Changes bring opportunities

Chris Jenkins is not afraid of change, he embraces it for the opportunities it brings. As portfolio manager for the Global Strategy Rothschild World Companies fund he has made use of these opportunities to propel his fund to the top of the global equity fund rankings, leaving his nearest competitor in the dust.

The Global Strategy Rothschild World Companies fund averaged a 33.1 per cent return over 5 years, a full 6.5 per cent higher than the next highest return among his peers for the period. A 20-year veteran, Chris got into money management pretty early in his career and has managed North American, Australian and Japanese equities, before being given a global mandate with Rothschild Asset Management. Now he is able to pick among the best companies in the world without any arbitrary constraints.

"The only constraint is we can own 80 stocks maximum in the portfolio," he says. "But that’s good discipline, it forces you to rank your ideas and know which ones you want to buy." Chris doesn’t have any problem coming up with new investment ideas, quite the opposite in fact. "We’re constantly looking at new ideas," Chris says, "but only a tiny percentage make it into the fund." For instance, last year Chris and his team spent two months researching the transportation industry before deciding they could not make the returns they wanted. "It can be frustrating," Chris says. "But it also keeps the mind fresh."

Chris uses an investment approach that is uniquely different than that of most of his peers. Rather than deciding which country or region he wants to be invested in, or following the country weighting of a benchmark world index, Chris uses a thematic approach. "We don’t want to be pigeonholed," he says, "or be forced to invest a certain percentage in a certain country."

The underlying themes of the fund are based on the concept of change. "Many people are frightened of change," Chris notes, "and they don’t see the opportunities to make money." Some of these opportunities are good, some are bad, but Chris focuses on companies that are on the leading edge and are genuinely driving change. "It’s a fascinating fund to run," he exclaims. Chris looks 5 to 10 years in the future, a much longer investment horizon than usual. "The themes we invest in will be going on for a long time," he explains, "they are long-term processes." First is the big picture, the environmental approach, which involves opportunities brought on by deregulation and restructuring. The second wave is a new focus on shareholder value for companies outside North America. The third theme is change itself, the new industries that will change the way we live and play and do business.

Every company Chris picks has to pass his "triangle" test. On one side is the business environment the company exists in, the other side is the company’s products and the final side is the company’s strategy and management. "They all have to fit," Chris says. The company’s management must support the product, the product must be right for the marketplace, etc. These parameters define what makes a good company. "Then," Chris adds, "we do our analysis to see if the valuation is right, to see if the good things that I see have been discounted by the market. If not, then I invest." Like all great players, he makes it look easy.

Chris has identified five sectors of the world economy that fit within the framework of what the fund is trying to accomplish:

• Digital Convergence. "The world is moving towards digitalization. We believe this is a large part of the world’s economy and marketplace, and we want to focus on the companies providing the infrastructure. We don’t want to try to guess which dot com will survive. After all, the guys selling picks and shovels during the gold rush always made money."
• Eurodynamics. "This plays into shareholder value coming into Europe. Plus the new currency provides a catalyst for change. Companies that were once national are now regional and in need of critical mass. We anticipate lots of mergers and acquisitions. Add to that the wave of deregulation and you have a very active market place."
• Alternate Power. "The replacement of the internal combustion engine will come, it has to come. We have to reduce emissions, and the energy companies will sell whatever fuel there is, not just gasoline. More companies are coming into the sector now and there is more choice."
• Outsourcing. "This is a very powerful wave going through the industrial and service sectors. Companies can outsource their production to smaller, efficient companies. This has been going on for years, if you think about it, with manufacturers outsourcing the sales job to retailers. This is a fast-growing sector."
• Demographic Change. "All about the baby boomers, the aging population, etc, but in a slightly different way. We’re looking deeper in this sector, not just toy companies. From the obvious plays, like China Telecom (lots of customers) to Sony (PlayStation 2 coming this week), to Sonosite (portable baby ultrasound scanners), also some life science companies (after all this is the decade of biotechnology). However, it is hard to make money in this sector.

Chris likes a number of Canadian stocks for his portfolio. "Ballard Power Systems , Global Thermoelectric and Westport Innovations are leaders in alternative power sources and they definitely fit my long term trend." Chris also likes JDS Uniphase. "We’re just scratching the surface of what we can do with light," he says. "The optical electronics journey is just starting."

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.