An experienced team led by veteran Richard Jenkins manages CI Black Creek International Equity. Their laser focus on identifying firms that will not only maintain but grow their market share for the next 10 years, and buying those that trade at a discount to their estimate of intrinsic value, has resulted in category-leading performance since the fund's October 2008 launch. This strategy is worthy of consideration for core foreign exposure in an investor's portfolio.
Jenkins joined Black Creek's founder Bill Kanko in 2008 and now leads a team of six investment professionals. Jenkins is the lead manager on this fund, and while Kanko is not directly involved with the final decision-making, this fund has significant overlap of positions with his CI Black Creek Global Leaders fund. The firm's managers strongly believe in having their own skin in the game alongside fundholders; its internal rules state that the team are only allowed to invest in the stock market through their own funds.
The team builds a 30- to 40-stock all-cap portfolio from the bottom up. This helps make the fund look very different from its benchmark, the MSCI EAFE Index, confirmed by a 98% active share. Taking differentiated bets from the benchmark increases the team's odds of producing differentiated results. The fund's category-leading results since inception is evidence that this approach has worked. However, the impact of any potential mistake in a concentrated portfolio will be magnified, and as such vetting the thesis of each stock is of utmost importance, and where the team at Black Creek spend most of their time.
Thinking like long-term business owners, the team focuses on the fundamentals of individual stocks, trying to identify industry leaders that are gaining market share and that have defensive barriers that will maintain their competitive position. The cornerstone of Black Creek's philosophy is the focus on the sustainability of a competitive advantage they have identified in a potential holding. Their due diligence process includes meeting the company's management, as well as its customers, suppliers and competitors. When they identify firms that meet their quality criteria, they will only buy at a price that provides them with a sufficient margin of safety.
Counterintuitively, the fund currently does not exhibit all the quality characteristics one would expect given the team's quality focus, such as an above-average portfolio return on equity. Management explains that due to their focus on market share gainers, they avoid companies that forego future growth and reinvestment opportunities in favour of maintaining margins and buying back shares. The team at Black Creek contends that while these companies may have high current ROEs, their ability to sustain and/or grow the ROE in the future may be limited.
The team's ability to look past short-term noise is another one of its strengths, exemplified in one of their top holdings: HeidelbergCement, a German multinational building company. The company's exposure to Ukraine was problematic in 2014, when the Russian government intervened in the territory of Crimea. Despite the firm having less than 10% of its revenues from that region, the stock fell by more than 20%. The team, confident in the overall strength of the business, added to the fund's position and the stock has increased 60% since then.
The fund has delivered strong results in the long term. Since its first full month of performance in October 2008 through the end of January 2018, it has returned an annualized 13.5%, ranking first in the International Equity category and handily outperforming the MSCI EAFE Index's 8.1% return. The uniqueness of Black Creek's holdings does have its drawbacks however, as the strong performance did come with higher volatility, as the fund's standard deviation of 15.3% over that span is higher than the benchmark's 12.8%. Additionally, the fund has not demonstrated much in terms of downside protection, capturing 98% of market declines. When taking the full picture into account though, the fund's risk-adjusted returns rank in the top 97th percentile over the period, and investors who can ride out market declines have been well rewarded.
The fund's MER of 2.46% for the series A, which includes a commission to compensate advisors, falls slightly above the International Equity category's median of 2.45%. That ranks in the third quartile among peers in the commission-based distribution channel. The fund's trading expense ratio (TER) added 0.17% in costs, landing the fund's total cost in the third quartile when accounting for trading expenses.
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