Facebook, Microsoft and Amazon win big - by Dan Good
Investing Becomes Popular
I feel like a fish out of water on a day when Facebook, Microsoft and Amazon shares have hit all time high levels. Generally, investing has worked best by purchasing underpriced securities and waiting for their value to become “recognized” by the market and then selling them. If you can’t find underpriced securities then you just hold cash or invest in an arbitrage situation – like corporate takeovers. This is value investing which in the longer term has produced the best investment results with the lowest risk.
Buying great businesses at reasonable prices also has worked well in the past except this method has more associated volatility. This method was adopted by Trimark funds when they began in 1982 and their investment success continues through Bill Kanko who founded Black Creek in 2005 and the EdgePoint Funds who are seeded with ex Trimark fund managers.
Thirdly there is momentum investing which is easily the most popular and effective form of investing today. You simply buy what is going up and you win as the shares continue to go up. If the firm’s earnings or revenue growth look like they are slipping then you just cull and goon to the next.
Bill Kanko at Black Creek
Bill’s style might be appropriate for today if the past is an indicator of success. An old article from the Globe and Mail sums it up: “The fund manager’s knack for finding undervalued global stories coincided with the meltdown of the growth-focused tech cycle. Between 2000 and 2003, Mr. Kanko’s Trimark Fund posted some heavy double-digit returns while competing global funds were in the red.” But Trimark was a victim of its own success as asset growth continued and Bill was managing up to $13 billion for AIM/Trimark and he was forced to look for bigger and bigger names to fill his portfolio. He left in 2004 and later set up Black Creek.
Richard Jenkins (who was born in Edmonton) came over to Black Creek in 2008 and previously managed the Trimark Global Balanced Fund which was the Global Balanced fund of the year for each of 2004, 2005 and 2006. Over the past 10 years their Global Balanced Fund with CI has average just under 8% per year and their CI Global Leaders Fund in excess of 10% per year to June of 2018. So they have done well for investors over a longer period of time.
It still makes sense today to go global as Canada only has roughly 3% of the world’s market share and this limits the manager’s choice of great businesses.
EdgePoint endeavors to buy interest in a business at below their assessment of its worth. In addition they want businesses capable of growing their value over time. So they want a growth business at a value price. This again is the old “Trimark” philosophy as Tye Bousada was vice-president and portfolio manager at Trimark before founding EdgePoint. In fact he became the lead manager of the Trimark Fund when Bill Kanko left in 2004.
EdgePoint wants to be at the top of their peer group as global managers and they focus on only 4 funds which helps their results. The history of EdgePoint does not go back 10 years but their Global Portfolio has averaged in excess of 16% since inception in November of 2008 and their Global Growth and Income Portfolio in excess of 13% since the same inception date.
EdgePoint does not believe in actively promoting their funds so their costs are lower and they also make minimum investment amounts higher which limits the amount of smaller investors (which again keep their costs low). They pass these savings on to their clients. I am currently in discussions with them to lower their trailer fees paid to dealers and we will see how fruitful this discussion is.
Will Danoff from the U.S.
Will is one of the top portfolio managers in the world but was not available to Canadians until the last few years. His Fidelity Insight’s Class fund ( U.S. focused) has averaged over 25% per year since its inception in January of 2017. He will have an especially good day today as his top four holdings are Amazon, Facebook, Alphabet and Microsoft. He likes these companies because he believes they offer sustained above average earnings growth. These are the “best-of-breed” firms and obviously dominate their business sectors.
Cundill, Ivy and Fidelity Canada Large Cap
With value investing out of favor these funds have lagged the markets and will likely continue to lag. Holding cash and investing in dull and boring businesses has become passé. But these funds offer greater protection should the markets drop significantly. To quote Bill Kanko from August of 2017: “We are slowly coming towards the end of an extended period of abnormal conditions for asset classes, which has created one of the most difficult market environments in living history.”
Era of Lower Interest Rates is Ending
The primary reason asset prices have risen dramatically over the past 10 years is the lowering of interest rates along with the Government making money “easy” to obtain. This period has ended. We just have to look downtown in Edmonton to see the amount of cranes building because financing costs are low and not to necessarily satisfy some recent demand for space. Some older office towers here will soon become dinosaurs. The real estate market will also have a glut of properties which will hopefully make it easier for buyers. But this scenario might play out in stock securities too as higher interest rates bite into corporate profits and also temper consumer demand. The market is highly levered as “investors” could borrow at low rates to invest. This eventually unwinds as it becomes less profitable to invest. The only question is how fast this unwinding takes place.