In this investor webinar, Marty Switzer interviews Greg Ise, Portfolio Manager, WCM Investment Management to discuss the most important factors to consider when selecting global growth companies. In the session, Greg reveals two stocks WCM has identified with continued long-term growth in their economic moat.
Greg is the Portfolio Manager of the WCM International Small Cap Growth Fund (Managed Fund). The Fund provides wholesale investors with access to a high conviction, actively managed diversified portfolio of listed, quality, high growth small capitalisation companies sourced from developed and emerging markets.
– Hi, I’m Marty Switzer, with me today is Greg Ise from WCM Investment Management. Greg is the portfolio manager from the WCM International Small Cap Growth Fund. The strategy has an incredible track record, averaging 22% per annum for the past five years, beating its benchmark by almost 12%.
WCM International Small Cap Growth Fund is available to wholesale investors only and will be open for a limited time as the capacity, is finite and the fund will close. Today Greg will be talking to us about the current investment landscape, how he is investing at the moment and some of the companies he likes right now. Welcome Greg.
– Thank you Marty, appreciate the opportunity to be here.
– Great to have you here. So Greg, for those that don’t know, can you give us some background on WCM Investment Management, your investment team and as the portfolio manager of the fund, a bit about your background as well.
– Yeah, certainly. So WCM Investment Management would manage about 50 billion US dollars, based out of Laguna Beach, California. We are focused on what we would call high-quality growth, global opportunities in the equity markets. We really run that across four core strategies and we utilize a very focused investment philosophy, to basically support those four strategies. From a team perspective we have a global generalist team, so consisting of roughly 12 analysts, slash portfolio managers along with an analyst, whose pure focus is on the cultural analysis of companies that we invest in. So we’re roughly 13 members in total, across all sectors and geographies, supporting those four core strategies. We think that’s been a fairly meaningful reason and contribution for kind of the consistent performance across the four global strategies.
In terms of myself, so I first joined the investment industry in 2001. I’ve been focused on international small caps, for approximately 13 years. Having been a part of two product launches during that time. The second of which was the ability to launch the international small cap strategy, here at WCM Investment Management a little over 5 years ago.
– So Greg, to introduce the fund to our investors. The strategy the fund uses has a very impressive track record, averaging 22% or thereabouts, for the past five years. As the name of the fund suggests, it’s an international small cap growth strategy and invests in companies with market caps between 500 million and five billion. The portfolio that you run focuses on high-growth sectors. Such as healthcare, technology and consumer and typically holds between 50 to 70 companies. With exposure to around 25 different countries. Greg, can you talk to us about WCM’s unique investment philosophy and how this is applied to the WCM International Small Cap Growth Fund?
– Yeah, happy to. So, you know, if I start with, I guess, kind of the core investment philosophy. It’s as I mentioned before, it’s one that shared across the global team, here at WCM and applies really to all four of our global strategies. And the real focus has, I’d say, two core pillars to it, but with some underlying factors as well. So the two core pillars are what we call moat trajectory and corporate culture. To the first point, the idea of moat trajectory is, trying to identify businesses that we think are getting stronger over time. You know, if I’m extreme in terms of explaining what that means, if you can imagine that, you know, every business that has, what we call a wide moat, that’s essentially static in time. You know, if we just went out and sought businesses that have wide moats, that were strong today.
That would imply that essentially, over time, over history, every business that was ever strong, would still be the case today and and we know that’s just not the reality. Right? We would still be in horse and buggies, rather than automobiles. We would still be doing all of our computer apps, on a personal computer, rather than increasingly shifting to smartphones. We would be using checks or credit cards, rather than increasingly shifting to digital payments. Additional factors like that. So the idea of moat trajectories, about identifying businesses that we think, are essentially disrupting the existing, kind of legacy landscape around the world. And so that’s essentially that idea of looking for businesses that are getting stronger over time. As opposed to just being strong, at a certain point in time.
And then the second pillar I touched on briefly, was this idea around corporate culture and it’s the idea that, you know, ultimately what differentiates one company from another, especially when they do compete in, arguably identical industries. Or with similar business models, ultimately does come down to the people in the culture, within that organization and we seen that even within our own organization and that’s actually, where the sole focus on culture stems from. Was that recognition of how important our own internal culture is, to the success that we’ve focused on and so what we do is we really try to evaluate business’. Not only through direct contact with management teams, but through kind of exploring the analysis around culture, through the broader ecosystem. So customers, suppliers, former employees, competitors, to really understand the kind of, if there’s a consistent theme or message we’re getting around the culture that exists with the business and how that aligns and therefore strengthens, around the idea of durability and sustainability, that moat trajectory or competitive advantage of that business. So that’s kind of the core philosophy around what we’re really looking for when we examine business’.
So in terms of the more kind of broader makeup, of the strategy itself, you know, we’re basically looking for these opportunities, all over the world. So the portfolio consists of about 50 to 70 holdings, so we’re fairly concentrated, because we believe that’s the best way to create excess returns for our clients. We’re looking all over the globe, so this would consist of everything from developed markets, to emerging markets. And we’re really focused on trying to identify long-term, sustainable businesses that we think are, again have that disruptive nature to them, but also have a culture that allows them, that level of sustainability and so that kind of gives you a sense of both, the geography and the types of holdings were looking for.
And then I guess the final thing I’d say, in terms of an industry perspective, again we are really trying to explore all industries, but we recognize that there are certain industries in the world that are simply more favorably positioned. Especially in terms of having all its secular tailwinds and the reason we think this is favorable, is because it essentially gives you, greater margin of error, when it comes to the analysis around these. So you will typically find we are going to be more focused on industries around technology, healthcare, consumer, both discretionary staples and what we would identify as very high quality niche industrials, or highly focused industrial companies.
– Greg, before we get into some of the stocks in the portfolio, which I guess our audience and the clients are going to be very keen to understand and hear about. We get back one step in, can you take us through, your view on the current market conditions, or the current market landscape.
– Yeah, I mean, you know, we clearly feel that the current environment, continues to be very favorable. Especially to growth investing in equities. I mean, there are clearly without question, some current concerns and uncertainties that exist out there, most prevalent being, you know, the containment of the corona virus. Having said that, beyond that, I mean, the overall environment continues to be very favorable. We are in a low interest rate environment, essentially globally. Which has made it increasingly difficult for investors to find real returns anywhere.
That has naturally, kind of, led investors to seeking returns in what we call high quality, growth opportunities. Which is very much aligned with the types of businesses we’re identifying. I think, more importantly though, when you look at some of the just more structural, secular changes happening around the world, because of innovation, digitization, automation. This is lending itself to a whole slew of opportunities, around the world, that very much aligns, with kind of the style of investing that we’ve been pursuing for close to 20 years now.
– Fantastic. Could you now run us through a couple of the stocks, in the portfolio that you really like at the moment?
– Yeah, I mean, I think it would be an injustice, if I didn’t mention, you know, our largest holding in the portfolio. As clearly an example of one that we feel very comfortable about. So the largest company in the strategy today, is a company called CAE. Its a Canadian based company, essentially what they are, they’re the largest global provider, in the world of simulation equipment and training services for pilots. So they have, you know, roughly about a 40% market share globally, in pilot training. As you could imagine, this is an industry that not only has a very favorable secular tailwind, as more people around the world look to travel. As more airlines are emerging, in all corners of the world. But theirs, just as important, there’s as a couple of other key factors at play here.
So. One. There are approximately 250 thousand pilots, commercial pilots in the world today, approximately half of which are going to retire over the next decade. And in addition of that, of course, as I mentioned before, you have the secular demand and growth around the industry and itself. So, in addition to needing to train a significant number of new commercial pilots, there’s also real urgency, in terms of replacing the existing ones, that will be retiring. And as we’ve seen, very unfortunately with issues around, for example, the Boeing Max. Training is becoming ever critical as a result of the changes that are happening around the design, of software, of aircraft. Along with the the continued changes around the aircraft bodies themselves, as a result of fuel efficiency and other changes within the cabin.
And so, a company like CAE, works very closely with the airline manufacture, or I should say with the air manufacturers, the aircraft manufacturers, to basically become embedded with them. To recognize whenever changes are being made and to update those real-time, in a way to train pilots all over the world, through their 55 different training centers. That would clearly be an example of a security, that we feel very confident about longer-term. As a global leader and in an industry that we see a significant, longer-term opportunity.
What’s another holding that you like at the moment?
– Yeah, so, this is another one, we’ve been investors in, since I think was approximately late 2016. It’s a company called takeaway.com, they are the global. Oh, I shouldn’t say the global leader. They’re the leader in Germany, the Netherlands and Poland, in terms of food take-away. So, for investors there, or consumers, there in Australia. You might know a similar businesses like Menulog or Uber Eats.
This is a player that exists essentially in a monopoly, in both Germany and the Netherlands. You know, if you were to look at the company today, they have about 17 million users. They’re doing around 150 million orders, each year. And this is a company that is still growing, in excess of 50% a year. And again when you look at their position within, both Germany and the Netherlands, they have essentially, a monopoly today and as you can imagine, this is a very high-margin business as a result of this basically being a software. Essentially an app or internet business. And so there is a network effect there that plays out, as more consumers join the outfit, naturally draws more restaurants and that, kind of, feeds off of itself in a, almost monopoly type structure and so this continues to be a company that we’re very positive on long-term. Both in terms of the growing demand for people to be able to, order food for takeout on their phones. The simplicity and efficiency that, that provides, combined with the fact that the network effect, comes into play and naturally drives Takeaway, to continue to be the clear leader, in the markets, in which it operates.
– Greg, in terms of, I guess, the countries and sectors where you see the most opportunities, at the moment? Can you share with us your view there?
– Yeah, I mean, there really are, they’re really no limitations around the sectors or the countries where we’re seeing opportunities. I mean, so many of the things that you’re seeing happening on a local level are happening on a global level. So we know that unemployment rates are low. We know automation is happening. We know demographics are lending themselves to trends around healthcare, around travel. We’re seeing again, globally, a shift towards digital payments. You know, if you, we go look at a market like Japan, there is an extraordinary shortage of talent and employees there, as a result of, essentially their zero immigration policy.
That shortage is naturally lending itself into, companies looking for solutions around automation, around software, as a service. To address some of their challenges with the labor force, automation is clearly something that’s happening on a global level which lends itself, to significant opportunities. Were seeing a lot of outsourcing efforts again, as companies think more thoroughly, about the way that they manage their business and essentially looking to outsource non-core activities. That’s lending itself into everything, from a contract research organizations, which support large pharmaceutical companies. All the way into video game development, where companies are increasingly, just wanting to focus on the core marketing and creative side of it and are looking to outsource things around testing and verification, language translation and components like that. So, a lot of the factors were seeing, really continue to replicate themselves, across markets and even across industries and that’s why we’ve been so excited, about the opportunities, that the strategies presented.
– Greg and last question before we go. This portfolio has done particularly well, in falling markets, what you refer to as downside capture. Can you explain, what you mean by downside capture and tell us why this portfolio does so well, when markets go down?
– Yeah, I mean, downside capture. The name itself is a bit counterintuitive. What downside capture ultimately means is, downside protection. We are big believers that by preserving capital, it is the best way to ultimately generate excess returns, for our clients. The old adage that if you lose 50%, you have to gain back 100%, just to get back to even. And so the way we think about downside capture, or in this case downside preservation, is by really focusing on those companies, that we think are just of the highest calibre, highest quality nature. So these are companies that tend to have very little leverage, very little debt on their balance sheets. These again are businesses that are naturally, disrupting legacy players. They tend to have very few legacy costs, that they need to worry about in the event of a downturn and again these are businesses that have very strong cultures. And we think that’s critical because when, you know, the overall economic environment does become more challenged, you needed the type of culture behind an organization, that can essentially, see through that, remain disciplined and remain focused, in terms of the opportunity that they’re pursuing.
– Greg Ise, thank you for your time.
– Thank you very much, I appreciate it.
– Thanks for joining us on today’s webinar. The WCM International Small Cap Growth Fund, is available to wholesale investors. The minimum investment is fifty thousand dollars and if you want more information,contact us. Thanks for watching.
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