Historically, the U.S. has been one of the toughest markets to beat on a consistent basis. That said, this is one of the higher quality funds and tends to be in the running more often than not.
It is managed using a highly disciplined, bottom up value approach that places emphasis on capital preservation, with a focus on delivering absolute returns and managing risks. To achieve this, the managers look for high quality, well managed, dividend paying companies that have a history of generating stable cash flows and have earned a level of return that is greater than the company’s cost of capital.
Given the value bias, any company considered for inclusion in the portfolio must not only be undervalued, but have the potential to grow their share price closer to its intrinsic value within a three year period. When evaluating a company, they pay particular attention to the price to earnings, price to cash flow and price to book ratios in the context of not only the company’s historical numbers, but also compared to the market and what the management believes to be the company’s sustainable earnings growth rate.
The result is a concentrated portfolio of U.S. based large cap companies that are leaders in their field. As of December 31, it held just under 30 stocks with a top ten making up over half the fund.
They are patient in implementing their process, with portfolio turnover averaging 33% for the past five years. That said, they are not afraid to use periods of heightened volatility as an opportunity to improve the quality of the portfolio. This happened in 2008 and again in the first half of 2012 when several new names were added to the portfolio.
Performance has been excellent, gaining an annualized return of 18.8% for the past five years, slightly trailing both the S&P 500, but outpacing the category average. It also has decent downside protection, holding up well in 2008, losing less than half of the index’s 23% drop. Volatility has been lower than the category average, but has matched the broader market. For those looking for actively managed U.S. equity, this is one of my favourites.