Q – What is your opinion of the Cundill Recovery Fund?
A – The timing of this question couldn’t be better, given that elsewhere in this edition we highlighted the new IA Clarington Sarbit Activist Opportunities Class. This fund is in a similar space in that it has the mandate to invest in companies that are undergoing some sort of recovery situation such as reorganization, coming out of bankruptcy protection, a change in ownership or other crisis. The company must also meet the very disciplined Cundill investment criteria. The big differences would be that with the Cundill Recovery Fund, there is no requirement for an activist shareholder to be involved, and the Cundill offering will be much more global in scope.
In building the portfolio, manager James Morton uses a very disciplined, bottom up, value approach to evaluate companies and determine their true value. He must see a near term catalyst in place that will unlock the true value of the company. Ideally, there will be at least a discount of 30% or more from his estimate of its worth. He also looks for companies that have growing intrinsic values and companies with tangible resources.
It has a go anywhere mandate, but tends to focus in small and mid cap issues and tends to favour Asia and developing Eastern Europe. The portfolio itself is quite diversified, holding around 60 names. Still, it is rather concentrated in the top ten holdings, which make up 42% of the fund. When adding a new company, he will typically take a small position first and gradually add to it as he becomes more comfortable with it.
Long term performance has been strong, gaining an annualized 10.4% per year over the past ten years, compared with a 7.7% gain for the Dow Jones Global Small Cap Index during the same period. However, the fund is volatile and prone to periods of significant underperformance. For example, in 2008 and 2011 it lost 54% and 26% respectively. That said, it does tend to bounce back strongly, typically outpacing the index and category in rising markets.
From a regional standpoint, Mr. Morton likes Europe and Russia from a valuation perspective. Despite that, he is reluctant to add much to Europe because of issues with the euro, but is on the lookout for statistical bargains. Russia is by far the most attractively valued country, but not without its risks. Asia and the Pacific Rim make up 54% of the fund, followed by Europe with about 31%.
In Asia, he favours Chinese property stocks feeling that current valuations support a strong rebound in the sector. Because of this view, real estate makes up about 32% of the fund, followed by financials at 21%.
This is a good fund for investors who have a very high risk tolerance. Before considering an investment in it, you must be willing to stomach some pretty jaw dropping selloffs in return for strong longer term returns. Overall volatility is expected to be much higher than other small and mid cap funds. We expect that longer term performance will be strong, but there will be periods of extreme underperformance.