Jim Hall, director of research at Calgary-based Mawer Investment Management Ltd. and chair of the company’s board of directors, says his success as a fund manager can be summed up by a slogan that once ran on Mawer billboards in Calgary: Be boring. Make money.
Hall, who took home the award for Morningstar Equity Fund Manager of the Year at the Canadian Investment Awards in Toronto on Dec. 1, says Mawer’s investment philosophy starts with what it calls “wealth-creating companies”—those companies that post a return on capital that beats the 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 members are, 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 midpoint to that fair value range, that, for us, would be a great investment,” says Hall.
Hall says another important factor for him in deciding where to invest involves looking at areas that 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 favourite 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 a thousand years from now, they still will.”
About six months ago, Mawer began investing in Croda, an 85-year-old U.K.-based company that makes 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; conversely, since the ingredient is 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 about a 40% return since making its initial investment in Croda. While he doesn’t anticipate that kind of return over the long term, Hall says 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, as an example. “Almost half of 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.”
Risk Management is Key
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% 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 initial public offering 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 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—because of 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.”