Using a mix of top down thematic investing and bottom up security selection, this fund managed by Erik Becker and Gus Zinn, posted a very strong 10.6% gain in the final quarter of the year. It was largely the technology and consumer names that propelled it higher, while the unhedged currency position bolstered gains further, as the Canadian dollar continued its slide against the U.S. dollar.
The portfolio holds approximately 45 names, with the top ten making up about a third of the fund. It is overweight in healthcare, consumer, and communication names – sectors, and companies that are expected to benefit from the current themes of the portfolio – the mobile internet, consolidation, and the North American manufacturing renaissance.
The fund has had a great run, gaining nearly 25% per year over the past three years, and more than 17% annualized over the past five, both of which were well above average. Looking at the portfolio now however, it has a definite growth tilt to it, with valuation levels that are higher than the broader market. According to Morningstar, the P/E on prospective earnings is nearly 23 times, compared with just over 17 for the S&P 500. Further, the expected earnings growth rates of the companies within the portfolio are lower than some of the other U.S. equity funds on the Recommended List, causing me some concern around the overall valuation picture.
Considering the above, I am placing the fund Under Review. I would expect that we will continue to see higher than normal levels of volatility within the portfolio, and expect to see performance lag should the market leadership shift towards more value focused names. If you have held this fund for any length of time, you will want to consider taking some of your gains off the table to protect against any major drawdown. I will continue to watch the fund closely for any material erosion in the risk reward metrics of the fund.