Mr. McCallum: We've been in business for seven years. The prime reason for starting it was that we felt there was a gap in the market - back in mid-2002 a lot of people were charging active management fees for quasi index tracking and the industry was very opaque. We wanted to be an asset management company investing in the best businesses globally - typically 35 to 50 stocks - irrespective of the index. So we put in place a corporate structure to reinforce our investment philosophy and process. We have always emphasized the need for a strong balance sheet, such as our own, together with a level of transparency that is unique, globally. This transparency applies both at the company and the investment level. For example, our public funds are posted on the Website daily; information includes not only all of the holdings, but targets price and valuations. We also established strict capacity constraints in terms of dollar capacity and the numbers of accounts and investment professionals. As we all know, mistakes are made when you get carried away and leave your investment process behind. This strong corporate structure reinforces a consistent and repeatable investment process. As a result of this, after our five years of building a track record, we have been winning new accounts from US institutional investors. We recently were awarded six global mandates, the two largest being one in the UK and another in the US. This has doubled our assets under management this year to $700 million.
TWST: Tell us more about your global approach. Would you take us through your
process?
Mr. McCallum: The investment process itself is all about minimizing mistakes,
otherwise known as risk. Our firm belief is that once you minimize risk, returns
from company earnings by definition should take care of the rest. Ultimately, we
are trying to screen out the uncertainty of whether the peak of the earnings
cycle is priced into the stock valuation. Hence we have very strict target price
discipline. If a stock based on our two-year forecast doesn't have a minimum 20%
upside, then we can't buy it. This stops us from falling into momentum traps,
stocks whose prices are not justified by underlying valuations and growth. This
problem applies to many stocks at the moment. Moreover, the process prevents us
from being "spooked" out of stocks at the bottom, as in September and October
last year. The target price discipline is unique and very important. Before we
buy a stock, we already have a strong idea of what it's worth.
We also try to screen out the threat to the company's key earnings drivers using
three approaches. The first is our sector screens in which we focus on the
credit cycle, the key to a lot of sectors. Because we are bearish on the credit
cycle, we still don't hold any banks and are comfortable with that.
Second, when we are looking at companies, not only do we always speak to their
management, but also to their competitors to cross-check our views. Finally,
during the modeling phase we stress-test with rigorous questioning at a team
level to make sure we are tapping into everyone's knowledge and don't miss
anything. So we've got the value screens and the target price discipline to make
sure we're not buying bad value.
Screening sectors, cross-checking with competitors and stress testing at a team
level mitigates the risk of buying companies that are facing big headwinds at
the sector level or threats to the key earnings drivers. Screening out these
risks has helped "new" name stock turnover remain below 30%; this is a byproduct
of the process. If you recall what I said earlier, we are only trying to find
the best businesses globally, but then building a portfolio of 35 to 50
companies based on the two-year forecasts. If you're genuinely buying into
strong businesses, in reality your stock turnover should not be much above 30%.
Tickers included in this excerpt: AEM, AGCO, BMY, GG, KMB, MOS, SGR
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