Trimark Fund: Three decades, one philosophy

“The investment process is consistent across the Trimark franchise,” Love says. “When you boil it right down, what we are attempting to do with the Trimark investment discipline is to buy good companies, with good underlying fundamentals and economics, for less than they’re worth.”

It’s a highly flexible global equity mandate, with no restrictions regarding capitalization, sector or geography. In theory, its investment universe encompasses every publicly listed company in the world.

The Trimark Canadian Fund takes a similar approach, though focused on the Canadian market. Foreign equities are not forbidden, however, and its managers can place up to 40% of assets outside of Canada.

He admits this requires a contrarian streak, and that the fund is sometimes out of favour for making “unpopular investment decisions” when the managers see value in a beaten-down stock.

Love points out buying unpopular stocks—or declining to buy “the next big thing”—poses career risk in some investment shops. The conventional wisdom that it’s better to lose money conventionally than make money unconventionally still applies. Not so at Invesco, say Love.

“We have a culture here that fosters…the ability to make those unpopular decisions.”

The fund still runs a concentrated portfolio, with management preferring to know the companies it owns intimately, rather than viewing each investment simply as a piece of paper—or data—to be traded on the market.

“The thought process behind that is no different than if we were going to buy a private company in its entirety,” he explains. “You want to understand the business, the products, the services, the competition…and ultimately why that company is going to be sustainably a better proposition than all of the other companies it competes with.”

Don’t chase, hold

It sounds like a simple concept, but he points out many investors stray from this discipline, seduced by momentum plays. Chasing past growth in a stock typically goes hand in hand with another common temptation in today’s markets: short-term investing.

“Every time we make an investment decision with respect to buying or selling a company, we’re thinking in terms of years rather than months or quarters,” Love says. “Increasingly that’s a differentiator. There’s hard data that shows the average holding period for a stock is now less than two months among institutional investors.”

In the 1970s, he says the average holding period was about two years; in the 1950s, it was up to five years. In contrast, Love says, the typical holding period across the firm is about five years, but many companies have been held for more than a decade.

“It’s time arbitrage,” says Ian Hardacre, manager of the Trimark Canadian Fund. “I’ll buy a business because I like it, [even if] it’s out of favour; it might have a short term issue. It may be 12, 24, 36 or 48 months before my thesis is realized. Often it takes three to five years.”

The focus on the management team is especially important on the Canadian fund, says Hardacre, because the quality of businesses in Canada tends to be below average, compared to the rest of the world.

“When you’re running a business that would be below average on a worldwide basis, you need a really top quality management team.”

The Canadian mandate is able to invest up to 40% of its assets in foreign securities, providing a safety valve in case there are few opportunities in the relatively small domestic market. This allows the fund to remain highly invested, rather than building up its cash position when selling securities.

“Cash is just a function of process,” Hardacre says. “If you can’t find something to invest in that meets your criteria, then you hold cash.”

Opportunity knocks

Neither manager has had much trouble finding unloved stocks lately – recent volatility provides ample selection.

“We see nothing but opportunity in this kind of environment,” Love says. “This is where we are often served our best, long-term opportunities, because the market tends to overreact from time to time, both with excessive optimism and excessive pessimism.”

On the Canadian fund, Hardacre says the toughest market trend to manage through is a persistent bull. While bull markets provide ample opportunity to take profits, there are fewer choices for redeployment of capital.

“Volatility is our friend,” says Hardacre. “That’s when you get dislocations in the stock prices, where maybe a company you’ve been watching for a long time goes down to where you think it’s trading well below what it’s worth.”

This contrarian streak was evident in mid-2008, when Hardacre was steering clear of the energy sector.

“When oil was at $140 in mid-2008, people were saying ‘you’re crazy, it’s going to $200.’ Two months later it was $40 a barrel,” he says. “At that point we bought a significant amount of energy stocks.”

Changing times

In recent years, the long-term focus has hurt the fund in some ways. Over the past decade, many investors have seen their savings ravaged by successive bubbles and crises, and are now scrambling to rebuild nest-eggs before they retire.

“People look at their time horizon as not being what it once was, and I think they’re more inclined to make hastier decisions,” Love says.

This includes trading in and out of mutual funds, believing a lull in the market is a sign of poor management.

“I hate to say it, but unfortunately a lot of people often do the wrong thing at the wrong time,” Hardacre says. “The key is to have a good advisor to talk to for a bit of guidance. The majority of people who don’t make money in mutual funds are not always willing to stick with the same mutual fund for a long time.”

Investors have become even more focused on short-term returns, Love says, as the proliferation of exchange traded funds and their celebration in the mainstream press has convinced many they’re nimble enough to become daytraders.

“I think in many cases, mutual funds are seen as too commonplace—they’re not sophisticated enough,” he says. “People are always looking for more sophisticated, more complex products, because they feel they’re going to be better for them. I think there’s probably an inverse relationship between the complexity of an investment product and its actual deliverable investment return.”

Too often, investors fall into the trap of believing more activity is better for an investment. But the underlying concept of a mutual fund is to buy it, and let a professional manager compound your investment.

“For the vast majority of people, their performance is worse than the fund itself over, say, a ten year period,” says Love. “That’s because they become impatient at the wrong time, and they try and be too active, which flies against the nature of what a mutual fund is supposed to be.”

It is just as important for the advisor to fully understand the investment philosophy of the fund in which their client is invested. Armed with this knowledge, the advisor can better explain periods of underperformance, and persuade the investor to sit tight. Bailing on a fund that is down, and redeploying the proceeds into a fund at its peak often destroys wealth.

“Do your homework, and understand the fund company investment philosophy, how its investment philosophy has done over time,” Hardacre says. “You need to understand what you bought. Often with mutual funds people really don’t know why they bought them, and what investment style they’ve invested in.”