Harry Truman Inspiration as Mawer Funds Vie for Tops in Canadaby
Two equity managers only 5 basis points apart in total return
Winning picks this year include Stella-Jones, CCL Industries
Fund manager Vijay Viswanathan likes to play down any rivalry that might be brewing inside Canada’s Mawer Investment Management Ltd.
Viswanathan and his colleague Jeff Mo are running neck-and-neck to claim title of the best-performing Canadian equity fund this year. As of Monday, Mo’s C$1.1 billion ($740 million) New Canada Fund, which focuses on small-cap equities, was up 2.54 percent, while Viswanathan’s large-cap Canadian Equity Fund had advanced 2.56 percent.
“There’s maybe some friendly competition,” Viswanathan, 40, said with a laugh. He co-manages the fund with Jim Hall, chairman and chief investment officer of the Calgary-based money manager with C$31.2 billion under management. “You give each other the gears a little bit.”
Mostly though, the fund managers cleave to the philosophy of a quote by former U.S. President Harry Truman that hangs in Mawer’s Calgary research department, Viswanathan said: “It is amazing what you can accomplish if you do not care who gets the credit.”
That the managers are dueling over low single-digit returns speaks to how awful the market has been for Canadian stocks this year. The benchmark Standard & Poor’s/TSX Composite Index, pummeled by the commodities collapse, has plunged 12 percent and is heading for its lowest level since 2011. It trails only Singapore and Greece among developed markets. The index fell almost 1 percent Tuesday to 12,913.69 at 10:10 a.m. in Toronto.
Only seven of 56 Canada-focused equity mutual funds with assets greater than C$750 million have posted positive returns this year, according to data on funds tracked by Bloomberg.
In such an environment, Mawer’s firm-wide, long-term approach to picking good companies has served both fund managers well.
“This year has been more of a stock-picker’s market, there’s a clear bifurcation between companies tied to resources and everybody else,” said Mo, 29, who took over co-lead manager duties at the New Canada fund earlier this year alongside Martin Ferguson. “When growth is slower, corporate rivalries intensify and it highlights true competitive advantages. Investing is forecasting the future. Forecasting a competitive advantage isn’t always easy.”
Since joining Mawer in 2008, Mo has embraced the firm’s investment philosophy of targeting “wealth-creating” companies that have an identifiable corporate advantage, whether it be a dominant market share, a unique product offering or just being better and more efficient than the competition.
Mo’s fund scored hits this year with top holdings including Stella-Jones Inc., which produces treated wood. The stock has rallied 55 percent this year, headed for a seventh straight year of gains, and touched an all-time high Nov. 30. The company has a dominant market share in Canada and expanding growth in the U.S., he said.
Another winner is EnerCare Inc., which rents water heaters to homeowners. The company’s business is steady, concentrated geographically in Ontario, and pays a decent dividend yielding about 5 percent, he said. The stock has rallied 20 percent since touching a year low in August.
The fund also bought into initial public offerings this year, including Quebec janitorial services firm GDI Integrated Facility Services Inc., music streaming company Stingray Digital Group Inc. and Sleep Country Canada Holdings Inc.
“Canada in small-caps is very entrepreneurial,” Mo said. “We participated in three IPOs and there are constantly new opportunities to come to market. We’re happy to invest in this market.”
Viswanathan’s fund has been boosted by its increased exposure to companies with revenue from foreign markets, especially the recovering U.S. economy. Top holdings in this category include packaging company CCL Industries Inc., Constellation Software Inc., and Brookfield Asset Management Inc. CCL is the second-best performing stock in the S&P/TSX this year with a return of 76 percent. Constellation has rallied 64 percent.
A combination of slowing economic growth in China, the threat of deflation in Europe and the prospect of likely interest rate increases in the U.S. have conspired to drive a gauge of commodities prices to more than 15-year lows, battering the resource-rich S&P/TSX.
And one of the biggest single winners through much of the year, Valeant Pharmaceuticals International Inc., saw its gains for the year wiped out in a matter of weeks as the drugmaker’s pricing practices came under intense scrutiny by investors and U.S. lawmakers.
For Viswanathan, this year’s performance was built through calls in past years, especially a shift away from energy stocks about two years ago. With the fund once having some 20 percent weight in energy, the portfolio now has about half that, he said.
“That has been a tailwind for us,” he said. “We were worried about the supply-demand imbalance. We saw what happened in natural gas would happen in oil markets.”
Looking ahead, Viswanathan is keeping an eye on energy stocks for signs of a rebound in 2016. Otherwise, he’s satisfied with staying the course.
“We’ve seen this year a pullback in markets so valuations are improving but the higher-quality names in Canada are not necessarily that cheap,” he said. “Not to say we won’t keep looking.”