USD-16.31

About Author

Achilleas Taxildaris

Achilleas Taxildaris  Achilleas Taxildaris is analyst for Manager Research and focuses on active strategies.

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