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Time-tested approach takes Trimark to top

Picking small group of well-priced stocks and hanging on to them has helped fund become long-term global-equity leader

Special to The Globe and Mail; Source: Globe HySales

The Trimark Fund has always marched to its own drummer.

Rather than making decisions based on macro-economic views, index weightings or even chasing after the latest hot trend, the fund's management team has consistently stuck to an investment philosophy that sets it apart from many of its peers.

Put simply, it uses an old-fashioned but time-tested approach that buys a relatively small group of companies at attractive prices and then holds them for several years.

And its investors have been well rewarded. The $3.3-billion front-end-load fund, which dates back to September, 1981, earned an average compound annual 14.3 per cent over the 15 years ended Dec. 15, 2001, versus 8.2 per cent for the average global-equity fund and 10.4 per cent for the benchmark MSCI World Index.

That made it the top fund in its category over that time, and one of the top performers across the whole fund universe. It has also been a top-quartile performer over the one-, three-, five- and 10-year periods.

"It's a matter of consistency of approach and the ability to exercise independent thinking and judgement -- and trying to avoid stupid things," says Bill Kanko, 43, the fund's lead manager and senior vice-president of investments at Toronto-based AIM Funds Management Inc.

Mr. Kanko, who took over the helm from founding manager Bob Krembil in the spring of 1999, characteristically gives much of the credit for the fund's long-term performance to Mr. Krembil. However, as a member of the Trimark team between 1985 and 1994, he's thoroughly identified with the fund's approach.

In fact, even though he took a hiatus from Trimark between 1994 and 1999, when he joined an independent fund-management firm, Bluewater Investment Management Ltd., and also worked for Mackenzie Financial Corp., he returned to Trimark, and its parent, AIM, because he felt it was a better cultural fit.

Looking back over the history of the Trimark Fund (and the $6.7-billion back-end load version, Trimark Select Growth Fund, launched in May, 1989), Mr. Kanko notes that, over short periods, it does not track indices or competing funds.

"We pay very little regard to sector or geographic weightings. It's all about finding 40 or so business ideas that we believe are good investments."

Moreover, he maintains that a fund manager who tracks an index will inevitably fall into a trap -- one, he argues, that got many managers in 1999-2000, when they got caught up in the technology and telecommunications mania that swept across global markets and dominated indices.

"Most of my competitors had become indexers, in effect," says Mr. Kanko. "They could not afford to be too far off the indices, and subsequently they went off the cliff."

The numbers speak for themselves. In 1999, Trimark Fund returned 15.5 per cent, a respectable figure but way below the average category return of 28.6 per cent and 18.2 per cent for the MSCI World Index.

Yet in 2000, it returned 12.6 per cent, versus a 5.3-per-cent loss for the average global equity fund and a 9.5-per-cent loss for the index.

Last year, the fund outperformed again when it returned 10.1 per cent, compared to the 12.4-per-cent loss for the peer group average and the 11.5-per-cent loss by the index.

Key to the fund's superior returns is a fundamentals-driven, bottom-up approach.

Mr. Kanko and his team of managers and analysts tries to understand the characteristics and economics of individual companies.

Then they try to develop a view that is different from the consensus, in terms of companies' longer-term earnings, and pay a price that will provide good relative returns.

Take, for example, Dun & Bradstreet Corp., which was bought a little over two years ago. "The company had a chequered history and was changing management," recalls Mr. Kanko. But his team concluded that Dun & Bradstreet had a unique asset in the form of a database of credit and trade information on 60 million businesses around the world.

"That asset was unique in enabling it to become a third-party provider of identification, verification, authorization and credit information in e-commerce," says Mr. Kanko. What's more, the firm had another valuable asset in the form of Moody's Corp., the highly profitable credit-rating agency.

"Other investors were ignoring Dun & Bradstreet. But at $28 [U.S.]a share, we judged that we were getting the Moody's business for free," says Mr. Kanko. Today, with Moody's spun off (and both stocks still within the fund), the combined shares are worth about $55, almost doubling the team's initial investment.

The team's discipline is also illustrated by the absence of Nortel Networks Corp. "People were saying it was a 35-per-cent-a-year growth business and were willing to pay a high multiple," says Mr. Kanko. "But you have sit back and ask yourself, 'Could the business grow at that rate over the long term?' "

He decided otherwise. "You have to question what the market is saying," says Mr. Kanko.

In building their portfolio, Mr. Kanko and his team aim for diversification across and within about 12 key industries. For example, the fund owns a half-dozen financial-services players -- such as The Progressive Corp., an auto insurer, Wells Fargo & Co., and American Express Co. Yet each has different product lines, underlying strategic directions and managements.

"The issue is, does it fit within the portfolio? It's deliberately diversified. You won't find five banks or five steel companies."

The fund also has a 67-per-cent U.S. weighting (about 10 percentage points higher than the index), which can lead to the criticism that it is not a true global product. Yet Mr. Kanko defends that move, largely on the basis that "the fund can go anywhere it wants, but doesn't need to."

Given that the U.S. market is the world's largest and most developed, "it's natural we will find most of our ideas there," he says.

Ultimately, it is performance that counts. So, he argues, it does not matter whether the fund is global or quasi-global. "Our goal is to build wealth over the long term," he shrugs. "If we are competitive with either U.S. or global funds, then we're doing our job."

Given the plaudits from analysts, that view is shared. "Bill Kanko knows the ins and outs of the markets so well," says James Gauthier, senior fund analyst at Toronto-based Corp. "He's following in the footsteps of Bob Krembil and thus far he's done a tremendous job."

Dan Hallett, senior fund analyst at Windsor, Ont.-based Sterling Mutuals Inc., is equally a fan. He praises the fund's low management expense ratio of 1.62 per cent and its consistent performance.

"In a frothy market like 1999, it will not do as well as its peers," says Mr. Hallett. "But as we've seen in the past couple of years since then, it's been fairly consistent. And when you consider the fund returned 10.1 per cent in a difficult year like 2001, that's quite an accomplishment.

"They won't bat 1000. But they will get it right more often than not," Mr. Hallett says.
Trimark Fund
Category: Global equity
Portfolio managers: Bill Kanko, Judith Adams and Tye Bousada
Fund status: Front-end
Total assets: $3.3-billion
Style: Value
Management expense ratio: 1.62%
Globe 5-star ratings: *****
Returns to Dec. 31, 2001
1-year compound annualize return: 10.1%
2-year compound annualize return: 11.4
3-year compound annualize return: 12.7
5-year compound annualize return: 12.1
10-year compound annualize return: 16.5
15-year compound annualize return: 14.3
20-year compound annualize return: 16.5
Telephone: 1-800-874-6275
Top 10 holdings
As at Dec. 31, 2001

Progressive Corp. Ohio        4.55%

Harrahs Entmt Inc             4.11

Moodys Corp                   3.85

American Express Co           3.59

W.W. Grainger Inc             3.32

Canon Inc                     3.21%

Knight Ridder Inc             3.17

Newell Rubbermaid Inc         3.16

Berkshire Hathaway Inc., A    3.14

Sony Corp                     3.02

© 2007 The Globe and Mail. All rights reserved.

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