A deep-value investor with a contrarian bent, Peter Moeschter relies on the global equity resources at Franklin Templeton Investments Corp. for investment ideas for the $202.1-millionTempleton Canadian Stock.
While the fund's holdings are almost entirely Canadian, global research helps put Canadian equity valuations in perspective. "We approach Canada from a global perspective and don't get hung up on being in a country with a narrow focus and owning certain names," says Moeschter, senior vice-president at Franklin Templeton in Toronto. "The danger is that you could easily become too focused on the index, by looking at Canada and then the rest of the world," he says. "We look at the world first, and use Canada in the context of what we generate around the world."
Moeschter works closely with 12 regional analysts and David Tuttle, an analyst in the Toronto office who looks at smaller firms that are not tracked by the global group. The team asks two key questions: "Is this truly a global bargain? Would we own it in a global portfolio?"
This prevents Moeschter from owning a stock simply because it's Canadian. "We own it because it's truly cheap. This makes us increasingly different from the index. We don't start from where we do want to be in relation to the index. We look for the cheapest bargains in the world, and consider the ones in Canada."
While Moeschter has marched to his own drum, returns have lately been disappointing. The Morningstar 1-star rated fund lost 4.1% for the year ended Dec. 31, compared with an 8% gain for the median fund in the Canadian Equity category. On a three and five-year basis, the fund had an average annual gain of 4.6%, and 7.8%, respectively, compared with 14.3% and 16.2% for the median fund.
Being very different has hurt the fund, since it has underweighted the strong-performing energy and materials sectors. Yet Moeschter has been vindicated in the past. In 2000 and 2001, the fund outperformed its peers because he loaded up on bread-and-butter companies with good earnings. "They were cheap and neglected by the market."
As a result, he is sticking to the process, which emphasizes a long-term view and low-multiple stocks. Drawing on a universe of around 250 names, Moeschter selects 40 for the portfolio.
"We ask ourselves, 'What will this company look like in three to five years? How much upside is there?'" By looking past the current issues that may be plaguing a company, he anticipates higher values as conditions start to improve.
One representative holding is ATS Automation Tooling Systems Inc. ( ATA/TSX). A producer of automated manufacturing and test systems and solar panels, its stock has been under pressure for almost two years mainly because of its high cost structure. Last summer, it endured a proxy battle that led to new senior management.
Moeschter added to the position as it continued to fall. "It has underperforming assets, but the company has the potential to do much better," he says. "When you normalize its earnings, the stock should be worth much more."
A Georgetown, Ont. native, Moeschter has been in the investment industry for two decades. He joined Ontario Hydro as a financial analyst in 1988 after he graduated from Wilfrid Laurier University with a bachelor of business administration.
In 1991, he was transferred into the pension division and developed an interest in investment management. At the same time, he completed an MBA in 1994 at York University.
That year, Moeschter joined Aetna Capital Management Ltd. and worked for about a year and a half as an investment analyst. In mid-1996, he was hired as an analyst at the Workers' Compensation Board. When the equity management division was shut down in 1997, he landed an analyst position at what is now Franklin Templeton.
Moeschter had already developed a contrarian style at Aetna, so joining the Templeton organization was a natural fit. He worked closely with George Morgan, who ran the Canadian equity fund until Moeschter took over in January 2001. Moeschter also provides the equity names for the $30.9-millionTempleton Balanced and the $109.7-millionTempleton Canadian Asset Allocation.
Since Moeschter takes a five-year perspective, his portfolio turnover is quite low. In 2006 it was 10.4%, and in 2005 it was 13.8%. Holdings of any one security are limited to about 5% of the fund's assets.
While the fund has experienced redemptions, Moeschter maintains that it has also seen inflows. "Investors have to appreciate it's not an index-oriented fund which follows the latest trends. It follows the Templeton process that focuses on normalized earnings and absolute value."
Moeschter says Franklin Templeton has a core group of clients "who really believe in the philosophy of being contrarian and buying value." He adds that he manages about $340 million in assets for institutional clients that sought out his value style. "It's a consistent, disciplined approach."
