Jeff Mo is the first to admit he doesn’t hold a crystal ball. Instead, the portfolio manager at Mawer Investment Management Ltd. focuses on picking companies that are cheap, with good management and a competitive advantage in their industry.
“We can’t predict the entire macroeconomy. Instead, we try to predict how long the company’s competitive advantages will last,” says Mr. Mo, who manages about $2.8-billion in assets, including the firm’s Mawer U.S. Mid Cap Equity Fund launched last September as well as the Mawer New Canada Fund.
The “bottom-up” approach has been a successful longer-term strategy, though more recent results have lagged. His New Canada Fund is down 16.1 per cent year-to-date as of July 31, compared with a drop of 7.6 per cent for the S&P/TSX SmallCap Index over the same period.
Mr. Mo says the short-term underperformance is largely owing to the concentration of higher-performing energy stocks on the benchmark index, whereas his fund has very little oil and gas exposure. The New Canada Fund’s annualized five-year return as of July 31 is 7.9 per cent versus nearly 5 per cent for the benchmark over the same period.
The U.S. Mid Cap Equity fund is down 15.2 per cent year-to-date to July 31, compared with a drop of 12.6 per cent for the benchmark Russell Midcap Index over the same period. All data are based on total returns.
The Globe and Mail recently spoke with Mr. Mo about what he’s been buying and selling.
Describe your investing style.
Our firm has a bottom-up stock selection style. It means we analyze companies one at a time, trying to find the best companies in the overall market to invest in. We de-emphasize investing based on macroeconomic predictions. That doesn’t mean we don’t think about macroeconomic variables. We treat it as a risk variable and try to insulate our clients from the vagaries of the macroeconomy as much as we can so that their portfolios will be resilient in almost any economic environment.
What have you been buying lately?
We recently bought Humana Inc., one of the largest health care insurance companies in the U.S. We like its focus on serving the aging baby boomer demographic. It’s trading at a discount, based on our modelling, and the cash flows are much more stable than the average company because it’s based on health care spending, which is almost always nondiscretionary.
In Canada, we recently bought Parex Resources PXT-T, one of the only oil and gas companies in Canada that’s trading at a lower valuation than in 2018. That’s because 100 per cent of its production is in Colombia, which recently elected a leftist President who has plans to ban the granting of new lands for drilling. Parex already has a lot of land that it hasn’t fully explored and more production is available on its existing lands. We also think it’s one of the best-run oil companies in Canada, with a good track record of delivering strong returns on invested capital.
What have you been selling?
A U.S. stock we trimmed was KLA Corp. KLAC-Q, the largest global provider of semiconductor process control equipment. Its competitive advantage is its strong intellectual property and history in calibrating these types of machines. We reduced our position since the stock had risen quite a bit as the semiconductor boom continued amid the shortages in various industries.
In Canada, we trimmed Descartes Systems Group Inc. DSG-T, which provides logistics software for shipping companies. It has had a wonderful track record over the 15 years we’ve owned it as a firm and is run by very capable management. However, because of that success, the valuation has also increased quite a bit over time.
What’s the best stock you’ve owned?
Constellation Software Inc. CSU-T, a stock we’ve owned at the firm since it went public in 2006 at $17 per share. It’s now trading around $2,000 per share and is in our Canadian large-cap fund. It’s a great example of the persistence of its founder and president Mark Leonard, and the payoff from having a long-term investment philosophy as we have at Mawer.
Our average holding period is about five to seven years, but we’ve owned many of our companies for more than a decade, including Constellation Software. At several points in our journey with the company, we were the largest external shareholder, holding more than 10 per cent of its outstanding shares.
What’s a stock you wish you bought?
Cargojet Inc. CJT-DB-E-T Its founder, CEO and largest shareholder Ajay Virmani has done a fabulous job of building out and consolidating Canada’s overnight air freight market. The biggest strategic move he made along the way was convincing Purolator in 2014 to end its contract with its existing carrier and move the volumes to Cargojet. We talked to the team at the time but decided to wait and see the results. We waited too long. Six years later, the stock was 10 times higher than it was.
What investing advice do you give friends and family when they inevitably ask?
If you’re able to stomach the volatility, invest in equities – if you don’t need the money for three or four years. Also, if you’re investing on your own but don’t have the time to do a lot of research, invest in passive funds or ETFs. If you have lots of time, and the inclination and interest, only then do I recommend investing in individual stocks. If you use an adviser, be sure to use the same level of due diligence in picking a fund manager as you would choosing a stock.
This interview has been edited and condensed.
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