March - CI Investments

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Spotlight onStephen JenkinsGood management teams are also key in Harbour’s stockselection. They look for teams that have been in place formore than one business cycle, ones that think and act likeowners, or make decisions for the long term.“And last, but not least, we want the stock to be availableat a good price. For us that’s often a significant discount toits long-term fair value, because that provides us with a veryimportant margin of safety,” says Mr. Jenkins.funds. But, it became apparent over time, and more recentlywith the credit crisis, that I didn’t want those handcuffs on.”The focus at Harbour Foreign Equity is on buying best-ofbreedbusinesses that have global footprints, and there areCanadian companies that fit the bill. “If one or two of thempresented an opportunity, I wanted to be able to act on it andbuy that company,” he says. “I didn’t want the handcuffs onany longer, and I don’t think our unitholders deserve that.”The companies in Harbour portfolios always have twotailwinds pushing prices higher over time – a growth tailwind,which is the growth in the underlying business, and avaluation tailwind, which is the price-earnings (P/E) multiple(what investors are willing to pay per dollar of earnings).Harbour expects the P/E to expand over time because theypurchase companies at a discount.One reason Harbour felt comfortable launching this fund wasthat the characteristics they look for in a business are the sameglobally. Their style and investment research process appliesto all leading developed markets. When Harbour researchesa company in France, or the U.K., it’s the same way they doin Canada. Mr. Jenkins says, “If you’re going to kick the tireson a company, it takes a little longer, but the process is thesame. Businesses we seek tend to grow at 8%-12% a year, nomatter where they are domiciled. For big globally focusedbusinesses, the opportunity comes from a larger valuationexpansion because that differs from one area to another fora number of reasons.”Harbour Foreign Equity has just undergone a subtle changein its philosophy. Mr. Jenkins says “When we launched thefund we decided to concentrate on developed nations outsideof Canada, so we weren’t overlapping with our CanadianManulife Financial was the company that prompted Mr.Jenkins to add Canadian companies to his portfolio. He says,“Manulife is a company we own in the Harbour Fund. I knewit well; I’d met with management and was involved in theresearch. I had become very excited by the company and itslong-term prospects.”Despite only being added to the fund at the end of 2009,Manulife is now a top 10 holding of the portfolio. Mr. Jenkinssays, “I bought it aggressively because of our high convictionlevel. I think it’s a tremendous long-term opportunity for ourunitholders.”The financial crisis also provided opportunities for Mr.Jenkins to make other changes in his portfolio, allowing himto get more growth for similar valuations. Within the lastyear there have been at least a dozen new positions initiatedand for a concentrated portfolio of only 40 stocks or so, that’ssignificant.But some positions, such as Diageo, Nestlé and Air Liquidehave been in the portfolio since the fund was launched. “Asyou know we’re long-term investors with an average holdingperiod of five years” Mr. Jenkins says. “If the fundamentalshaven’t changed and the valuations aren’t extremely excessive,PAGE 20 • SPRING 2010 PERSPECTIVE AS AT MARCH 31, 2010
Spotlight onStephen Jenkinswe’ll continue to hold the company. We just move it from avery prominent position in the portfolio to a lesser weighting.”“At times, Nestlé has been close to 7% of my portfolio, whenthe valuation was highly compelling; now, the weighting hasbeen reduced to 3%. The company is still growing so thegrowth tailwind is still evident, but the stock is more fairlyvalued today. I now see less in the way of value expansiongoing forward.”are going to find more of them if the world is your oyster.If you are looking globally, there are going to be moreopportunities than there are in a single country.”He thinks that the distaste many Canadian investors havewith global investing stems from changes in currencies. Andit’s played a very big role in the returns of foreign equity fundsto Canadian investors over the past decade as the Canadiandollar has swung from US$0.62 in 2002 to par today.Mr. Jenkins says that one advantage to keeping a stock inthe portfolio is that you’re in a better position to move it toa higher weighting when the price becomes more attractive.And that was certainly the case at the end of 2008 and early in2009 when markets bottomed. All the Harbour funds boughtaggressively in that period and poured more than $1 billioninto the market.One advantage, according to Mr. Jenkins, is the ability to takethe Harbour investment style and philosophy and apply it ina global marketplace. “I’ve always believed is that in terms ofwhat we do – buying these high-quality leading businesses,leaders in their industries, with their global footprints – youHarbour Foreign Equity started currency hedging in 2007.Mr. Jenkins says, “I think one of the most important benefitsthis fund brings to the investment community is the factthat we’ve taken the volatile currency component out of theequation for our unitholders by hedging.“If you believe we are good stock pickers, and can find highqualitycompanies around the world that are going to producean above-average return over time, that’s all you should want– the return from those individual stocks, unaltered by anymovements in currencies.”PAGE 21 • SPRING 2010 PERSPECTIVE AS AT MARCH 31, 2010
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CI Sales TeamNeal KerrSenior Vice-P
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