July - Summer Edition - CI Investments

Introducing Black Creek
JENKINS: Sometimes an event happens – let’s say a competitor
gets taken over and everything goes up – so we decide, “Okay,
everything positive we can think about that could happen to
this company has happened, so it’s time to move on.”
[Q] Let’s talk about some of your current and previous
holdings and why you bought and sold them.
JENKINS: I’m going to talk about Publicis – a French
company that leads in different advertising markets around
the world. It’s number one in advertising, media planning
and buying, and an industry leader in digital media, such
as Web ads. We bought it in 2008 when cyclically many
of their customers were cutting back on advertising. Since
automobiles are a very large portion of media advertising,
the concern was with General Motors and Chrysler going
bankrupt. At Publicis, auto advertising accounted for
significant revenues and market sentiment was that the
company would have bad accounts receivable from the auto
firms. As we did our work, we discovered that the accounts
receivable to Publicis from these two firms was less than the
upfront deposits they had already made to buy media for the
following year. As we thought about it, we assumed that even
if they went bankrupt, it would be interesting for them to
try to get their money back from Publicis. We came to the
conclusion that the market had overdone it.
The second part of our thesis was that as we came out of this
downturn, the battle for market share was actually going to
be at a higher level than it was before the recession. That’s
because company balance sheets would be very clean. In
addition, we were seeing the emergence of competitors from
emerging markets. Companies like Jaguar and Volvo were
being rejuvenated by India’s Tata Motors and China’s Geely
Automobile Holdings. Our view was that competition in
advertising would snap back faster and be more intense than
it was before the downturn. Recently, we had Publicis’ largest
competitor in our office and they were surprised at how fast
the market snapped back. Our thesis is now playing out.
KANKO: It goes back to our unique insights and how we
generate ideas. Years ago, I owned Canon and for me, it was
always an Internet idea because the Internet was changing
the print model. Instead of printing glossy brochures centrally
and distributing them, companies could easily distribute the
information electronically and then print at any location.
Canon owned the desktop. They had an 80% market
share of laser print engines, plus bubble jet printers,
and camera printers. Since the Internet was driving the local
print business, it benefited Canon and its ability to sell ink.
Then, three or four years ago, we started using Adobe Acrobat
in our office. Almost everything we do is in electronic form.
We started thinking about the prospects for a paperless world
as technology became cheaper. In 2009, Adobe went from
US$50 down to less than US$17. That was the genesis of the
idea. We sold Canon and bought Adobe. Adobe is a follow up
on the Canon idea.
[Q] How do you manage risk?
KANKO: We define risk as permanent impairment of capital
– not volatility of share price. We focus on businesses and
how they act in different environments. Typically, we buy
companies dramatically below what we think it’s worth. We
have 25 holdings and make sure they are not all in the same
geography and industry. Then we go through an exercise,
such as, “What happens if commodity prices are higher than
what we expect? Can our companies increase prices? If they
can’t, who gets hurt? Who gets hurt by low interest rates?
Who gets hurt by different economic factors?”
[Q] As investors, Black Creek measures itself over a
10-year horizon. Why?
JENKINS: The reason we use 10 years is because we want
to understand how that business does throughout an entire
business cycle. If it has two or three years where it does great
and eight that do poorly – it’s a bad investment. As investors,
we want to be in businesses that over a 10-year period are
growing value for their shareholders. For example, if I’m
buying a business that is cyclical, and we’re at year six of an
expansion, and I’m using a 10-year view, then I’m putting a
recession in the next two or three years, which is presumably
going to be reflected in the price. If I’m in the middle of a
recession, and I’m doing a 10-year analysis, it’s likely that the
next recession isn’t for another eight to 10 years – again, it
should be reflected in the price. The point is to make sure
you differentiate between cyclical growth and real growth.
This is the problem right now because we’re coming out of a
big downturn, where lots of things look like they’re growing
quickly. But we are about to shift down. Over the next year or
so, we’re going to find out who is really growing.
KANKO: If you’re focused on the long term, you see things
differently when you speak to companies – you ask different
questions. When we go to meetings with other investment
managers, we’re asking very different questions than everyone else.
4 SUMMER 2011 PERSPECTIVE AS AT JUNE 30, 2011