Active management is a bit of a misnomer because in practice, it’s actually a strategy of patience.
I can talk philosophy until the end of time, but an example will give you a clearer picture of how this works in the day-to-day (or year-to-year) life of the Fund.
Active management the Trimark way
Let’s start with the philosophy. There isn’t a lot of activity, at least the way we practice active management here at Trimark. We hold companies for long periods and we have very few of them in the portfolio, which results in very little trading within the funds.
Let’s say, hypothetically, we own 30 companies in a portfolio and we’re holding each company for five years. This implies that I’m adding six companies per year. This is very low turnover, by industry standards, and not far off the reality of our small-cap funds.
For me, the key element here is that we tend to make very few, but very substantial, decisions. We are able to put a lot of time, effort and work into each and every company. We are not making a decision a day, like some other managers out there, and our funds look nothing like the index. All three of the Trimark small-cap funds have an active share score* above 97%. This infuses every move with a level of confidence that leads to patience in action and conviction in decision. Essentially, we are actively managing the fund by restricting the level of activity. It sounds strange, I know.
I firmly believe this patience results in a higher batting average over time.
Company example: Lithia Motors Inc.
Here’s the example I mentioned at the start. In 2004, we bought a company called Lithia Motors Inc.† The company owned roughly 100 car dealerships in the U.S. We bought them at $20 a share and over the next few years the stock price retreated to about half that. We doubled our weight and eventually it was a 6% holding in Trimark U.S. Small Companies Class at $15 a share. (Source: Bloomberg) What did we like about this unknown company with a collection of car dealerships?
- Lack of competition. About 80% of its dealerships were in towns with only one car dealer so buyers aren’t running from one to the next chasing deals
- Balanced, steady profit stream. They have four solid revenue sources: selling new cars, selling used cars, arranging financing and providing vehicle repair and maintenance services
- Relative obscurity. In the investing world, analysts couldn’t agree on how to value the company, but we were focused on the business quality, superior management team and free cash flow levels, so weren’t concerned about outside analysis
We ended up selling our stake in the business for $90 a share in 2014.
To me, this is a great example of truly active management. We found a business that we were confident would grow, did our due diligence, bought in and … waited. When the share price halved, we had the conviction to double our weighting and … wait. And that patience, our style of active management, paid off.
If you have any questions or comments about active management or anything else related to the funds, feel free to leave them below and I’ll do my best to respond in good time.
*Active share is the percentage of a fund’s holdings that differs from its benchmark index’s holdings. By quantifying a fund’s degree of active management, active share provides a means of distinguishing funds that have the potential for outperformance from those that are likely to deliver index-like returns. Source: CFA Institute, 2013.
†The above company was selected for illustrative purposes only and is not intended to convey specific investment advice.