Invesco Canada blog

Insights, commentary and investing expertise

Jeff Feng | July 26, 2013

The stock dropped 40%, we started buying

How often does a fund manager jump to buy after a company’s stock price drops more than 40%? Probably not very often. But that’s exactly what happened here at Trimark when a negative research report hit the media this time last year.

Last July, Muddy Waters LLC, the investment research firm now well-known in Canada for its 2011 negative research report on Sino-Forest, issued a report on a Chinese education company on our radar. The report accused New Oriental Education and Technology Group of fraudulent accounting.

Because of my numerous connections in China, our team’s extensive travel to the area and our intensive research on New Oriental, we felt confident despite the report’s findings. I have met with the management team multiple times and know them as decent, intelligent business people. I was and still am confident that the business is not only professional and legitimate, but growing. This is not a Sino-Forest situation.

The report ultimately created a great opportunity for us. In two days, the stock dropped more than 40%*. We hadn’t had an opportunity to buy this business at an attractive price because Wall Street was so enthusiastic about its growth potential. But suddenly, because the infamous Muddy Waters name now showed up alongside New Oriental on Bloomberg and in other media reports, many investors panicked and sold.

We started buying.

Fast forward seven months: New Oriental’s stock price rose almost 80%. It’s been a great investment for us. It’s currently a 1.23% weighting in Trimark Emerging Markets Class and a 0.63% weighting in Trimark Global Fundamental Equity Fund and a 1.84% weighting in Trimark International Companies Fund (as at June 30, 2013).

Since becoming lead manager on Trimark Emerging Markets Class, I’ve been asked a lot about my background in Asia and how it affects my work on the fund. I believe New Oriental is an example of how it gives our team an advantage.

I’m from China and came to Canada 11 years ago. I speak Mandarin and I spent the early years of my investing career in China and Hong Kong, so I understand the business culture in that part of the world. Some standard business practices are different than those in North America and may seem strange to investors born and raised in Canada.

I’m able to understand where people are coming from and in some cases catch nuances that would otherwise be lost in translation or cultural misunderstanding. This, including speaking the language, helps break the ice when building new relationships with management teams, analysts and other professionals.

Is it impossible to be a successful investor in China without local language skills and cultural understanding? Of course not, but I do believe that in some situations, my background helps.

Having a solid understanding of and belief in a company’s management team is a big part of our investment philosophy and the better the communication, the better the understanding.

Has your background helped you make wiser investment decisions? If so, how?

Note: The above companies were selected for illustrative purposes only and are not intended to convey specific investment advice.

*Source: Factset. The stock price fell 34.32%, from $22.26 to $14.62, on July 17, 2012, and fell 35% to $9.50 on July 18, 2012.

Get more information on Trimark Emerging Markets Class, Trimark Global Fundamental Equity Fund and Trimark International Companies Fund.

Learn more about the Trimark Investments team.

Trimark Emerging Markets Class, Series A provided the following performance returns as at June 30, 2013: 1-year, 4.48%; 2-year, -8.31%; Since inception, -9.51%.

Trimark Global Fundamental Equity Fund, Series A provided the following performance returns as at June 30, 2013: 1-year, 18.58%; 3-year, 12.17%; 5-year, 1.83%; 10-year, 1.86%.

Trimark International Companies Fund, Series A provided the following performance returns as at June 30, 2013: 1-year, 17.96%; 3-year, 8.45%; 5-year, 0.66%; 10-year, 3.58%.

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2 responses to “The stock dropped 40%, we started buying

  1. Assuming your team is always trying to upgrade the portfolio and measure all current holdings against new ideas (or unusual buying opportunities such as this) would your team in this case, have sold some other positions to make more room for the buying opportunity that his holding presented you with at that time?

    1. Hi Carey, good question. In this case, we had sufficient cash in the portfolios so we didn’t need to trim or replace any existing positions. However, if we prefer to maintain the cash weighting in a portfolio, we would certainly compare the attractiveness of a new idea vs. the least attractive one in the portfolio, looking closely at both quality and valuation.

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