Come February 2020, I’ll be celebrating my nine-year anniversary at Cambridge Global Asset Management (“Cambridge”). During this time, I’ve exclusively covered Canadian and global small/mid-capitalization stocks, and I believe I’ve done my best to deliver on my promise of achieving investment excellence for our clients. A few weeks ago, I held a call with advisors across Canada, and we had a good conversation. I felt that a short recap of part of that discussion was worthwhile repeating here.
Question: What does Cambridge think about merging several funds into one fund, and what was the reasoning behind the name change to Cambridge Global Smaller Companies Fund?
We strongly believe these changes will better serve our clients over the long run. We have worked in collaboration with CI Investments to implement these changes, which we believe will allow more flexibility for clients and a way to simplify our lineup.
In the early days of launching Cambridge Global Smaller Companies Fund, we had long-term view to orchestrate our business around two key areas: global investment excellence and Canadian investment excellence. Cambridge Canadian Growth Companies Fund sat in between this vision, as that fund had a fixed allocation to Canada and the “rest of the world.” With these changes, advisors now have the enhanced flexibility of determining the right mix of Canada/rest of world for their unique clients’ needs. So long as clients believe in Cambridge’s ability to be good stewards of their capital, Cambridge has several award-winning funds that invest in Canada for them to choose from. Since we have anticipated these changes, the previous Cambridge Canadian Growth Companies Fund hasn’t held any unique holdings from Cambridge Pure Canadian Equity Fund and Cambridge Global Smaller Companies Fund for several years.
We also believe the new name, Cambridge Global Smaller Companies Fund, is a benefit to clients as the name accurately reflects what the fund intends to invest in.
The changes couldn’t have happened at a better time. In the past, the Cambridge team was structured around a centralized pool of analysts covering ideas on a global basis. Over the past 18 months, we have made changes to enhance the team structure – we’ve doubled the size of the analyst team and restructured the team for greater focus in the areas we feel we can best add value to our clients; i.e., Canada, Global Large Cap, Global Small Cap and Fixed Income. With these changes, Jordan McNamee is now a member of the Global Small Cap team. Many of the ideas for the fund over the past several years can be attributed to Jordan, and I’m excited to have his undivided attention. We also hired Arthur (“Arty”) Phillips, an experienced professional with over 10 years of investment banking and private equity experience, and offered a full-time role to a former Cambridge co-op student who was with us this summer. He’ll join us upon graduating from Concordia University in mid-2020.
This is an exciting time for CI Investments and Cambridge, and we want to remain strong partners with advisors and clients to ensure long-term success.
Question: Since your last communications on the four stocks that affected the fund’s performance in the short term, what has happened since?
The fund went through a period of short-term underperformance, which we addressed in my previous call and blog post. To recap, four unrelated holdings plus an underweight position in the U.S. constituted the majority of the relative underperformance over an eight-week period in the third quarter of 2019.
One of the holdings, which I have previously discussed, is LendingTree, Inc. (TREE.US). The company is America’s largest online lending marketplace, connecting borrowers with multiple lenders so they can find and compare competitive rates across an array of financial products. After we initiated a fund position in LendingTree, the company’s stock doubled within the following six months. However, the company had a challenging second quarter of 2019, where the margins in personal loans eroded substantially, and the company missed on earnings expectations. Subsequent to that, the company’s stock fell 35%. The stock has since recovered, and over the past 11 months, the company’s stock has made a strong positive contribution to the fund.
A stock that hasn’t recovered since my last communication is that of Byggmax Group AB (BMAX.STO). The company is a discount provider of do-it-yourself building materials, operating in Sweden, Norway and Finland with additional presence online. Despite seasonality challenges in 2018 that hampered sales, we believe the company has the potential to recover, but not to the level we previously expected. As a result, we have reduced the fund’s position in Byggmax Group as we have identified better risk/reward opportunities in other areas.
While we are just as unhappy as you and your clients, we strongly believe the fund has never been better positioned for clients in the long term.
Question: The fund used to have top-quartile numbers, but I noticed that the medium to longer-term performance are on the lower side. Do you have any comments as to why?
We believe a good marker of how we have performed is measuring success against the long term (i.e., three-, five- and 10-year periods). When we launched this fund, our goal was for it to be a top fund in its category over three, five and 10 years. We celebrated the five-year anniversary of the fund on June 30, 2019, and I was pleased with the figures below (source: Morningstar Research Inc., as at June 30, 2019):
- 1 year: 90% of peers beaten
- 3 years: 95% of peers beaten
- Since the fund’s inception: 91% of peers beaten
That being said, investment excellence is a journey and not a destination. The fund’s recent underperformance has been a humbling reminder of how hard it is to be consistently excellent. We are frustrated but not defeated. In the same way that short-term performance can affect the long-term numbers in a negative way, this can happen in both directions. This is especially true when we own a concentrated portfolio of businesses that are uncorrelated across a broad number of industries; you can meaningfully outperform or underperform in both ways. We believe we are on the right track with the holdings and allocations of the fund, and we are optimistic things will improve. These sorts of periods can and will likely occur on our journey to 10 years of investment excellence.
Question: Given the global economic slowdown, how does a relative underweight position in the U.S. impact the businesses you own, and why is the fund underweight in the U.S.?
I am always trying to avoid four key exposures – commodities, currencies, interest rates and government policy – and find businesses that we believe will have the potential to enjoy long-term value creation through the economic cycle, despite inevitable macroeconomic and geopolitical risks.
Within Cambridge Global Smaller Companies Fund, a larger portion of the holdings in recent years have come from outside the U.S. Prior to the election of Donald Trump as U.S. president (November 2016), the fund had an “overweight” position in the U.S. after finding good opportunities in the financials sector, where our funds benefited from strong returns during that time period. Post the election of Trump, expectations grew in the U.S. as the tax rates came down and earnings went up. While we believe there are a lot of good-quality businesses in the largest stock market in the world, we feel that our job is to go where expectations are low and quality is high. We felt our resources were better spent in finding opportunities in other regions, so geographic allocations to Japan, Australia and the U.K. grew as a result. As of November 2019, approximately 35% of Cambridge Global Smaller Companies Fund was held in the U.S., not because we don’t feel like it’s a good market but because we have been finding better opportunities elsewhere.
The investment team at Cambridge is presented with a plethora of ideas on a daily basis, and not all good stories end up as good stocks or good businesses. Our job is to be able to dig in and understand the companies that can create value in the long term, something I believe we have proven out over time. This will help us in the long run as we continue to create value over the long term.
I hope clients are excited about periods of uncertainty because if uncertainty didn’t exist, we’d have a hard time outperforming.
Greg Dean, Principal & Portfolio Manager
Source: Morningstar (as at October 31, 2019). Date of inception July 31, 2014.
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Published December 9, 2019