Favouring an opportunistic approach to stock picking, driven by fundamentals, Ajay Krishnan is finding emerging markets attractive for the Silver-rated Renaissance Global Small Cap mandate.
Among the global equities, emerging markets represent 10% of the overall fund, the maximum weighting for emerging markets. Other than that restraint, the investment process is based on bottom-up research, using the benchmark MSCI World Small Cap Index. Overall, the fund holds approximately 50% U.S. equities and 40% International equities.
“We’ve been exploring emerging markets for a little over a year now, and it’s s not a tale of risk anymore,” Krishnan said. He leads the portfolio, along with JB Taylor, the chief executive officer at Wasatch Global Investors in Salt Lake city, Utah, subadvisor to CIBC Asset Management Inc.
The Art of Stock Picking
The bar is set high for stock holdings. Krishnan focuses on businesses that can grow by at least a 15% annual compounded rate for both revenues and earnings. Companies are sought that essentially can double over the next five years and then have the potential to double again over the subsequent five years. “We’re trying to find truly enduring businesses,” says Krishnan, “businesses that can survive 10 to 12 years.”
The overall portfolio has sector weightings of approximately 26% technology, 24% healthcare, and 20% industrials. The weightings do not tend to shift significantly.
The investment strategy has remained the same since 1975. “I think we have a particular skill set at Wasatch,” says Krishnan, “to identify these high-quality businesses run by exceptional management.” Quantitative and qualitative research are essential to the investment process. High quality is defined as businesses that generate high returns on capital. The managers want companies that are cash-flow generative, who can fund their own growth without having to go to the capital markets to fund their growth.
In positioning the fund, a strong incentive is shared by the firm’s employees, large shareholders. Krishnan, for example, holds about 95% of his net worth in Wasatch funds. “I think eating your own cooking is a good thing.”
During the research process, the vast universe of companies goes through a rigorous screening process. Due diligence includes visiting companies on site (pre-coronavirus pandemic), building their own model, and talking to competitors and ex-employees. The quality of the management, with a special focus on the culture that the team embodies, is essential criteria.
Prior to COVID-19, the investment team included visits to India and China at least twice a year and each trip entailed visits to 40 or 50 companies. Research in other countries also included at least an annual trip.
Among the 60 to 90 holdings that span microcap to midcap, about 50% of the overall portfolio is invested in names above $3 billion market cap. That differs from the initial approach which focused only on microcap and small cap companies. Over the last 10 years, the firm has moved more to midcap opportunities.
According to Krishnan, after the team found high quality names, especially in small caps that still had significant head room, it seemed foolish to sell the holding just because of restraints on market cap. “So that’s when we decided to explore and launch some new strategies.”
When reviewing the mandate, the managers assess companies that may be at risk of not surviving. Once they make that determination, “Then it’s stay the course,” says Krishnan, “we don’t tend to zig and zag too much.” Historically, the portfolio has an average annual turnover of approximately 35%.
Stocks in Focus
Globant SA, an IT digital design company among the top five holdings, illustrates the investment criteria. “If you think back to the digitization wave that has been occurring even before COVID, Globant plays into that digitization. And that trend is here to stay.” He also sees the new wave of artificial intelligence ramping up and applying to every company. “Companies like Globant who have been growing their revenue are businesses that will do exceedingly well,” says Krishnan.
Silergy Corp., a semi-conductor industry based in Taiwan, is another favoured holding. According to Krishnan, Silergy designs analog chips that are essential for every electronic system. Adding to Silergy’s strength and potential, the company has a design company in California and Shanghai, “So it’s getting the best of both worlds,” says Krishnan, “and it’s able to develop products at a much faster pace than its peers.” In addition, he notes that the company has been doing phenomenally well and gaining share across a number of verticals. “The products may change,” Krishnan says, “but you will need always needs these chips and that’s why we think it’s an enduring business.”
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