Patient capital

“The [portfolio’s] cash level kept increasing, and I went from 5% to 30%. It wasn’t a call on the market; it was all based on fundamental valuation,” says the portfolio manager at Cumberland Wealth Management in Toronto.

This patience parlayed into a well-protected portfolio during the market crash.

“I went into the crisis with 30% cash. The funds had balanced mandates, so we had 50% bonds and only 20% equity exposure.” That setup meant the equity portion of the portfolio only dropped 17%, compared with a 37% fall for the S&P in 2008. And the total portfolio was only down 8% overall.

Her secret? Ignore market noise.

“The [current] headlines do not mean that every single company based in Europe is going down,” she says. “If you search out high-quality companies that have leading-edge services and goods, and are globally diversified in terms of revenue, you’re going to be able to withstand any calamity in the market.” It seems that philosophy has served her well.

Yang manages two funds: the Global Core, which comprises 32 companies based worldwide; as well as the International Fund, which holds 24 companies based outside North America.

As of the end of September, only three of the 32 companies in her Global Core portfolio have declined, and only by single digits. And her five-year returns for that portfolio as of June 30, 2012 is 1.2% (over the same period, the index returned -3.2%).

“We keep companies for many years. Some names we had back in 2005 are still in there. Our objective is to repeat returns on a consistent basis, not shoot up one year and then not deliver in the following.”

As a result, the Global Core’s turnover rate ranges, depending on the year, between 15% and 25%.

Her investment philosophy sounds simple, but it belies the vast amount of research necessary to execute that simplicity.

She can rattle off the product lines of each company she owns— plus those of competitors; she knows what inventions each firm’s working on; and she can speak to the demographic trends propelling each corporation’s success. Those factors may not translate into rising stock prices every year, or for several years, but Yang’s portfolio is mostly buy-and-hold.

She’s also harnessed the power of patience outside the office. She’s an experienced fly fisher; her biggest catch being a 40-pound West Coast salmon, netted in 1997.

“That one wasn’t that difficult,” she says. “The one that’s more exciting” is the Atlantic salmon she caught in the Grand Cascapedia river in Gaspe in 2011.

“It was six in the morning. You’re standing in rushing water, and you play with the fish, and try to bring it in, and this one was 23lbs. It took me about 25 minutes[to catch]. ”That’s the biggest she’s caught on the east coast.

“How long have I waited for a fish? Years,” she laughs.

It would seem rigour comes naturally to Yang. “I’ve been doing this for 20 years and I was a CA before that,” she says. “We’re stock pickers.”

Advisor Group sat down with Yang in her offices in Toronto to learn more.

How do you identify quality companies?

Balance sheets are crucial. We saw companies in Italy that had great sales but the balance sheets were horrible; and shortly after they went bankrupt.

Companies that only grow by acquisitions—many times things end badly because they don’t find the proper acquisition. Successful companies have to be in an industry where they can grow organically. And they must have teams with realistic goals, and that deliver on a consistent basis. Management shouldn’t just be one hero who’s always in the news.

And, we look for the company that’s survived over generations.

Such as?

Essilor Glass, a French optics maker, is a big weight in our portfolio. It has 40% global market share, and its next two competitors have 10% each. Not only is Essilor a very good operator, but it’s also recently benefited from the decline of one of their competitors. It’s created innovative products for developing markets. As it’s gotten bigger, the time between innovations has shrunk. Last year it invented a lens spray so that when you enter a warm building from the outside your glasses won’t fog up. It’s also developed a coating on the inside of the lens that prevents reflection of light into your eyes.

Essilor is based in France. The country got downgraded, but Essilor is a global company. It has sales to Spain and Italy that are 6% together, but that has minimal impact.

In 2008, it still showed earnings growth. That bottom-line growth was about 8%-to-9%, but Essilor learned from the recession that it had to go into the middle market. So it focused on growing lower value- added products for emerging markets. It also bought a reading glasses company, knowing that’s something on a demographic basis we’ll all need. So there is some steady revenue.

Another company we’ve held for a long time is Fresenius SE, based in Germany. It specializes in kidney dialysis, which you need when your kidneys fail.

That can be a result of many lifestyle diseases, including obesity and diabetes, which makes it a growth industry. That’s also the case in emerging markets because they are adopting the American diet, unfortunately.

What triggers you to divest companies?

Negative news. I owned Siemens, and once the bribery case came out in 2008, I sold it. We still made money because we bought it at a cheap valuation.

What kind of exposures do you have?

The Canadian index is mainly composed of three sectors. Two of them are commodities [energy and materials], and those are dependent on events happening elsewhere. Studies have shown commodities-based indexes are volatile.

So, we tend not to have big exposure to commodities because Canadian-focused portfolios naturally have that exposure. One of the attractions of going global isto have companies you wouldn’t have in Canada.

We go outside of Canada for consumer staples, consumer discretionary and healthcare companies. Our materials exposure is quite low; we have some industrial gas exposure.

As for countries, we have good exposure to Switzerland, although we have less now because we sold to take advantage of the strength of the Swiss franc.

For a small country, it has a big proportion of global companies. They’re in the $30-billion range, which globally is mid cap but in Canada would be considered larger cap. Switzerland has a leader in toilets; it has a leader in farm equipment; the world’s two biggest luxury watch designers are there.

We would change the portfolio a little if we thought global GDP growth would be double digits. Then we would tilt it, and on the margin we would add a bit more beta. We would be comfortable adding some companies that would benefit from a surge in global growth. We don’t believe that’s the situation right now.

How are your picks doing?

Essilor is up 35.4% this year.

Of the energy stocks in the international portfolio, Schlumberger is up 7.7% year-to-date, Vale from Brazil is down (but it only constitutes 1%of the portfolio), and natural-gas company BG Group is down. The only other stock that’s down in that portfolio is a Hong Kong-listed watch retailer called Hengdeli.

So out of the 24 stocks in the international portfolio, only three are down.

We have companies that are up in Germany by double digits: Fresenius, which is in both the global and international portfolios, is at a lifetime high. It’s up 25.6%YTD.

We have Canadian banks—we believe they are world leaders—and they’ve recovered since the summer. TD is up 12%. They’re stick-around things.

Do you hedge currencies?

For the international fund, we don’t do any currency hedging. There are many currencies inside that portfolio, so some do well and some don’t. On balance, it washes itself out.

We experienced this last year when the franc appreciated so much that Swiss companies were making money on a constant currency basis. But when the companies translated the numbers back to their own Swiss franc, some were showing [losses].

All the companies in the portfolio are diversified globally within themselves. It becomes very difficult [to hedge], so we just look at the quality of the company and no one currency dominates in any portfolio.

For the Global Core fund, we have only hedged against the U.S. dollar to take out the volatility, because in that fund U.S. currency is dominant.

Right now nothing is hedged. When there’s a wide gap in currency values, we may put it on. It’s not really to make a call or make money on the hedge; it’s just to take the swings out.

Would you ever go all cash?

In the International Fund, we have a lot of cash right now.

There are some companies that look interesting, but with the cautious environment, we’d still like to get them at cheaper prices. We have 20% cash in the International Fund and in the Global Core we are 80% invested and have the rest in cash bonds.

Even at the best of times I always have 5% cash. I don’t want to be forced into selling something in order to buy something. Conversely, there are times where I will go to 35% cash.