The investment philosophy adopted by the investment team at Black Creek Investment Management is focused on identifying “winning” businesses, businesses that are (or will be) market leaders that gain significant market share with significant barriers to entry. This focus may be shared by other investment managers, but Bill Kanko and the rest of the team are more contrarian than most, building concentrated portfolios that look, and consequently behave, quite differently from the benchmark, the MSCI World Index.
Long-term, patient investors who are looking for differentiated global equities to include in their portfolio will be well-served by the Black Creek Global Leader’s fund, although costs take the gloss off this otherwise top-notch offering.
The fund is co-managed by an experienced team, as Kanko, Heather Pierce and Mattias Galarce have 37, 26, and 17 years of industry experience respectively. Kanko has a long track record of investment excellence, dating back to his days at Trimark (now known as Invesco) and Confederation Life, before leaving to found Black Creek.
The Black Creek process employs a true team approach, as each member of the team can add a name to the portfolio, although ideas are vetted as a group. Given that assessing the sustainability of the company’s competitive advantage is a crucial part of the process, the team spends most of their time debating their thesis, evaluating whether it is progressing as expected and constantly evaluating their decision-making, through both pre and post-mortems on names held in the portfolio.
The cornerstone of their philosophy is the focus on independent thinking. No manager can add a new idea without explaining how their investment thesis is different from the widely accepted view of the market. The team builds concentrated portfolios of 25 to 35 ideas, and the in-depth due diligence on a new idea includes meeting not just the company’s management, but also its customers, suppliers and competitors. Given this emphasis, this fund is unlikely to hold any of the current market darlings, making it a strong diversifier for a portfolio.
The portfolio does not stand out on typical “quality” metrics, but this makes sense given the team’s philosophy. They believe that many firms that today that may have high margins are emphasizing short-term profitability at the expense of long-term success. They prefer firms that reinvest heavily into their businesses, through R&D or capital expenditures, for example, to not only maintain but grow their market share.
The final part of the process is ensuring that they pay less than their estimate of intrinsic value for any company they buy, ensuring that a healthy margin of safety is built in to protect them from mistakes in their estimates. They build conservative forward-looking cash flow models that provide them with an estimate of the returns they can achieve over 5-10 years. Portfolio construction, often more art than science, is geared towards giving more weight to companies with the highest projected return while balancing liquidity and ownership concentration considerations.
U.K. headquartered pharmaceutical firm Glaxosmithkline (GSK) is an example of the company’s long-term time horizon and emphasis on having a proprietary view. The company’s share price dropped dramatically in the second half of 2017 on worries about the sustainability of their dividend and weakness of their pharmaceutical pipeline. The Black Creek team disagreed, arguing that the sustainability of the dividend payout ratio is not a long-term issue that will define the business, and the issue of the pipeline was overblown given that it is not a major portion of their overall revenue. Instead, they focused on what they viewed as a very positive change in the company leadership and believed operational improvements and sales of non-core assets would improve the balance sheet. Given how quickly the share price has recovered to prior levels, the short-term dip offered them the chance to acquire a business they covet for the long-term at a healthy margin of safety.
The Black Creek team does not define risk as the volatility of returns or stock prices, instead spending all their time trying to ensure they do not incur permanent losses. To manage risk, they focus on diversifying their portfolios based on businesses and earnings drivers. This requires that investors who buy the fund be patient, as often it can take years for their thesis to play out, especially when macro headwinds can stall progress. For example, the fund currently holds multiple stocks in Mexico, where the country’s index has declined over the past 5 years, including retail bank Banco Santander Mexico, a subsidiary of the Spanish firm Banco Santander (SAN). The Mexican market is a nascent one for banking services – there is a lot of growth to be had in consumer lending and retail banking in coming years, and Banco Santander Mexico has significant market share in the regions in which it operates.
Since the fund’s July 2006 inception through November 2018, the F-series of the fund’s 9.1% annualized return has outpaced the 7.8% of the MSCI World Index, although the fund’s concentrated nature means it has done so with slightly higher volatility. However, the fund’s performance really shines versus the average fund in the category, which has returned just 5.2% annualized over the same time span. As such, investors who have the ability to have weathered the bumpier ride have been well-rewarded for their patience, another reminder for investors that their own behavior is just as crucial to investment success as is choosing the right investments.
Distributed to retail investors by CI Investments, the fund is priced reasonably for do-it-yourself investors, as the D-series MER of 2.06% ranks in the top quartile of funds in the global equity category, even when including trading expense ratio (TER) of 0.12%. There is however, a much smaller universe of funds to choose from in that channel. The fund is more costly for investors buying the fund through their advisor, however, as the A-series MER of 2.46%, which includes a 1% commission paid annually to the advisor ranks in the 3rd quartile, while the F-series MER of 1.36%, which only includes the cost of investment management, clocks in the most expensive quartile of funds. Despite the track record of success that the portfolio management team has achieved applying their investment process, costs are a headwind to future success, albeit one they have overcome over their 12-plus year history.
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