‘Top Fund Manager’ shares secrets

Jim Hall, the winner of the Morningstar Equity Fund Manager of the Year award at the Canadian Investment Awards, says a simple Mawer billboard slogan pretty much sums up his success in and approach to the advisor business.

“Be boring. Make money.” is what the sign read.

Hall, the director of research at Calgary-based Mawer Investment Management Ltd and chair of the company’s board of directors, says Mawer’s investment philosophy starts with what they call ‘wealth-creating companies’ – those companies that post a return on capital that beats their cost of capital.

“It’s a very straightforward concept, but for us, that’s the bedrock,” he says.

Hall says that from that starting point, he and his team analyze potential investments around four key pillars:

Understanding the business model. Evaluating what a company’s model is based on, whether that model is sustainable over a five or 10 year period, and its potential to generate an attractive return on capital;

Understanding the management. Hall says he places a strong emphasis on knowing who a company’s management team is, their backgrounds, whether they understand that their job is to generate a return on capital, and how they manage risk;

Understanding the risks in a business model. Analyzing not only what could go right, but also what could go wrong;

Understanding a company’s value. This involves determining the range of values a business could be worth, given all factors. “If the market gives us an opportunity to buy something at a discount, or mid-point to that fair value range, that for us would be a great investment,” says Hall.

Hall says another important factor for him involves looking at areas others aren’t focused on. He offers the example of the cosmetics industry, which he believes is a solid long-term investment.

“Cosmetics is one of my favorite businesses. It’s human nature that people want to improve their appearance and delay aging. A thousand years ago they wanted to do this, and 1,000 years from now, they still will.”

About six months ago, Mawer began investing in Croda, an 85-year-old U.K.-based company making ingredients found in cosmetics, including one used in Nivea skin cream. The ingredient Croda manufactures represents about 2% of the total cost of manufacturing the cream, so Croda can get away with moderate price increases on its ingredient without dramatically altering Nivea’s cost structure. Also, since the ingredient is a vital to the creation of the cream, Nivea is more likely to tolerate occasional price increases on Croda’s ingredient.

Hall says Mawer has seen a return of about 40% since making its initial investment in Croda. While he doesn’t anticipate that kind of return over the long-term, the stability of the cosmetics industry means Croda will continue to post consistent gains.

Hall also applies a strategy of looking where others fail to when investing globally. He says that China will continue to lead emerging markets for the next decade or so, with India eventually overtaking China. But, he also believes that knowledge doesn’t simply mean investors should put their money directly in those countries.

“You need to find a point of view different from the rest of the market. If I tell you that China is going to grow quickly and everyone else does as well, that’s probably just going to be an average return,” he says. “Many of the companies we look at in China and India are pricing in a lot of that growth already, so we’re not seeing a lot of opportunities to invest.”

Where Hall says he is seeing opportunity is in multinational corporations that have a strong foothold in emerging markets. He cites Unilever, a well-established company based in Europe. “Almost half their sales are to emerging markets, so that’s a great growth opportunity for them. They’ve been in India for almost 100 years. So if and when India moves up the income curve and people start buying more packaged goods, Unilever should be in a good position. And it will be a lot less expensive than buying a company in India directly.”

Of course, Hall also realizes that any investment, no matter how well researched, is liable to risk. So he emphasizes risk management in his strategy.

“If you start with companies that have a good business model, run by good people, you’re probably 80 percent of the way to success. If you can just eliminate investing in bad businesses, or even in good businesses run by people who don’t do a very good job of it, that goes a long way to managing risk,” he says.

He also applies risk management to the valuation process by building a margin of safety into determining what to pay for a business. And he says it’s important to understand exactly what he owns, which involves a lot of homework before investing as well as over the length of investment in a company to know what they’re doing, and what they expect to be doing going forward.

Finally, Hall says it is important to constantly monitor risks within the economy in general and risks specific to an industry.

Hall has held Saputo, Canada’s largest dairy processor, since its IPO in 1997. He says the company’s recent recall of some of its cheese product came as a bit of a surprise. He says the recall is concerning but that because Mawer has continually monitored and analyzed its investment in the company, he is fairly confident in its continued viability.

“It’s unfortunate because it goes to the very heart of why we own Saputo—primarily because of their operational excellence. For us, it’s extremely unusual to see that they’d have this kind of issue. But if it happens once every 30 years, I would say that their operations are under control.”

Ultimately, Hall says that his investment strategy with Mawer has been successful for much the same reasons the companies he has invested in have been successful: a reluctance to stray from the core philosophy.

“The philosophy is certainly not unique. We’re following investors who’ve been successful for centuries – we didn’t invent the idea of buying good companies run by good people, at good prices. But I think the mistakes that some people make are to think short term, and to invest on emotion rather than fact and evidence.”