Hello everyone and welcome to today’s live chat. I’m Darcy Keith with the Globe and Mail. We’ll be getting underway shortly. Please submit your questions for Jeff at any time.
Thanks Darcy. I look forward to the opportunity today.
Jeff, thanks for joining us and congrats on the award last week.
Thank you Darcy, it was a great honour for the firm.
To start off Jeff, can you tell us a bit more about the Mawer strategy that has produced such strong returns over the past couple of years for the New Canada small-cap fund? I know Mawer often talks about seeking to identify companies with sustainable competitive advantages, competent management and track records of smart capital allocation. But isn’t every fund manager looking for the same qualities in a potential stock buy?
We always try to do right by our clients.
Very good point Darcy. The things we look for definitely puts us in the category of "bottom-up" investors.
I think where we differ is our focus on what we call wealth-creating
These are companies that can earn a high return on capital, and if you hold these companies over time, the value of your holdings should increase.
I think one thing that separates us from many investors is our long-term holding horizon.
We average 5 years for holding a stock.
So by focusing on quality companies where time is on your side, and not paying too much for them, then holding them over a long period of time, I believe we have achieved good results for our clients.
Thank you for that question Darcy.
December is usually a strong month for equities overall, especially as we get closer to the Christmas holidays. Does the same hold true for the small cap sector in Canada though?
That's a very difficult question to answer. First, I must say that I can shed little insight on monthly stock movements. Given our long-term horizon we put less effort into forecasting short term market moves.
However, this year it appears that the second half of the year has been more volatile than the first half.
This has largely been a result of the recent weakness we've seen in oil prices. However, whether or not that continues is very hard to say in such a short-term time horizon. Thank you for that question Darcy.
I know commodities tends to be an area you stay away from in the fund. But with the recent steep selloff in oil - are you bottom fishing at all in the energy small cap space? Or the gold sector?
We tend to stay away from commodity producing companies because they have no control over the price at which they sell their products. This leads to narrow competitive advantages and a harder time to create wealth.
In addition, because these companies have to spend all their capital up-front and the volume of their production is not always known up-front, it is difficult for us to assess with any degree of certainty whether or not company is actually "cheap".
However, this downdraft has created an opportunity in the energy service companies. We think these companies have more definable competitive advantages and we are starting to see some opportunities created by the recent downdraft. We've had less luck in gold so far however. Thanks for that question Darcy.
Interesting. Can you name some energy services companies you like in particular?
Canadian Energy Services is our largest holding in the sector.
We think it has a very interesting growth profile along with very high returns on capital
and is now trading at a reasonable valuation.
Another holding we like is Secure Energy Services.
Can you elaborate further? Also high returns on capital at reasonable valuations?
We believe the management team are good capital allocators and both divisions it operates in have definable competitive advantage. As well, it seems to have a "cookie-cutter" growth model.
It's been growing its EBITDA at over 30% per year since its IPO.
Does that elaboration help give you a sense?
Can you share your general outlook for 2015 – for both equity markets and for small caps?
Sure Darcy. I will add a provisio for this one again that even a one-year time frame is a very short period of time and not something we focus on forecasting.
That being said, at Mawer we believe that the economy is still in an expansionary phase after the last recession in 2009.
In normal trading periods (i.e. when there isn't a large shock to financial markets like the European Sovereign Debt Crisis) the stock market tends to follow the economy.
However, valuations have certainly run up in the last number of years since the Great Recession, and our internal discounted cash flow modelling suggests that the Canadian small cap universe might only be able to generate mid to
high single digit rates of return for the next 5 years.
Thanks for the question Darcy.
Here's a couple questions from Gerryp on some specific names.
Newalta is a company in transition. We certainly like the company as it's one of our larger holdings in the Fund.
However, for many years it focused on diversifying its energy environmental services offering into the industrial sector, making several acquisitions along the way. These turned out not to be wealth-creating.
The company has now reversed course and put these assets up for sale, and the company is guiding that there will be an announcement by year end. So the company is now focusing on its higher return businesses, particularly in the oilsands.
We really like the oilsands business, where our estimate is the company is able to earn a mid-teens return on capital unlevered. These assets are underpinned by production volumes and should not be overly affected by the recent oil price drop. We think the stock perhaps has overreacted and this is definitely one company we are keeping an eye on in these volatile markets. Thanks for asking Gerry.
And Gerryp's second question: