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business newsHunting for Companies With Opportunities Overseas
By
Josh Lipton May 14, 2010 3:15 pm
Longtime pro Rob McIver walks us through his strategy and picks.
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Granted, the 44-year-old co-portfolio manager of the $2.7 billion Jensen Fund (JENSX) has a fine selection of microbreweries to tap around his offices in Portland, Oregon, and, truth be told, he says, family and work now keep him too busy to enjoy the local bar scene anyway.
“I’m a family man now,” he says. “Those days are long behind me.”
The manager’s focus on profits over pints has benefited his investors: Morningstar analysts write that the fund has successfully set itself apart from rivals as well as its benchmark, the S&P 500, by adhering to a distinctive, disciplined strategy.
McIver only buys attractively valued companies, with market capitalizations above $1 billion, boasting solid growth prospects and Return on Equity (ROE) of at least 15% in each of the previous 10 calendar years.
The strategy works over the long haul: Through May 13, the fund’s 10-year annualized return of 3.11% beats the S&P 500 by 3.34 percentage points and leads its competitors by 5.95 percentage points, landing in the top 5% of it Morningstar category.
Morningstar awards the fund five stars, its highest rating.
The no-load fund, comprised of approximately 30 stocks, has an annual expense ratio of 0.86%. The minimum investment is $2,500.
Recently, we called up McIver to chat about his strategy and top picks including Abbott Laboratories (ABT), Praxair (PX), and Colgate-Palmolive (CL). For more, please read on.
Minyanville: Walk us through your investment strategy.
Rob McIver: The fund invests in high-quality companies. We will only consider those companies that have generated a high Return on Equity (ROE) -- the number we use is 15% -- each year for 10 years. That is a very demanding hurdle. Less than 200 companies can generate those sorts of consistent earnings over that time period. So it’s a high-quality pond in which we’re fishing.Minyanville: Explain to our readers what ROE means.
McIver: It’s straightforward: It's the net income produced by the company on an annual basis divided by the shareholders equity. It’s a simple but powerful screen.
Minyanville: What common characteristics do companies with high ROE share?
McIver: Typically, they will have durable competitive advantages; pricing power; strong balance sheets; and growing free cash flow. With cash flow, a company determines its own destiny rather than bankers or the government. That is so key for us. What we find with these companies, with strong free cash flow, is that they can re-invest in their businesses for future growth; grow through acquisition; and take care of shareholders by paying a dividend or buying back shares.
Minyanville: What are the shortcomings of demanding a decade-long track record?
McIver: It has been argued that if you demand a 10-year track record then don’t you miss out on opportunities? Like those young, smaller companies growing aggressively? Our answer is that we will miss some opportunities. However, those companies might grow fast, but they don’t have the financial resources to survive when times get tough. So we readily admit that we’re not market timers or momentum players. We are long term investors.
Minyanville: What is turnover like in the portfolio?
McIver: Our turnover is typically 15%. The average holding period for our company is seven years. Over the long term, we have provided superior returns, lower volatility and lower trading costs. It’s not the sexiest strategy, but it has real value. A key secret to long term success in investing is to participate in bull markets, but don’t lose your shirt in bear markets. You will not recover from that.
Minyanville: Let’s do some stock-picking. The fund’s largest holding is Abbott Laboratories. How come?
McIver: Last year, the company bought a European pharmaceutical business for $6 billion. It just wrote a check for it. It had the cash on its balance sheet. That is a fantastic testament to the strength of Abbott. The dividend has increased consecutively for 37 years. It is a very strong company, and well diversified internationally: 50% of sales come from overseas.
Minyanville: The stock, year-to-date, is down 11%.McIver: The stock market isn’t always rational and it just thinks about the health-care reform. But, as long-term investors, we have actually been adding to our position. It’s also very cheap at the moment.
Minyanville: What’s the thesis on Emerson Electric (EMR)?
McIver: It has been a long-term holding in the portfolio. A lot of folks here in the States just think about the local products it makes, but the company is also a wonderful play on growth in the emerging markets, particularly the global infrastructure spin. Today, about 70% of its earnings are coming from those fast growing markets.
Minyanville: Praxair is also in your top five. This is the largest industrial gas supplier in North America and South America.
McIver: It typically trades at a high premium to the market because it is such a high quality company. But, when the market tanked, it became affordable for us. We went in heavily. Again, there are a couple persuasive cases for holding the company: First, it is one of the top three in terms of market dominance of industrial gases.
Minyanville: And the second reason?
McIver: It’s a very smart business model. Say the company has a customer that is, for instance, a steel manufacturer somewhere in the world. Praxair will set up a plant right next door and have a long-term contract with the customer. They provide gases to the customer on site and, whatever gases are produced as a residual, are bottled and supplied to other customers again at a profit. So maybe it doesn’t sound sexy, but it generates a huge amount of money.
Minyanville: In the first quarter, you added a new position in transportation company C.H. Robinson Worldwide (CHRW). What’s the thesis?
McIver: It has become affordable because the share price has underperformed. It is one of the strongest players in North America in terms of transportation logistics. It is an asset-light business model. They tend to be a broker. It’s a one stop shop where they can match buyers and sellers and margins tend to be stable because they don’t have assets themselves. It’s a nice play on the continued globalization and consolidation of haulage routes.
Minyanville: During the first quarter, you also sold out of Danaher (DHR) and Ametek (AME). What’s the story there?
McIver: Those were two companies that we really like. But they both broke that 15% ROE requirement. Their earnings came down and typically, when that threshold is broken, it indicates a loss of competitive advantage. They are fundamentally strong companies but our discipline is strict. We sold.
Minyanville: You’re a bottom-up stock picker, but let’s talk about your macroeconomic outlook. What kind of recovery will we have in the US?
McIver: The depth and length of this recession has been the worst in any of our lifetimes and it will take a long time to recover. There will not be the snapback we saw in prior recoveries. We have some pretty major headwinds: a stubbornly high unemployment rate; a huge amount of government debt; and taxes will rise.Minyanville: So you’re now concentrating on companies that generate a significant amount of their revenues in faster growing emerging markets?
McIver: It is one of our themes. The companies in which we invest are looking increasingly overseas for opportunities.
Minyanville: An example would be Colgate-Palmolive?
McIver: Yes, it is a leading consumer products company with $15 billion worth of sales, 77% of which are overseas. Globally, they account for 45% of the toothpaste market. They have strong distribution, stable margins and, with the developing markets story, they are extremely well placed. It is a very persuasive story. And it comes with a nice 2% yield so what’s not to like?
Minyanville: Thanks for your time.
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No positions in stocks mentioned.
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