Stable management, a proven process and a solid long-term track record help Trimark Global Endeavour earn a Morningstar Analyst Rating of Silver. True to Trimark's overall investment philosophy, this fund's process seeks quality businesses trading at attractive valuations. That in itself is not unique, but this strategy's seasoned managers gain an advantage through rigorous fundamental research and an ability to look past short-term market fluctuations and focus on the long-term prospects of the firms they buy and own.
The managers use elementary screening methods to identify companies with high returns on invested capital and good free-cash-flow conversion. They then do a deeper dive on companies that pass when their shares experience price weakness. The managers read annual reports and speak to management, suppliers, clients, competitors and experts as they build their valuation models. Then they seek at least a 30% margin of safety from their estimate of a stock's value before considering it as a potential holding. The goal is to avoid permanent loss of capital. The managers try to control that risk through careful security selection. They focus on quality firms with reasonable leverage based on their cash flows that trade at sufficient margins of safety. The managers do scenario analysis on holdings to assess their downside risks. They aim to build a portfolio that on average is cheaper but showing more quality characteristics than the benchmark.
The rigorous process produces only a handful of investment candidates each year. So the portfolio tends to be concentrated, with about 35 stocks, and to have a low turnover of less than 20%. The managers are willing to be patient with holdings as long as they continue to compound returns, but they will trim or sell if valuations get out of whack. They will also sell when their thesis on a stock breaks, but in both cases not before doing another deep dive.
Similar to other managers, the team here will consider hedging up to 50% of the portfolio when the Canadian dollar is trading at extremes based on purchasing power parity as a way to curb volatility rather than to add to returns.
Management does a good job diversifying across the market-capitalization range. Its 35 holdings sprawl across the Morningstar Style Box. This makes the fund look very different versus its benchmark -- the MSCI World Index -- and its average peer in the Global Equity category. The fund's track record, which has a low correlation of about 70% with the index, bears this out.
The portfolio's other characteristics, such as its average valuations and quality measures, also are consistent with the managers' stated approach. The fund sports a much higher average return on invested capital and equity than those of both its benchmark and average peer. It looks better according to Morningstar's proprietary equity grades, such as financial health, profitability and growth. The portfolio's average price ratios, such as price/earnings and price/sales, also look attractive versus both its peers and benchmark.
Bottom-up stock-picking, not macroeconomic calls, determines any sector or country allocation differences between the fund and its benchmark. That said, the managers' penchant for quality make it harder for firms from certain sectors, such as resources, to make it into the portfolio. The fund's notable underweighting of more than 10% in U.S. stocks versus the benchmark is consistent with its value leanings, as that market's valuations have risen in recent years. The managers don't invest in emerging markets.
To mitigate the risks of concentration, the managers try to pick firms whose revenue sources, business models and investment theses are unique and uncorrelated. This helps avoid unintended bets on specific sectors and themes, such as the U.S. consumer.
Over lead manager Jeff Hyrich's tenure, this fund sports one of the top records among its peers. Since he took over in October 2001, the fund's 8.6% annualized gain through August 2016 is more than double the Global Equity category's 4.1% average. That ranks in the peer group's top decile. That has come with higher-than-average volatility, but its risk-adjusted metrics, such as Sharpe and Sortino ratios, are strong, too.
The fund looks more consistent over longer time periods. During Hyrich's tenure, the fund has landed in the category's top quartile in 62.5% of 120 rolling five-year periods and ranked in the bottom quartile 3.3% of the time. It's been above average in more than 80% of the spans.
Volatility has dropped below the category average in the past five years, in part because Hyrich hedges certain currency exposures at the extremes. Through Hyrich's tenure, the fund also has tended to be more volatile on the upside than on the downside and has captured less of the category's and benchmark's losses.
The fund's commission-based series A has a management-expense ratio of 2.59% based on the June 2016 semiannual regulatory filing. This is above the category median of 2.54% in the same distribution channel and lands in the middle quintile among peers. The fee-based series F's management-expense ratio of 1.40% is up from 1.32% in 2015 -- above the category median of 1.34% -- and lands just outside the middle quintile. Fortunately for investors, the manager's low-turnover approach results in low trading-expense ratio, which, when taken into account, drops the fund in the middle quintile among peers.
The fund's do-it-yourself option -- series D -- is not competitively priced at 1.65%, and even after taking into account the fund's low 0.07% trading-expense ratio, it falls just below the middle quintile among peers in the same channel.
