As co-manager of Mawer Investment Management Ltd.’s $4.9-billion Global Small Cap Fund, John Wilson saw some of his stocks take a particularly hard hit during the pandemic-induced market meltdown in the spring of 2020.
“That tends to be the case if you’re dealing with smaller companies during a market downturn,” Mr. Wilson says. “They don’t necessarily have the same access to capital as some of the larger companies. Also, they tend to have a more concentrated business. They might be focusing on a few regions or even just a few products. That’s very different than in large-cap land where you’re much more diversified.”
But what quickly went down in his portfolio has, by and large, bounced back strongly, which Mr. Wilson believes is in part because of the firm’s stock-picking approach.
“From a portfolio standpoint, we often don’t try to predict what’s going to happen, we try instead to find filters that are helpful,” he said. One such filter would look for companies that have a very clean and conservative balance sheet.
The fund, which holds about 60 companies in 22 countries and has a management expense ratio of 1.76 per cent, has gained 24.1 per cent on a total return basis over the past year, as of June 30, and has seen an annualized total return of 13.5 per cent over the past five years.
The Globe and Mail recently spoke to Mr. Wilson about the global small-cap space and what he’s been buying and selling:
What’s your investing style?
We have a very long-term hold period; on average we are holding our companies for five to 10 years. What naturally follows is you want companies to have a return on capital that is greater than the cost of capital, because that often correlates with the performance you see in the stock over time. We also want them to have a moat. We focus a lot on trying to understand the company’s competitive advantage; whether there are economies of scale that they benefit from ... or customer stickiness. And ideally, the company is run by an able management team who own the shares so they’re aligned with shareholders. The final piece is we want to purchase the company at a discount to intrinsic value.
What have you been buying lately?
One company we’ve been buying is Electrocomponents PLC, a British-based distributor of industrial and electronics products. Not all distributors are created equal. This is a long-tail distributor, which basically means it sits on a lot of inventory that doesn’t move very quickly, which on the face of it sounds like a horrible business. With this company, the customers are calling when their machines broke down or there’s an issue – they really want that product immediately. About 90 per cent of orders get to customers within 24 hours. If you think about that, the customer is highly time-sensitive but not very price-sensitive, so the company has pricing power. It’s also a bit of a turnaround story with new management that came in in 2016.
We’ve also been adding to Atea ATA, out of Norway, a value-added reseller of IT software and hardware equipment. It’s effectively an outsourced IT department. It’s a leader in that market; the company is three times larger than its next largest competitor, which gives it purchasing power with the software and hardware vendors. Its customer base is also very sticky.
Another one we’ve been adding to Winmark Corp., based out of the U.S. It’s a franchisee of used clothing stores with brands such as Once Upon a Child and Plato’s Closet. The company pays consumers for goods they bring into their store. It’s a good business because of the markup the company can make on those used items, which is still good value for the customers while still earning it big margins. It’s also part of the rising sustainability trend.
What have you been selling?
We have been trimming companies that have slipped in terms of quality, or where we’ve seen valuation run-up. In the past six months, it’s been more trimming due to rising valuations.
One company we sold out of is Bechtle AG in Germany, another value-added reseller of IT software and hardware. We’ve owned the company since 2016. The management team has done an excellent job, but when we look at the valuation we felt it made sense to pull back and allocate some of the funds to Atea.
We also recently sold our position in Kainos Group PLC, an IT consultant out of the U.K. that we also purchased in 2016. It’s run by a fantastic entrepreneur who has done an excellent job ... but it’s one where we looked at the valuation and it didn’t make sense to us at current prices.
Another one we’ve sold recently is Vitec Software Group in Sweden. It’s similar to Constellation Software in Canada. It does what’s known as vertical market software, which is very niche. It has a playbook similar to what Constellation has done in terms of buying businesses and integrating them into their business. It was not a fairly well-known company when we bought it in 2015, but has become more appreciated over time. We exited that one in January of this year.
This interview has been edited and condensed.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.