by Salman Ahmed
If you follow our newsletter you’ve likely seen the shot of Tom celebrating a hole-in-one in Scotland. Pretty cool. This wasn’t the only good thing to happen in Scotland. Tom and I also came away more confident in the manager of our Global Equity Fund, Edinburgh Partners (EP).
We were in Scotland to conduct EP’s annual review, which compliments the quarterly updates and other ongoing communication we have with our managers. During this review, we spend time with the primary decision makers and the analysts that support them. We often meet with people from other departments as well, including operations, trading, and risk management.
The objective of this, and much of our other research, is the same. We’re trying to determine if your money (and ours) is managed by the best investors we can find. Here are some of the thoughts we came away with after spending time with EP.
It’s no secret that our Global Equity Fund has lagged over its history. This has largely been a result of holding less in U.S. companies compared to most peers and market indexes. For example, the MSCI World Index, a proxy for global markets, has 60% in U.S. stocks; EP currently holds just over 10%. The U.S. has been one of the world’s best performing markets over the past decade.
We appreciate EP’s undexing approach in this regard. They aren’t beholden to what the index looks like. Instead, they buy companies that are attractively priced in their view. A company’s domicile is often a result of where it can get the best tax rate or which stock market it chose to be listed on. EP, on the other hand, looks at the regions a company’s revenues come from. In their opinion, and ours, this is a better way to assess a stock.
This approach has led the team to invest in companies from Japan, Europe and emerging markets. While this decision has caused them to trail the pack during the bull run in U.S. stocks, it has started to pay off over the last year.
EP’s valuation focus (the price paid today for future earnings) can result in the Global Equity Fund sometimes holding stocks with negative headlines. These stocks have been beaten up because of poor sentiment. EP isn’t swayed by emotion and instead focuses on whether the market is overreacting. This can lead to mistakes (Gazprom), but with good research, can also lead to wins (Bridgestone, SK Hynix, Intesa Sanpaolo). It also means the portfolio may behave very differently than peers or indexes.
The firm puts a lot of consideration into the team. Sandy Nairn, EP’s co-founder and chief executive, has built a strong bench with individuals who have taken on increasing responsibility. EP did, however, lose a senior member to early retirement this year. While personnel departure is always disappointing, there were legitimate personal reasons behind this one.
EP also added two experienced analysts to its team over the last two years. Other managers we meet often fire staff to reduce their costs when performance is struggling; EP has done the opposite, which we see as a testament to their long-term thinking.
EP, like our other managers, doesn’t currently see an abundance of opportunities. That said, there are still attractive companies out there. For example, Sandy purchased Galaxy Entertainment Group in 2015 when all Asian gaming stocks were being painted with the same negative brush. Galaxy has gained 75% since they bought it.
Banks comprise the largest part of the fund overall. In Canada we’re used to thinking of banks as one homogenous group. Our Global Equity fund, on the other hand, holds banks in Thailand, Indonesia, Peru, Norway, France, Germany and the UK. Each of these have unique factors that make them attractive.
More recently, EP is also seeing value in some pharmaceuticals. These companies produce significant amounts of cash, some of which gets paid in dividends. Additionally, many have attractive new drugs in the works. While there is still some risk around drug price regulations in the U.S., the manager believes stock prices more than reflect the uncertainty.
Our Global Equity Fund has struggled at times over its history. We’re the first to acknowledge this. But in investing we look forward. Through our assessment of dozens of global equity managers, we believe the caliber and experience of EP’s people, and the discipline and thoughtfulness of their philosophy and process gives investors in the Global Fund access to a top-tier investment manager with all the ingredients for strong future long-term performance.
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