The Mercator International Opportunity Fund (MOPPX):
- International equities
- Primarily from mature economies
- Geographically diversified
- Mostly mid-cap stocks
- Growth bias
- Typically long-term holding period
- Bottom-up, stock picking discipline
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The Mercator International Opportunity Fund (MOPPX) invests in foreign stocks of mature economies.
The stocks we hold in the portfolio tend to fall in three categories: companies with exceptional growth potential; reasonably priced companies with a steady growth history (so-called “Growth At a Reasonable Price”, or GARP stocks) and turnaround situations. These companies have mostly medium-sized market capitalizations.
The Fund’s benchmark is the MSCI EAFE (Morgan Stanley Capital International Europe Australia Far EAST) index.
Investing in Management Vision
“Skate to where the puck is going, not where it has been.” —Wayne Gretzky
We do not chase short-term market trends. Our approach is to be patient with the understanding that outsized returns will more than justify it. There are four reasons for this. 1) Our research is based around finding companies whose managements have a clearly articulated strategy of creating long-term value for their shareholders; bringing corporate strategies to fruition often takes time. 2) Stock market participants may be slow to recognize a company’s potential but share prices do eventually follow fundamentals. 3) Timing investments is usually impossible. 4) We believe that a long holding period allows us to benefit from the compounding effect of earnings growth.
Investments are made after in-depth analysis of companies’ fundamentals. Bringing corporate strategies to fruition often takes time. In addition, stock market participants may be slow to recognize a company’s potential. Therefore, timing investments is usually impossible. For this reason, patience is required with the understanding that outsized returns will more than justify it. Share prices do eventually follow fundamentals.
We do not chase short-term market trends. Instead, the intention is to hold an investment as long as the desired outcome seems realistic and management is making progress towards it. The Fund invests for the long term, aiming to benefit from the compounding effect of earnings growth.
Such an approach leads us to buy primarily three kinds of companies:
- Medium-sized capitalizations with a lot of growth ahead,
- Companies with moderate, but steady growth (so-called Growth At a Reasonable Price or GARP companies),
- Turnaround situations.
The first question we ask ourselves when looking at a potential stock purchase is, “Where is the company likely to be in the future, be it 3, 5, or 10 years?” If it is a medium-sized company with strong momentum, can we imagine its market capitalization to double, triple, or even go up tenfold over time?
A good example of the kind of growth company we like is the Canadian eCommerce platform business Shopify (SHOP)*. It is our opinion that Shopify is gaining commanding market share and becoming a proven concept, and has the potential to be a major beneficiary of booming demand in this budding industry.
Companies can be reinvented as well. A new CEO at BlackBerry (BB)* is doing just that, turning the historic manufacturer of mobile phones into a software producer. John Chen is turning BlackBerry around by reinventing it.
In order to realize that upside, it is important that valuations at point of purchase leave room for price appreciation.
GROWTH: Valuations have to be viewed in relation to long-term prospects. A medium-sized company still in its early growth phase reinvests most of its profits. Hence one should not value its potential by looking at a price earnings ratio or even enterprise value over EBITDA (earnings before interest, depreciation and amortization). A more appropriate ratio is EV (enterprise value) to sales. The size of its revenues and its growth rate matters most at this stage of development. One can then look at projected revenues and reasonable expected profit margins at a more mature stage to value the stock. Such multi-year perspective needs to be considered in tandem with a careful analysis of the required cash flow during the rapid growth phase of the company.
GARP: In contrast to these rapid growers, GARP stocks need a different approach. Steadily growing companies do not need massive investments. By definition they generate regular earnings growth for which the fund is paying a reasonable multiple. As a rule of thumb, such stocks are bought between 1 and 2 times their growth rate — the so-called PEG ratio which divides the PE ratio by the growth rate.
TURNAROUND: Turnaround situations require a more classic valuation based on intrinsic value where the risk/reward ratio is taken into account.
Thematic Investments vs. Stock Picking
We find investment opportunities by visiting companies around the globe. We select stocks one at a time, using a bottom-up, company-specific fundamental approach.
We also find new investment ideas by identifying beneficiaries of broader technological, economic, or societal change. Examples of thematic areas that have helped us uncover fruitful investments include the Internet of Things, the digitalization of the economy, and pent-up demand for capital goods after years of under-investment. Themes point the way to possibilities, but the ultimate decision to include a stock in the portfolio is still driven by its intrinsic attractiveness based on our usual growth and valuation criteria.
Themes lead to stock ideas, but the reverse is also true. When visiting companies, we sometimes perceive the emergence of a major trend that may benefit companies in related sectors. For example we learned that 3D printing is revolutionizing the orthopedic industry. From this we realized that this industry’s growth in turn is driving substantial opportunities for specialized software companies.
Share Price Volatility and Risk
Volatility is often confused with risk. Because we have a multi-year investment horizon, we look at volatility differently.
At the end of the day, there are only two prices that count: the purchase price and the selling price. Volatility between those two points matters only in that it offers opportunities to add to the fund’s weighting in that particular investment.
External factors linked to macroeconomic or political events influence investors’ perception of the intrinsic value of stocks in the short term. This we try to overlook or take advantage of. Short term volatility offers buying — or selling — opportunities for investors focused on the long term.
We do not try to guess the next market rotation or the winners and losers of a central bank’s decision. Since we do not participate in such market mood swings, we will at times seem to be swimming against the tide.
A common error among portfolio managers is the tendency to take profits. This leads to selling winners and holding on to losers. We take the opposite attitude. We let our winners run, even after they reach “full value.”
A fully-priced company growing at 30% will be up another 30% a year down the road if it remains fully priced. Selling a growth stock after a mere revaluation means giving up on the most important factor for a long term investor, i.e., compounding growth. Price targets only make sense for undervalued stocks that do not have long-term potential besides a re-rating.
The Fund’s turnover is low because investments are made for the long term. Stocks are held as long as value is being created and valuations are not hugely out of sync with fundamentals. Patience is justified by the ambitious returns we seek when buying a stock.
Risks and Opportunities in Foreign Markets
The purpose of the Fund is to participate in the growth of great companies Americans are not too familiar with because they are based overseas. The Fund looks for these opportunities in mature economies around the globe, which include Japan, Canada, Australia, and the Western European countries. Unlike emerging markets, these countries do not normally present major macro-economic risks. Their political systems are stable, and they all have functioning markets and low levels of corruption.
Nonetheless, it is important to understand the different cultures we are dealing with. We monitor most countries’ political developments, their economic strength, and different monetary policies. This helps us understand the framework in which we operate, but seldom does a top-down analysis lead to investment decisions.
Finally, we do not try to predict currency movements. Not only is it a notoriously difficult exercise, but currency movements between mature economies fluctuate mostly in an orderly manner. The risks of a collapse of the euro or the yen are quite low. These are skillfully managed currencies backed by mature economies and stable political systems.
While we do not plan to hedge the currencies under normal circumstances, there may be times where the dollar’s strength may require a partial hedge.
About the Portfolio Manager
Read the prospectus carefully before you invest.
Ticker Symbol: MOPPX
Maximum Annual Fund Operating Expense: 1.20%
The minimum initial and subsequent investment for Institutional Class shares is $1,000 and $100, respectively, for all accounts.
*All two securities are held by the fund. As of March 29, 2019 the fund owned as a percentage of it’s portfolio Shopify (SHOP) 4.07% and Blackberry (BB) 4.73%.
The mention of any investments in this commentary should not be considered a recommendation to sell or purchase the security(ies) mentioned or similar investments. Please consult an investment professional on how the purchase or sale of such investments can be implemented to meet your particular investment objective or goals. Investments in securities and/or similar investments are subject to risks. It is important to obtain information about and understand these risks prior to investing.