July - Summer Edition - CI Investments

Introducing Black Creek
That gives us a sense of how a company is positioned. To us,
it means that they’re leading in market share and growing
market share faster than the competition. In our judgment,
it’s essentially a company that’s going to outpace its industry.
In general, those companies typically have significantly
higher long-term profits and sustainable positions. Our view
may not be the common view, but over time, we feel that
they’re going to do much better than other companies.
A good example is Adidas. We invested in it over a decade ago
when it was viewed as not being as strong as Nike. At the time,
Adidas was a well-known brand that had suffered for lack of
investment. However, it had new management with a lot of
brand experience and there were tailwinds for the industry,
such as demographics. Over the years, they have done a
really great job of rebuilding the brand, taking market share
and building it up in different parts of the world. It’s now to
the point where they’re growing just as fast as Nike. It’s a good
example of identifying a leading company before everyone else
figured that out. Hence, the idea was unique and proprietary.
KANKO: The flip side is also true. If it’s a widely held view
that a company is a leading in its field and the prospects look
great, and we don’t have any view that’s different than the
market view, then we might choose not to own it. A portfolio
is not just what you own – it’s also what you don’t.
[Q] Are there any themes that run through your portfolios?
KANKO: We are not “thematic” investors, but we are
certainly aware of the big picture and the trends and issues
that might impact our investments. For example, we stay on
top of technology and how it could affect various companies
– either positively or negatively. As investors, we are very
conscious of the threat to manufacturers from low-priced
Chinese and Korean suppliers. Another area we follow are
companies that are dependent on government financing or
subsidies because these might have more difficulty in the
future because of the fiscal position of governments. There
are a host of other factors that we consider which could
present investment opportunities or risks.
[Q] The Black Creek portfolios are concentrated –
generally only 20–25 companies. How do you achieve
diversification with such a concentrated portfolio?
JENKINS: From financial theory perspective, 20 to
25 companies is statistically more than enough to achieve
diversification – so long as the businesses are in different
geographies and industries and exposed to different
economic effects. We make sure our portfolio is diversified,
but in the end there has to be someone making decisions
about a portfolio. In order to understand the businesses at
great length, you need to study them, follow them, build
a thesis, and then track them. It’s impossible to do that as a
decision maker if you have100 or 200 companies. No one can
know that many companies in depth. The Black Creek team
is four people. Inside our firm there are about 35 holdings.
Divided by four people, that’s roughly 8 to 9 each. On average,
each person is looking at 10 to 12 companies, and with our
turnover rate of between 20% and 30%, each person is buying
two or three stocks a year. In addition, the discipline of having
20 to 25 companies forces us to make choices between
something that’s good and something that’s even better – which
is hard to do as an investor. It might mean selling something
that’s still undervalued to buy something more undervalued.
In the long run, it ensures that we’re always upgrading the
portfolio. We are always selling our least preferred idea to buy
our most preferred one.
[Q] What are the benefits of a focused portfolio?
KANKO: The biggest benefit of having a focused portfolio is
that it keeps you from getting overly diversified and becoming
like the market. We think that if our investment approach is
correct and we execute properly, we should focus our efforts
on a select group of companies. The shorter list also helps
us stay on top of the companies better and know them a
little better than our competitors. Lastly, it promotes a sell
discipline. If we find a new idea that we like, we have to make
room in the portfolio for it by selling our least favourite idea.
[Q] How do you make that decision to buy or sell one
company instead of another?
KANKO: The selling goes along with the buy process. It’s
having a unique view that is different from everyone else –
and a picture of the company looking out five or 10 years. We
then determine what we think the company is worth based on
that view. If we think it’s worth substantially more than what
the market says, it becomes an idea. That’s how we build the
portfolio. We find 20 or 25 of those ideas, and then the sell
process just follows. If we find something else that we think
is a good idea, we have to make room for it by selling our
least favourite idea. Anything we look at has to compare with
everything we already own. Ideally, we sell to make room for
a new holding, and that maintains the discipline of a focused,
concentrated portfolio. We also sell if there’s a significant
negative change in the business that we think is ongoing, or if
the price gets too high.
SUMMER 2011 PERSPECTIVE AS AT JUNE 30, 2011 3