Vijay Viswanathan, co-manager of the award-winning $1.3-billion Mawer Canadian Equity, credits his firm's steady and "boring" approach for the fund's track record.
"We used to have a billboard sign in Calgary that stated, 'Be Boring. Make Money.' Boring is investing in wealth-creating businesses, with good management teams, and not overpaying for those assets," Viswanathan says. "And doing that systematically, over and over and over again."
Viswanathan is the director of research and a portfolio manager at Mawer Investment Management Ltd. Mawer Canadian Equity won the award for the best Canadian equity fund at the 2012 Morningstar Canadian Investment Awards gala. Two years earlier, the fund's lead manager, James Hall, was honoured as the domestic equity manager of the year in 2010.
Since joining the firm in 2007, Viswanathan has worked closely with Hall. Analyst Stanislav Lopata is the third member of the team that concentrates on the Canadian mandate.
Viswanathan says three pillars of investing drive the bottom-up investment process at Mawer. First of all, the managers seek wealth builders, defined as companies that can consistently earn return on capital that is greater than their cost of capital. If they have that sustainable competitive advantage, "then it's a compounding money-making machine over time," Viswanathan says.
For the second pillar, the trio looks for management teams that understand how to allocate capital so that they can earn that higher return, as well as understanding how to manage risk within their business.
The third pillar is valuation, looking for quality assets at a discount. Mawer uses a discounted-cash-flow model to assess fair value for a company's stock.
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| Vijay Viswanathan accepting the award for Best Canadian Equity Fund at the 2012 Morningstar Canadian Investment Awards. | |
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There are always trade-offs, such as finding great assets but not-so-great management teams, "but the one trade-off we won't make is on the business model," Viswanathan adds.
The team's research involves extensive fundamental analysis on approximately 300 companies in Canada. After narrowing down the universe, the team holds 30 to 50 names in the fund.
The fully invested fund, which is "benchmark agnostic," is concentrated in mid-to-large-capitalization companies. There are no constraints when it comes to broad sector weights. But for specific industries within sectors -- such as the banks and real estate -- there is a 20% maximum per industry.
For individual stock holdings, the weights in the overall portfolio are held to no more than 6%. Among the fund's top holdings is Constellation Software Inc. CSU. It provides "mission-critical software" for niche customers, such as scheduling for bus companies and golf clubs.
"We like that business model for that niche service that they provide," says Viswanathan, "and the significant amount of recurring revenue from licences and fees on the software." As well, "the management is compensated on the return on capital that they're able to generate, we like that part of it." On valuation, the company offers a "lot of runway for growth," in both acquisitions and the growth in customer bases.
The fund's average portfolio turnover tends to be low, "between 10% and 20%," says Viswanathan. "It takes us a long while to warm up to companies, and when we do, we're usually in for the longer haul."
Shoppers Drug Mart SC, which was held in the fund several years ago, is an example of the Mawer team's sell discipline. "We decided to exit that position," says Viswanathan, "because of the change in regulation that fundamentally changed their business model." In general, other reasons to sell a holding may be a lack of confidence in the ability of the company's management team to allocate capital.
Viswanathan, 37, is a graduate of the University of Waterloo, where he earned a bachelor of science in 1998. After graduation, he joined Archer Decision Sciences as an information-technology consultant. In 2001, he moved to CGI Inc. as a senior IT consultant.
In 2004, Viswanathan launched his own company, Viswanathan Associates Management Inc., where he was the president until 2005. Wanting to pursue further studies, he returned to school and received an MBA from the Richard Ivey School of Business in 2007, joining Mawer upon graduation. Moving up from his initial position as an equity analyst on the fund, he was named co-manager in September 2011, and was appointed director of research in April 2012.
Over the long haul, and also in more recent periods, the Morningstar 5-star rated Mawer Canadian Equity has excelled. It's a top-quartile performer in the Canadian Equity category for the one-, three-, five- and 10-year periods ended Dec. 31.
To build on this impressive track record, Viswanathan and his colleagues will focus on companies that are able to weather adverse market conditions. "Invariably when times get tough," says Viswanathan, "such as 2008 and 2011, those resilient business models that we look for are able to ride out those tough times. And the companies we invest in have pretty strong balance sheets, because debt can be a total killer, especially when you look at volatility."
