As a bottom-up value investor, Michael Hatcher pays little heed to where a company has its head office. He focuses instead on its competitive edge and cash- flow strength.
"Many, if not most, of our holdings are pan-regional, or global in nature," says Hatcher, lead manager of Trimark Europlus and vice-president and head of global equities of Trimark Investments at Toronto-based Invesco Canada Ltd. "I don't take the view that the UK is cheap, so I should hunt for UK stocks. I'm hunting in that market simply because I can find a great company that has its headquarters there."
While mindful of macroeconomic developments, such as the ever-grinding European debt crisis, Hatcher focuses on individual companies that have so-called "moats" around their businesses and are able to generate significant cash flows. "These are businesses that should do well in most environments, but should do particularly well in turbulent times. They have recurring revenue streams."
A classic instance is Ipsos SA, a French market-research firm with global operations. "This is the company that does brand research for Procter & Gamble, which is their largest client," says Hatcher. "They will track the diaper market, for example, and find out how well P&G is doing."
Ipsos has a resilient business model because it benefits from historical data and methodology that few competitors can match. "They have been able to develop a global mandate by following their multinational clients around the world," says Hatcher, noting that the firm has a 25% return on tangible capital and experienced 5% to 8% organic growth over long periods.
The stock recently traded at a multiple of 9.3 times enterprise value to earnings before interest and taxes, somewhat higher than the eight times multiple it had when it was acquired in March 2009. "The valuation has expanded, but the underlying profit has expanded too," Hatcher says.
A native of Halifax, Hatcher worked as an economist and statistician before moving into the investment industry. He attended Carleton University, graduating with a bachelor of arts in statistics in 1993, and a BA in economics in 1994. He then spent a year at Hara Associates, an economic consulting firm in Ottawa.
After Hatcher moved to England and attended the London School of Economics, he graduated in 1996 with an MSc degree in econometrics and mathematical economics. He spent 18 months at Canada Mortgage and Housing Corp., and decided to return to school once more, earning a master's degree in mathematical finance at the University of Toronto.
It was at CMHC that Hatcher realized he did not want to be either an economist or civil servant. He pursued an interest in investing, and became fascinated with Warren Buffett, profiled in The Making of an American Capitalist. "I had an epiphany: this is what I wanted to do. What Buffett outlined in his investing philosophy made more sense to me than anything I learned in economics."
In 1999, Hatcher began his investing career when he was hired as a Canadian equity analyst at Elliot & Page Ltd. Five years later, he joined Burgundy Asset Management as a Canadian equity analyst. The following year, he moved to the European equities side.
In 2009, Hatcher was hired by Invesco Canada and joined the Trimark team as vice-president. In October of that year, he assumed responsibility for Trimark Europlus, which currently has 26 names. Single positions are limited to about 6.5% of fund assets. Turnover was a very low 3.1% for the first half of 2012.
The 5-star rated fund returned 24.3% for the 12 months ended Feb. 28, compared with 16.1% for the median fund in the European Equity category. Over three years, the annualized return is 12.1%, versus 6.4% for the median return.
Since April 2011, Hatcher has also been lead manager of Trimark Global Fundamental Equity. The 3-star rated fund, which has about 80 holdings, has been a second-quartile performer over the past three years and top-quartile in the most recent 12 months.
Last May, Hatcher was named head of global equities and assumed the lead manager role for the 4-star rated Trimark Fund. A global fund that holds about 40 positions, it's one of the two original equity funds offered under the Trimark brand back in 1981.
Looking ahead, Hatcher believes Europe and the United States "will muddle through" and the investment climate will be generally stable. "In which case, what should you do? Focus on high-quality companies with great cash flows."
That's why Hatcher continues to hold, for instance, British American Tobacco PLC, a UK-based cigarette manufacturer which benefits from a tight global oligopoly.
Tobacco companies enjoy pricing power which gets them 2% to 4% price increases, says Hatcher. They also benefit from 2% to 4% gains in operating profits from production efficiencies, and share buybacks that boost earnings per share growth by 2% to 3%.
"Add all these up, and you're left with a 'no-growth' company, by volume, but whose earnings base is growing somewhere between 7% and 9%," says Hatcher.
