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Fund manager David Ragan recalls an incident in 2010 when his colleague was riding the elevator at the London headquarters of Barclays PLC. What caught his partner’s eye was the global bank’s stock price printed on a sheet of paper that was dropped daily into a frame on the elevator wall.
Along with other red flags that had surfaced during the 2008 financial crisis, this incident served only to reinforce a bigger picture emerging about the bank that had once been a fixture in Mr. Ragan’s international stock fund.
“We saw a culture of aggressiveness and risk-taking,” recalls the 32-year-old manager at Calgary-based Mawer Investment Management Ltd. “You saw a very short-term focus. You can look at the stock price every day, but realistically you should be focusing on your return on capital and business fundamentals. We sold [the Barclay shares] in early 2012.”
Over the past decade, Mr. Ragan has visited some 30 countries to research companies for either his fund, or his colleague Paul Moroz’s global small-cap fund. “You can really create an edge for yourself by talking to [foreign] companies” in person, he said.
Their strategy appears to be working. Mr. Ragan’s Mawer International Equity Fund has won a Lipper Award for three, five and 10-year performance in the international equity fund group. Over three years to last Oct. 31, the fund has posted a 6.2-per-cent average annual return. Mr. Ragan became the fund’s lead manager in 2010 but had been working on it since 2004 when he joined the firm as an analyst after earning a commerce degree from the University of Calgary.
Because his mandate requires him to buy stocks outside North America, that often takes him to Europe, a region that now represents 70 per cent of the fund. In fact, he became “quite bullish” a year ago on some of the beaten-up European stocks that were hurt on concerns about the euro-zone debt crisis. “This was a screaming deal available to us,” especially in countries like Britain and Germany, Mr. Ragan said.
“Those markets in the fund did quite well over the last 12 months even though there wasn’t a significant improvement in the environment,” he said. “The thing about Europe is that countries export a lot to China and other emerging markets. ... But the run that we had last year has taken a fair bit of the margin of safety away [in the stocks].”
Over three years, some top-performing stocks have included Fuchs Petrolub AG, a producer of industrial and automotive lubricants, and Intertek Group PLC, a global product-testing firm. The latter caught his eye when Mattel Inc. was forced to recall Chinese-made toys in 2007 because of possible lead-paint hazards for children. Mattel is now an Intertek client.
Mr. Ragan buys companies that are run by strong managers, have a competitive advantage and whose stocks trade at reasonable prices. And he doesn’t care about hugging his benchmark, the MSCI Europe, Australasia and Far East [EAFE] Index. His fund is under 5 per cent invested in Japan, which is 20 per cent of the index. The Japanese market has gotten cheaper over the years, but “their management teams are not focused on shareholders’ interest or wealth creation,” he argues.
Many institutional investors still have a lot of money in Japan even though it has been been in a prolonged bear market, but that is because they care about returns relative to the index more than absolute returns, he suggested. “Risk to them is underperforming. Risk to us is impairing capital for our clients.”