Global small-cap specialist Chuck Bastyr believes that Asian markets have lately rolled over, while the U.S. is plodding along and Europe is attracting more attention.
"In Asia, multiples have been contracting a bit," says Bastyr, co-manager of the $174-million Mackenzie Global Small Cap Growth and vice-president at Toronto-based Mackenzie Investments. "People are worried about currencies and inflation. The big China story has gone from a commodity story to domestic consumption story. This affects Asia and the flow of funds as well."
Meanwhile, Bastyr notes that European stocks have moved up materially in response to positive earnings revisions. "People are more positive on Europe and less so on Asia." But the U.S. is a conundrum, says Bastyr, because earnings have not kept pace with share prices. "It can only go so far. Earnings have been good, but prices have gone up faster."
For the most part Bastyr is a bottom-up investor who specializes in non-North American companies, while co-manager Phil Taller focuses on North American names. Formerly known as Mackenzie Ivy Enterprise, the fund was re-named and adopted a global mandate.
"I can't predict what will happen in Europe or Asia," says Bastyr, who began re-vamping the 4-star rated fund last spring after the departure of the previous manager, Stephanie Griffiths. "But if I can get the company fundamentals right, and they're sustainable, that's what you want to own."
Bastyr has focused on about 35 to 40 companies that have attributes such as a minimum 10% top-line sustainable growth, strong free cash flow and little debt. "I always gravitate to companies that have net cash. Being net cash means you can change direction or manage a downturn. You need this flexibility with small-caps, because they haven't got the liquidity."
One representative holding is Starbucks Coffee Japan Ltd., a Tokyo-listed subsidiary of U.S.-based Starbucks Corp. SBUX. The Japanese firm trades at a price-earnings multiple of 25, versus 30 times for the parent company. But Bastyr believes it understates its earnings and its multiple should be 19 times.
"They have 1,000 stores even though Japan is a tea-drinking country," says Bastyr, noting that the firm's first-half sales were up 10% and net income was up 35%. "If I can buy Starbucks in Japan where they are using 'Abenomics' to get consumers to spend and you have a rapidly aging population who likes coffee, then I'll take it."
A native of Austin, Minnesota, Bastyr is a 24-year industry veteran who graduated from the University of Minnesota, where he earned a BSc in business administration in 1981. Initially, he worked for a family-owned construction firm that built roads and parking lots. "I learned a lot about balance sheets," says Bastyr, recalling that the firm had to deal with very high borrowing costs in the 1980s. "As long as you have a good balance sheet, you can survive."
After completing an accounting diploma, Bastyr decided to get a post-graduate degree and attended the University of Edinburgh, where he earned an MBA in 1988. The following year, he joined Des Moines, Iowa-based Principal Financial Group (now Invista Capital Management) as an international equity manager who focused on cheap, high-yielding stocks.
In 1994, Bastyr moved to Toronto, where he was invited by portfolio manager Ian Ainsworth,to join Altamira Investment Management Inc. Ultimately responsible for about $600 million in assets, Bastyr managed several mandates, ranging from an international equity fund to global small-caps to a Japanese equity fund. "My favourite has always been global small-caps," he says. "I'm not a mega blue-chip kind of guy."
From 2003 to 2005, Bastyr worked for Orlando, Florida-based BPI Global Management where he co-managed a US$3-billion international equity fund. In 2006, he co-founded Meadowbank Asset Management in Toronto and was involved in corporate finance for technology and mining companies. He also launched a closed-end fund with a global fixed-income mandate.
In January 2013, Bastyr returned to the retail side of the business when he was recruited by Mackenzie and re-joined former Altamira colleagues on a seven-person growth team that includes Ainsworth and Mark Grammer.
Through the end of November, the fund has a year-to-date return of 30.9%, benefiting from the bullish performance of global small- and mid-cap stocks. This was closely in line with the median return of 31.7% in the Global Small/Mid Cap Equity category.
In the course of his search for growth names, Bastyr has identified companies that he believes will benefit from rising health-care spending in emerging markets. One of them is NMC Health PLC, which is listed in London and is the largest health-care provider in the United Arab Emirates. "They like to spend on health and have the highest life expectancy, which is 77 years," says Bastyr, noting that the company saw 1.8 million patients in 2012. "Their revenues are up 17% year over year."
The stock is trading at 15 times 2013 earnings, although Bastyr expects earnings to flatten until three new hospitals get established within two years. "It's probably trading at around 10 times 2016 earnings."
