We’ve received a lot of great questions over the past few months, and one recurring theme has been “What are the mutual fund managers doing in light of the changes in the global economy”. Further we’ve heard “What is the team at CH doing as it relates to our investments?”.
In response, we’ve created a two part-series to kick off our Portfolio Minute. The first ‘Minute’ will be a glimpse into some of the moves our partners at EdgePoint have made recently on the Global Equity side. We believe very strongly in their processes, proprietary insight and their people – and we are in constant contact with the portfolio managers and owners to ensure this continues to be the case. Below you’ll see an excerpt from one of our conversations where they drill down some of their specific calls of late. Then next week you’ll get a glimpse into our RFP (Request for Proposal) process as it unfolds live. We are in the process of replacing one of the funds on our shelf, and we’ll give you an idea of how we come to the decision to initiate the RFP process, and the work that is involved internally to find a suitable replacement and implement the change. We touched on this process a bit in an article published on our website in 2019 (click here to read!), and we will expand on this.
CH Portfolio Minute, Take 1:
EdgePoint remarks on current weightings:
“Our investment team has been highly active recently as periods of intense market volatility allow us to build positions in new names and re-invest in our existing holdings. Consistent with previous periods of volatility, the portfolio tends to be concentrated as we focus on some of our best ideas (Our Top 10 names comprise 46% of the portfolio, Some changes to the Global portfolio include:
We have added 10 new businesses from across the globe into the portfolio such as:
O’Reilly Auto Parts:
an American auto parts retailer that can stand to benefit from the aging of existing vehicles, decreased reliance on public transit, and increase in DIY car repair
A Japanese IT firm focused on transitioning Japanese businesses from mainframe computing to the cloud
International Flavors & Fragrances:
An American food additive business growing in the nutrition and biosciences space
We bought more shares in 13 businesses in the portfolio including the following:
They supply the plastic for face masks, diapers, feminine hygiene products, among many other items. Their major input cost, resin, went down along with the oil price collapse and has allowed them to grow their free cash flow amid the tough economic environment.
They are a pump and valve manufacturer where over 85% of profits come from repairing and replacing existing pumps. This heavy reliance on aftermarket servicing allows them to earn recurring revenue without the need for an expansion in economic activity.
They are a warehouse club operator dubbed ‘Latin America’s Costco’. Even though their gross margins and same-store-sales are higher in 2020, they are trading at half of the multiple as Costco.
We trimmed our weightings in Berkshire Hathaway as well as Swedish Orphan Biovitrum at points during the volatility. We still have strong conviction behind both names however we wanted more capital to deploy into names that experienced more of a sell-off
Across the portfolio we have stressed tested and re-evaluated our proprietary insights to ensure that the portfolio is best positioned for the next 3-5 years. As a result, we have exited 7 positions including the following:
Due to policies in reaction to the COVID-19 pandemic, global airline traffic has decreased 90% and there is little clarity as to when operating an airline will return to an economically viable level.
A significant portion of their revenue comes from supplying food for sports and entertainment venues which have shut down due to the COVID-19 pandemic.
We feel that the regulatory burden the company faces has inhibited the business from operating as well as it should.
- The Global portfolio had 8% of its assets in cash on the day of the market peak (February 24). We used some of this cash to buy new names that were attractively priced however we still have some cash on the sideline in the event more opportunities arise.
- The following table has information as of Friday, May 29:
We believe that the uncertainty in today’s markets makes it a good time to be investing. Outsized returns come from having a view that’s different than the rest of the market therefore if there is more uncertainty, there is more opportunity for us to add value.”.
We hope the above personalized commentary has given you some insight into the inner-workings of one of your larger holdings. If you’d like to see more information like this in future ‘Minutes’ please let us know. Alternatively, if there is something else you’re interest in learning about our firm, partners or strategies, please reply to this email and let us know what that is!
Until next time,