During a time when fund managers specializing in U.S. stocks have been struggling to combat the detrimental exchange-rate effects of a weaker U.S. dollar, Rob Mikalachki, vice-president of investments at AIM Trimark Investments, has managed to excel.
HisTrimark U.S. Small Companies Class has a one-year return to June 30 of 10.1%, placing it fifth out of 58 U.S. Small and Mid Cap Equity funds. In fact, the fund has not only done much better than the category's median return of 0.8%. It has also beaten the Mikalachki-managedTrimark Canadian Small Companies, which hasn't had to overcome any currency challenges. His Canadian small cap fund has a one-year gain of 7.5%, well behind the category's median gain of 13.1%.
Mikalachki seeks companies with a lasting competitive advantage that will appreciate meaningfully during the next three to five years. "If I got knocked into a coma and woke up in three years, most of the companies I own would still have just as big a 'moat' around them as they do today," he says.
He also seeks a talented management team, a conservative approach to debt and healthy free cash flow generation. And once he's found all that, the companies he buys must be trading at reasonable prices.
There aren't many companies that meet Mikalachki's stringent criteria, particularly in Canada, where he looks only at stock market capitalizations of $500 million or less. In his Canadian fund he's currently been able to find only 18 Canadian stocks that meet his standards, complemented by another 11 based in the U.S. (The fund has been closed to new investors since May 17, 2002.)
In the U.S., Mikalachki's capitalization standard is less restrictive at US$2.5 billion or less, and he is finding a lot more opportunities. His U.S. fund has about 33 holdings, putting it in the 30-to-35-company ballpark that he says provides the optimal balance between portfolio diversification and meaningful stock concentration.
Mikalachki likes to play detective when it comes to researching stocks. He says it is the "blue collar legwork" that helps him find good ideas before they become widely disseminated. He visits companies on their own turf, which he says prompts him to ask questions that might not otherwise occur to him.
He also likes to find unusual ways to get information on a company. For example, when investing in Dynamex Inc. ( DDMX/NASDAQ), a U.S.-based "same-day" courier company, he grilled the employees of AIM Trimark's mailroom. Everyday activities such as shopping and visiting the doctor also provide opportunities for conversations that can lead to investment leads.
Mikalachki graduated with a business degree from Wilfrid Laurier University in 1994, and worked for a couple of years at The Loyalty Group developing an air-travel reward program. In 1996, he joined PricewaterhouseCoopers Canada in its corporate finance practice, where he learned how to value companies.
As he became better at analysis, he became more interested in investing, and realized that was what he wanted to do for a living. He cold-called a handful of companies including AIM Trimark to present his investment ideas and company reports. He was hired by the predecessor firm, Trimark Investment Management, in 1999.
In December 2000, Mikalachki became a co-manager of Trimark Canadian Small Companies, becoming the sole manager in April 2003 when fellow co-manager, Keith Graham, left the company. Mikalachki has been lead manager of the $74.3-million Trimark U.S. Small Companies Class since inception in August 2002.
Mikalachki says about 90% of his effort is spent identifying good companies while the other 10% is spent massaging the overall portfolio to avoid lopsidedness and overexposure to any one macroeconomic risk. Although there are no formal limits on sector weightings, he typically restricts any one company from accounting for more than 7% of fund assets.
His portfolio turnover is roughly 35% to 40% annually, although stock sales are sometimes triggered by takeover activity as corporate acquirers discover similar compelling reasons for owning a particular company.
"We are mindful of capital preservation, and if we err, it is on the side of selling too early," Mikalachki says. "I envision the people whose retirement nest eggs I'm managing, or who are investing to send their kids to college."
It is partially this conservatism that has caused the $276.6-million Trimark Canadian Small Companies to lag recently. While Mikalachki made good returns by buying resource stocks three or four years ago when everyone thought they were "dead money," he has been out of them during the past year because he believes they are overvalued.
It's been hard to fall behind the competition, but Mikalachki believes the truer story is told by three-to-five-year performance. "We are willing to stand aside from the crowd and look wrong in the short term," he says.
