Portfolio manager Jeff Mo was happy to sit on the sidelines as the U.S. presidential election played out and to wait and see what happens with the latest wave of COVID-19. As the lead small cap manager at Mawer Investment Management Ltd., Mr. Mo and his team try not to make investments based on macroeconomic events, focusing instead on specific companies and their ability to generate growth for investors over the long term.
“Our view is to always be resilient to most economic scenarios,” says Mr. Mo, who oversees about $2.5-billion of his firm’s $70-billion in assets. “We focus on … what we think each company’s future looks like and try as best as we can to insulate our clients from all of the macroeconomic variables that can also play a role in those companies.”
Mr. Mo’s team also makes “inherent contradictions,” in its stock selections. For instance, to balance fluctuating oil prices, Mawer owns packaging company Winpak Ltd., which benefits when the price of oil, used to make its products, plunges. Mawer also owns Mainstreet Equity Corp., which has a lot of apartment buildings in Alberta and benefits when oil prices are on the rise.
The strategy appears to be paying off as the Mawer New Canada Fund was a multiple winner for the recent Refinitiv Lipper Fund Awards in the Canadian Small/Mid Cap Equity category in recognition of “consistently strong risk-adjusted performance” relative to its peers over the past three, five and 10 years as of July 31. The fund, which has a management expense ratio of 1.34 per cent, has seen a total return of 6.8 per cent year-to-date and 10.6 per cent over the past year, according to Morningstar as of Nov. 17. That compares with a year-to-date return of 2 per cent and a one-year gain of 9 per cent for the benchmark S&P/TSX Smallcap Index. The small cap fund’s annualized total return for the past three, five and 10 years is 8.7 per cent, 8.8 per cent and 12.8 per cent, respectively.
Its top five holdings today include Enghouse Systems Ltd., Richards Packaging Income Fund, Boyd Group Services Inc., newly listed Dye & Durham Ltd., and Stella-Jones Inc.
Mr. Mo’s team did a bit of selling when the pandemic hit in March, trimming holdings of fast-food chain owner MTY Food Group Inc., and selling out of restaurant owner Recipe Unlimited Corp. and bus maker NFI Group Inc., seeing a more negative outlook over the longer term for those names. The team increased its position in cable company Cogeco Inc. in March and bought Dye & Durham, a legal services cloud software provider, at its initial public offering in July.
“Generally speaking, our style is steady and consistent,” Mr. Mo says. “When we find a company that we think meets our criteria we buy it. When a company we think is no longer a wealth-creating company we sell it, [with the focus] on company-by-company analysis.”
Below is a look at Mr. Mo’s top three fund holdings and his take on each (all data as of Nov. 17 market close):
Enghouse Systems Ltd. (ENGH)
- Market cap: $3.5-billion
- 52-week range: $35.87 to $80.91
- Year-to-date total return: 63.7 per cent
- Five-year annualized total return: 15.7 per cent
Mawer has owned this software provider since 2012. Mr. Mo says it fits Mawer’s criteria of owning wealth-creating companies with strong management teams. He says CEO Stephen Sadler has a good track record of making “very astute acquisitions” and finding ways to make the company more profitable, growing earnings per share by about 15 to 20 per cent over the past decade. “It’s a very stable business,” he says.
Enghouse is a leader in interactive software that helps companies run call centres and has “sticky” customer retention rates of about 90 per cent, Mr. Mo says. In addition, the company has software that helps companies manage physical assets such as communication networks or emergency services. He says that business also has a high customer retention rate and recurring revenue.
The risks for Enghouse include competition from both large players like Amazon.com Inc. and “well-funded” Silicon Valley startups, Mr. Mo notes. He says Enghouse is updating its infrastructure to better compete, but notes existing revenue has been declining slightly in recent years. Still, Mr. Mo is happy owning the stock today. ” We think there’s a long runway of consolidation,” he says.
Richards Packaging Income Fund (RPI.UN)
- Market cap: $752-million
- 52-week range: $27.51 to $86.28
- YTD total return: 47 per cent
- Five-year annualized total return: 31 per cent
Richards Packaging, one of the few income funds left in Canada, makes packaging for food and cosmetics, such as jars, buckets and spray bottles, as well as health care products like droppers and pill bottles. Its customers are mostly small businesses who aren’t big enough to purchase from the large packaging manufacturers, Mr. Mo says.
“It’s just a really well-run, well-operated company,” he says, and it’s a stock Mawer has own since 2017. “[Richards Packaging] has consistently been growing its revenues a bit faster than GDP and has been able to increase its margins.”
The company has got a boost during COVID-19, as consumers shift spending toward grocers and away from restaurants, as well as by an increase in sales of health care products. “Of course we expect that type of drive to come off over time, but it’s still a very solid, well-run business,” Mr. Mo says.
He notes the stock dropped recently amid positive vaccine news, which has caused investors to sell stocks that have benefited during the pandemic. “However, we still believe in the longer-term prospects for Richards,” he says.
Boyd Group Services Inc. (BYD)
- Market cap: $4.6-billion
- 52-week range: $125.01 to $231.52
- YTD total return: 9 per cent
- Five-year annualized total return: 26.7 per cent
Mawer has owned Boyd Group, North America’s second-largest collision repair chain, since 2014, drawn by its ability to consolidate body shops and capitalize on the growing number of people driving (and in need of auto repairs).
The stock dropped in March, as people stayed home, but has bounced back and trading near record highs reached in February.
“This is a company that, despite its long track of growth over the past 10 to 15 years, still only has single-digit market share in this industry. We think they still have another five or 10 years of runway to continue to consolidate,” Mr. Mo says.
He adds there is a risk that the work-from-home trend could affect the amount of driving people do over the long term, or that insurance companies – under pressure from steadily rising costs across divisions – may reduce coverage for collision repair.
Still, he believes says those risks aren’t enough for his firm to sell the stock in the near term. “We’re happy with the holding we have now,” he says, adding it’s about 4 per cent of the portfolio, which is roughly the same weighting as the first two picks.
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