Generally speaking, many of today’s global mutual funds are heavy on U.S. equities, specifically large-cap, blue-chip companies. It is very difficult to outperform passive products with this approach, especially given the low-fee options currently available. Trimark International Companies Fund is different, in this regard and many others.
It is a global, ex-U.S. mandate, and we view it as a competitive product in the international space, but also as a complement for investors looking to separate their Global exposure into U.S. and international allocations. The Fund has been getting a lot of attention recently from advisors, investors and the media. Its long-term performance is likely part of this, but I believe the attention is also due to a few differentiating factors about the Fund that stand out in today’s marketplace.
Here are six things that investors can expect from Trimark International Companies Fund.
1. All-cap mandate
We take advantage of the freedom to invest in companies of any size. Roughly 20% of the Fund’s holdings are companies under $10 billion in market capitalization – we uncover quite a few small- and mid-cap companies in both Europe and emerging markets (EM) that meet our stringent criteria. Many of these companies are either very small components in the benchmark or are off-benchmark names that aren’t available in index-based products. These smaller companies are less likely to be followed by analysts and influenced by passive investment flows, and our research allows us to take advantage of that when see attractive valuations.
Looking at the numbers, the average market cap listed for the Fund skews a little high (above $60 billion), driven by a few of the mega-cap companies we hold, such as Alibaba Group Holding Ltd. and Anheuser-Busch InBev Plc. But a closer look will show that the dispersion around that average is quite wide, and we do hold a number of high-quality, small- and mid-cap companies.
2. No sector constraints
We are completely agnostic as to the sectors we hold in the Fund. Other portfolio managers also focus on quality, but there are many ways to define quality. For some, it means buying the highest quality companies within a sector in order to maintain exposure to all sectors. We take a different approach.
We set the same bar across every sector, and if we don’t find any businesses in a particular sector that satisfy our quality criteria, the Fund will have zero exposure to that sector. No question. We will not sacrifice quality for unnecessary sector exposure. For example, we currently don’t have any exposure to the energy or materials sectors (as at September 30, 2017).
3. On the ground in emerging markets
We have a high degree of expertise in the emerging-markets space. This includes my colleague Jeff Feng, who is based in Hong Kong and whose first language is Mandarin. Jeff and his team do on-the-ground research and have access to the Invesco Asia investment teams based in Hong Kong and Shanghai. Now that mainland Chinese markets have opened up to foreign investors with the Shanghai and Shenzhen Stock Connect programs, we feel having Jeff on the ground is a huge advantage for us. The Trimark International Companies Fund mandate allows for up to 30% EM exposure, which we use as opportunities arise.
4. Concentrated portfolio
There just aren’t that many really great ideas out there. When we find one that we have high conviction in, we want to make it a meaningful weight in the portfolio. The Fund is invested in roughly 40 companies and our top holdings are generally somewhere between 3.5% to 5% of the Fund – occasionally as high as 6%. Because we have low turnover and tend to hold positions over a longer term, we are also able to take these larger weights in our small- and mid-cap investments. We can take our time to build the position. When we invest in a company, our intention is to hold it indefinitely. In my experience, many managers with higher turnover rates cannot take a long time building a position that may be less liquid, which can limit potential in the small- and mid-cap space.
5. Long-term approach
Our long-term approach means the Fund has very low turnover rates (20% to 25%). Four- to five-year holding periods reflect the fact that we are buying businesses that we want to hang on to, allowing the value to compound and provide strong returns for our investors.
I believe this is a real differentiator in today’s marketplace, which in my view is far too focused on three-, six- or 12-month earnings growth. With our long-term focus, we may buy a stock when the next year looks quite negative, but the next five and 10 years look compelling. By taking these positions that are out of favour, we’re able to find better valuations on companies that we believe will come out strong over the longer term.
6. True quality focus
There isn’t a manager out there that would say they buy low-quality companies. But there are varying definitions of quality, and I believe our disciplined approach is unique. To illustrate this, let’s take a look at our company watch list. This is the list of businesses that have satisfied our business-quality and management quality criteria. Relative to the total investable universe (different for each fund, based on mandate) our watch list is typically 5% or less of the total available companies. What that implies is that 5% or less of companies clear our business quality hurdles.
Business quality comes first. If a company satisfies our criteria in this area, we’ll then move on to researching the management team and establish an intrinsic value for the company. It’s a hierarchical process that begins with the quality of the business. We believe that in the long run, the performance of the stock will track the performance of the underlying business. Our approach is “quality-based” rather than “trade-based” – meaning we’re looking for a company that will compound over time rather than simply a cheap price that we can turn over for a quick win.
Watch for my next blog post, where I’ll cover how we measure business quality in detail.
If you have any questions, please leave a comment below.