Earlier today, Mawer launched a new fund – the Mawer U.S. Mid-Cap Equity Fund. The fund will be headed by Jeff Mo, who also leads the bronze-rated Mawer New Canada A Fund.
According to Mo, a lot of the focus in U.S. equity investing is in large caps, especially in the technology sector, but the lower U.S. threshold of $1-$60-billion market cap, “seemed to be the sweet spot.”
Why Now?
Mo believes that in recent years, the U.S. economy has been the most dynamic entrepreneurial economy in the world. “When we look at Mawer’s general approach in a post-pandemic environment, we think an economic backdrop where there are some winners and some losers is an ideal backdrop for an active, stock-picking investment approach.”
For almost a year now, the 35-member research team has been running a model portfolio for the fund’s investment strategy. The “sandbox” currently has a relatively concentrated portfolio of 42 holdings.
The firm follows a single investment philosophy, which is a predominantly bottom-up approach, seeking wealth-creating companies with excellent managers, and trading at a discount to intrinsic value.
The fund has a management expense ratio (MERs) of 1.45%. “Obviously with the new fund launch,” says Mo, “and smaller assets at this stage, our management has agreed to subsidize the operating expense of the fund.”
This is important information. "Our own research an academic studies consistently point to the fact that fund fees are a consistent detriment to long term investor return. Fund fees are a constant erosion if your investment return, and in most cases are paid regardless of the performance of the investment. When compounded over time, fees can be significant and hence a worthwhile area to keep an eye one as an investor," says Ian Tam, Morningstar's Director of Investment Research.
The mandate is weighted approximately 35% in technology, about 22% in industrials, and around 10% equally across consumer discretionary, financial and health care. Historically, Mawer funds typically target a five-year holding period or longer, and Mo expects the same portfolio turnover in the new U.S. Mid-Cap Equity.
Three Layers of Defense
When it comes to investment style, the industry tends to put funds into a bucket of value or GARP (growth-at-a reasonable price). “We don’t see the world in these vertical positions,” says Mo. “Instead, we define it as between companies we think can create wealth by virtue of possessing a competitive advantage and companies that cannot.” When investors look at the portfolio, including the model portfolio used for the fund, it would contain companies that traditional investors would label as value as well as growth.
Three essential stock criteria drive all the mandates at Mawer. The first line of defense, and the foundation of the risk framework, is a quality, wealth-creating company. Mo says wealth-creating companies have competitive advantages to withstand economic downturns. He adds that many of Mawer’s holdings increased their competitive position in the past downturn, and came out stronger. The research blends both quantitative and qualitative assessments of companies and industries.
The second layer of defense is at the portfolio level. The risk parameter is a portfolio weighting that does not exceed 20% in one industry, and no more than a 6% weighting in any individual holding, thus positioning the portfolio to ensure there are no “sharp edges.” When the mandate does take on risk, it is acknowledged as offsetting the return potential of a holding among diversified businesses, for additional protection.
The third level of defense is the risk framework from a team-wide approach. Industry veteran, Jim Hall, Mawer’s former CEO, who remains chairman, sits down twice a year with every portfolio manager to go through a risk assessment. The process starts at the macro-economic level, then the portfolio level, then the individual security level to discuss the potential for unintended consequences. For example, escalating concerns over the financial market in China, triggered by the debt load of property developer, Evergrande, and the global repercussions on other industries would be assessed. “So perhaps the potential risk of China,” says Mo, “may not have been adequately caught by using the first two layers of the framework.”
Stocks in Focus
Among the favoured holdings is Charles River Laboratories International, the largest provider of outsourced, early-stage medical research for pharmaceutical companies. According to Mo, because of the regulatory nature of pharmaceutical research, you have to be a long-term supplier and Charles River has been around for many decades. “The competitive advantage,” says Mo, “is their brand and their history of providing high-quality service and expertise.” As well, the company is growing organically at a low, double-digit pace. “We think that growth will accelerate over time and in our internal modelling, it trades at a discount to intrinsic value.”
Another favoured holding is FTI Consulting, one of the largest specialty consulting companies in the world, focused on bankruptcy, insolvency and forensic services. “Employing very seasoned experts,” says Mo, “the company has re-focused its management team and streamlined its organizational structure to focus on growth. The company today is able or organically grow its revenue around 7% and it has been increasing its margins well. We also believe it is trading below its intrinsic value.
A third pick and somewhat different pick is Elastic, the world’s largest search company. “When I say world’s largest,” says Mo, “Elastic has become the strongest technology company for unstructured search. Google obviously dominates text-based search, but Elastic’s software can do much more. It can find the closest Uber driver for you, for example, among other searches. They are the leader because they have chosen to open-source their software, offering additional revenue opportunities.” Elastic is favoured for its incredible strong competitive advantage, with very bright growth prospects, and is believed to be trading at a discount.”
