Mackenzie Cundill Recovery Fund

Analysis: This is a neat little fund that has the mandate to invest in companies that are undergoing some sort of a recovery situation such as reorganization, coming out of bankruptcy, change in ownership or other crisis. In addition to this, the company must also meet the very disciplined Cundill investment criteria.

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 their estimate of its worth. They also look 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 10, which make up 42% of the fund. When adding a new company into the fund, they will typically take a small position first and gradually add to it as they become more comfortable with it.

Long term performance has been strong, gaining an annualized 10.4% per year over the past ten years, compared with 7.7% for the Dow Jones Global Small Cap Index. It is volatile and prone to periods of significant underperformance. For example, in 2008 and 2011 it lost 54% and 26% respectively. However, it does tend to bounce back strongly, typically outpacing the index and category in rising markets.

From a positioning standpoint, he likes Europe and Russia from a valuation standpoint. 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. Portfolio exposure should be limited with this fund.