Cambridge Growth Companies Corporate Class

Greg Dean's picture

I have been meaning to write about the new fund we launched 10 short weeks ago but it has been pretty hectic and I apologize for the delay. We are very excited to introduce something that we think will take advantage of opportunities we are seeing in the market in a way our existing mandates cannot, to the same extent. I'm sure you are all aware that we capped the Cambridge Canadian Growth Companies Fund back in March because we wanted to preserve its ability to take advantage of opportunities in Canadian small and mid-cap stocks which is not a very big or liquid universe. We always thought we could take our expertise and extend it beyond Canada in a more significant way. We now think we have the right team, structure, and most importantly, a market that has created immense opportunity to own very high-quality, fast growing companies at prices we think are very compelling. 

In terms of the specifics, I wanted to highlight a few things about this new fund: 

  • We have capped the Canadian portion at around 10% of total assets (maximum geographic and market cap flexibility).
  • This is a highly concentrated fund (35-40 companies).
  • We are focused primarily on small and mid-cap companies who are growing its cash flow per share significantly faster than the market.

We have long discussed the possibility of a global growth companies-type mandate. We wanted to wait until we had the resources in place and our pipeline of ideas was double or triple the amount to populate this fund. We are convinced that we are there now and everything you have come to expect from a Cambridge mandate in terms of philosophy and process will remain the same. Most importantly, we (Brandon and I) seeded it with a very significant amount of our own (new) money. 

The way to think about this growth fund is that it is focused on companies with very high return on invested capital and operating margins, low leverage, and the willingness and ability to inorganically allocate capital. We believe that these three elements have the potential to generate superior cash flow per share. Note, I did NOT say revenue growth or market cap growth! An important distinguishing factor of this fund versus other competing offerings is – if the company is not already profitable (i.e. generating cash) we will not own it (sorry Amazon!).

Hopefully this provides a good overview of the new fund and why we think now is the time to offer it. 

Comments

Submitted by Efraim Gusman on

Dear Mr. Dean,

I have a few questions about the new fund, Cambridge Growth Companies Corporate Class, that I was hoping you could answer for me. My questions are mainly related to asset allocation/geographic/market cap flexibility, in other words, the “go anywhere” mandate.

1. Cap and growth/value flexibility – fund is classified as global rather than small/med cap equity

• Is the fund small/med cap growth, any cap growth, or value companies?
• Can you buy value or large companies if you see value in them or do you have to stick to growth small/med cap?

2. Geographic flexibility – you state “We have capped the Canadian portion at around 10% of total assets (maximum geographic and market cap flexibility).”

• If the Canadian or foreign markets look more advantageous can you go higher than 10%?

3. Asset allocation flexibility

• Is there a limitation on your maximum cash position? (Important for a bear market like in 2008)
• Or do you have to be almost fully invested?
• What will you use as shelter when extreme volatility occurs (e.g. 2008)?

4. Is there any overlap between this fund and other Cambridge funds (i.e. Cambridge Canadian Equity Corporate Class, Cambridge Canadian Growth Companies Fund and Cambridge Global Equity Corporate Class)?

5. To what extent is it a team effort? Will other Cambridge managers like Mr. Radlo, Mr. Swanson etc. be involved in strategic and day-to-day activities?

Thank you very much and good luck,
Efraim Gusman

Greg Dean's picture
Submitted by Greg Dean on

I appreciate your questions and interest in learning more about the fund. I will do my best to answer them but please feel free to reach out if anything remains unclear.

Market cap and style
The main focus of the fund is small/mid-cap growth companies but we define growth slightly differently than others. To us, the growth that matters is cash flow per share. At times that may encompass ‘value’ companies – for example: CGI Group (10x cash flow but cash flow is growing greater than 20%). The mandate is very open allowing for maximum flexibility to pursue opportunities across the market cap spectrum – for example I own Budweiser which is > $100b market cap.

Geographic flexibility
The mandate is wide open geographically to take advantage of opportunities anywhere and is currently roughly 80% U.S./10% international/10% Canada.  If we found more opportunity in Europe or the political and economic environment improved, we could change to any allocation we want. The Canada cap is going to be more strictly adhered to as we think it’s responsible to manage our overall allocation to small and mid-cap stocks (thus we soft capped the Cambridge Canadian Growth Companies Fund in March).

Asset allocation flexibility
There is no limitation to our potential cash levels but, practically speaking, 10-25% will be the most common range. If we wanted, we could go to 50% or even 100% cash as we are not required to be fully invested nor is our compensation tied to relative returns, a benchmark or a peer group. Honestly, I believe the best shelter comes from owning the right companies and always having enough cash to take advantage of volatility. If you have to sell a stock that is down 20% to buy one that’s down 30% you are not going to be very successful long-term. At the end of the day it’s not the cash in the fund that will help us sleep at night, it’s the other 75-90% of the fund and types of companies we’ve chosen to invest our clients’ hard earned money into that will leave us comfortable. Beyond that, not having to be fully invested or required to replicate a benchmark means we can avoid those areas of the market where risks are most perverse and where we don’t believe we are being compensated to take risk.

Overlap with existing funds
There will be modest overlap with existing funds (e.g. Cambridge U.S. Dividend Fund, Cambridge Canadian Growth Companies Fund) but this fund is more complementary than cannibalizing of those opportunities. It has more ability to invest outside Canada than Cambridge Canadian Growth Companies Fund and does not need to provide income like the Cambridge U.S. Dividend Fund.

Involvement of the team
As with every one of the Cambridge funds we utilize the same philosophy and process. By its design, there is a lot of reliance on the analysts for idea generation and ongoing coverage of companies. In terms of day-to-day things like portfolio construction, risk management and hedging, that falls on me as it does with the lead manager of each of our funds. Our team is engaged in constant communication on things like economic indicators, interest rate assumptions, outlook for various countries/industries as well as more fundamental views on specific companies and their competitors.

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