By Philip van Doorn, MarketWatch
For investors, finding an edge can make all the difference between winning and losing stocks.
A way fund managers do that is by speaking with company executives. At LGM Investments, a subsidiary of the Bank of Montreal that oversees $5.5 billion, managers, analysts and researchers held 932 company meetings, including 202 on-site visits, over the past year.
LGM’s strategy is to select companies whose management teams “have their interests aligned with minority shareholders and that allocate capital very prudently,” said Irina Hunter, co-manager of the $204 million BMO LGM Emerging Markets Equity Fund /zigman2/quotes/201911794/realtime BAEMX -0.71% which was established in December 2008. It has a five-star rating, the highest, from Morningstar.
Visiting companies and analyzing their operations in person can give a money manager a deeper understanding of unique opportunities and risks, said Hunter, who’s based in London.
“Our job is to find quality companies that are dominant with high moats,” she said in an interview July 24. “They generate a lot of cash and allocate capital in a way that allows them to generate high returns. We travel to where the companies are, because it is important for us to understand the opportunities and challenges in the market. It is also important for us to hear the challenges and opportunities from management itself, and get an understanding of the culture.”
We’ll show how well the fund has performed below, along with its top holdings. But first, here are comments from Hunter about how she and her colleagues select companies for investment.
Doing what is right for all shareholders
Hunter said she is most interested in companies with low debt and high cash returns that operate in countries “where consumers are coming from a low economic base — countries such as India, Indonesia and Vietnam.” Companies with good free cash flow can “compound” cash flow in those markets because of growing populations and “the rise of the middle class,” she said.
She then emphasized how important it is for the interest of a company’s management and board of directors to be “aligned with minority shareholders,” while capital is allocated “very prudently.” Hunter said that some large companies that investors might expect to see in an emerging-market fund don’t fit the bill because of family control over voting shares.
The fund invests only in stocks that pay dividends. Buybacks can be a prudent way for management teams to deploy capital, Hunter said.
Mr Price Group
Hunter said Mr Price Group /zigman2/quotes/205747024/delayed ZA:MRP -4.18% /zigman2/quotes/209804675/delayed MRPLY -8.22% , a fashion retailer in South Africa, had increased its sales significantly while doubling its profit margin and “almost quadrupling” its free cash flow over the past 10 years.
An American investor who hears that a retailer is increasing its sales rapidly might shy away from the stock if the company is following the typical growth pattern of building a lot of new stores. A debt-fueled over-expansion might lead to an eventual slowing of same-store sales growth, lower profits and poor stock performance.
But Hunter said Mr Price Group‘s growth came mainly from increased sales and better profit margins within its existing store base.
LGM Investment Management
She met with Mr Price’s management team in February and came away “very impressed” with their “focus on execution and driving profitability out of the existing network — re-negotiating cheaper rents, focusing on having store extensions rather than new stores, using scale to negotiate even better deals with suppliers and working on consolidating distribution centers.”