I like to hold 20 companies in the fund at least, and 25 at most. Last year and 2000 showed that you need to stay on top of where companies actually sell products and make profits. We can do that by having a focused portfolio and low turnover of new investment ideas.
I share the bullishness on Asia and infrastructure, and I have for over a decade, but I don't share the bullishness on the prices I have to pay in India and China right now.
Johnson Matthey is a play on higher emission standards in India and China through its platinum-group metals, which are used in catalytic converters.
I get wary when a chief financial officer retires early. CFO changes are often ignored, yet they are the capital controllers. There's a risk that the company's been avoiding new investment to increase profits in the short run. And I don't like seeing management cutting research when business is bad.
We watch for rising capital intensity-capital expenditure that's growing much faster than sales. It can signal a deterioration long before a company's sales and margins turn down. In essence, business is being bought rather than being earned. Some companies focus too much on internal returns and are too profitable, inviting competitors to enter. Investors feel comforted by high returns on equity, but it usually suggests a management team that lacks client focus and is too short-term.
Rockwell Collins has done well for the fund. So have Erste Bank of Austria, metal powder producer Höganäs of Sweden, Adidas AG, toolmaker Makita of Japan, graphics software maker Adobe Systems, Brazilian educator Estacio and Swedish industrial equipment maker Atlas Copco. Each one's a global leader and most were severely beaten down in 2008, before we invested. They all offer cyclicality or exposure to emerging markets or environmental themes.
Hamamatsu Photonics of Japan has been a disappointment, but our research suggests it's just a cyclical downturn in earnings. Going by capital expenditures, acknowledgments in academic journals and their work on the CERN collider and the Hubble telescope, this company's technologies are world class. In many products, they have no competitors.
UPS held its share price quite well, but we were disappointed by the increasing competition from government-sponsored postal offices offering huge discounts on parcel traffic to fill unused capacity after the collapse in first-class mail. We sold it.
Photograph by Liam Sharp
© 2007 The Globe and Mail. All rights reserved.
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