By Rob Mikalachki, Head of Small-Cap Equities
The time-tested Trimark investment discipline has been around for more than three decades. In this special interview, Rob Mikalachki, head of small cap equities at Invesco Canada and lead manager of Invesco Select Companies Fund and co-manager of Invesco Select Opportunities Fund, provides a candid look at what drives the team's investment decisions, where they're finding opportunities and how the Trimark team works together to navigate through volatility to achieve lasting performance.
The Invesco Select Companies Fund has produced strong long-term performance (top decile of the Morningstar Small Cap Blend category over 5-years and since inception as of 6/30/13) and the Invesco Select Opportunities Fund is off to a good start (outperforming the MSCI World Small Cap Index by over 3%) since its inception in August of 2012. What has driven this performance?
|Total Returns (%)
As of 6/30/13
| Invesco Select Opportunities Fund
Class A Shares at NAV
|MSCI World Small Cap
|Since Inception of 8/3/12
|Invesco Select Companies Fund
Rankings Based on Total Return
Class A Shares at NAV As of 6/30/13
|Vs. Morningstar Small Blend Category
(9 of 548)
(11 of 408)
I believe there are a few cultural elements that have laid the foundation for the performance we're seeing today and hope to see in the future. The first is the common philosophy used by all of the Trimark portfolio managers. Everyone at Trimark speaks the same language, and that really allows us to communicate exceptionally well with one another. Even more important is the spirit of "co-opetition" that exists. What I mean by that is that the Trimark Investments team consists of very competitive people who all endeavor to be the best in their class of asset, but they're very much engaged with one another. They engage each other in debate. They provide different angles on companies that their colleagues might be looking at. When you have 25 people all going the same direction and helping each other out, you arrive at a situation where the sum is greater than its parts. The third thing is simply affording every member of the team the time they need to see their decisions through. From a "nuts-and-bolts" investing standpoint, it should be noted that over the past two years 18 stocks were acquired within our small-cap mandates. The common element among these businesses is their high degree of differentiation. They all had a service, product or methodology that was hard to replicate. Arbitron Inc., a ratings provider for radio stations with cutting edge technology; and Kinetic Concepts, Inc., a global medical leader specializing in innovative wound therapies, are just two examples.
Finding underpriced stocks at the bottom of the market was likely easier in the past than it is today. Where are you finding value now?
In March 2009, almost everything was on sale, so you could really make some "once in-a-career" type of investments. Right now, things have normalized and the market, overall, is more fairly priced. In this type of environment, what you're really relying on is your homework and the work you've done over the past three to five years to identify quality companies that you want to hold over the long term. This is a matter of leveraging not only your own knowledge base, but that of the entire team's and scouring the world to uncover the next one to two great companies to add to the portfolio. Having said that, in these more stable environments, high-quality and resilient businesses tend to be underappreciated by the market. We're focusing on finding those companies with good competitive advantages and pricing power, regardless of the environment over the next three to five years – whether inflation creeps back in, we go through another downturn or things stabilize and go up. Among the small-cap funds I feel Invesco Select Opportunities Fund, our global offering, is where the best opportunities exist. In an environment like today's, where it's not that easy to find great ideas, you want maximum flexibility. This is a time when global investing is even more important than usual, because it gives you the flexibility to search different jurisdictions the world over to find the very best ideas.
We know the Trimark investment style typically excels in periods of volatility, and we've had no shortage of that in the past few years. How do you expect the discipline will do going forward during these volatile times?
Over the years that I've been here, the best times for Trimark have been when the market's volatile. Volatility provides the best opportunities since you get the greatest mispricing of securities in the market. We do our homework ahead of time, so we know which stocks we'd like to own at what price. When you have dislocations and pessimism, opportunities arise where you can buy those stocks. Otherwise we're patient and we wait. I think we're in for volatile times over the next five-plus years, which is perfect for the Trimark discipline.
The average client is bombarded with "crisis" messages from the media, and many have migrated to fixed-income and yield-focused products. Why should investors consider putting money into equities today?
More often than not I believe investors should consider doing the opposite of what their instincts tell them. There's a swath of data that supports that's what gets them their best returns over time. Right now, the soothing, gentle thing to do is to buy gold, long bonds or real estate investment trusts (REITs) because they provide the dividends many investors are looking for. But whether it's six weeks, six months or six years from now, there's the possibility for something to go drastically wrong with that decision because they don't offer the growth potential required to build wealth over the long term. Basically, if you can endure a little bit of pain and a little bit of short-term potential underperformance, you're getting equities now that have the potential to give you a much better risk/reward than things like bonds.
How about investors looking to generate income? Should equities be a meaningful part of their investment strategy?
If I were 65 years old, not particularly affluent and in need of a certain amount of income, I'd be heavily invested in equities today. And I wouldn't necessarily be looking for companies that pay dividend yields. I certainly wouldn't be managing my portfolio strictly around yields. I'd be looking for great companies with resilient franchises trading at attractive prices. To the extent I needed income or cash annually, I would systematically sell a portion of my holdings. That might be painful or you might see that as a risky exercise when you're 65, but 10 years later you're likely to be doing a lot better than your friend across the street who put all his money into REITs or pipelines or long bonds. The bottom line is that it sometimes pays to do the unorthodox thing. Many investors are focused on dividend yields, but they need to realize that it's not the dividend yields that are attractive; it's the sustainable cash flow that a company generates. If you go to these great businesses that have franchises around them, these are typically the companies that generate significant cash flow. If they generate cash, they're going to do one of two things with it. Either they will pay it out as a dividend – that's why you get some companies with good dividend yields that are truly great investments – or, if they have good reinvestment opportunities, they're going to reinvest it to generate even more cash flow.
How does the Trimark team approach to investing benefit investors?
While we all share one philosophy and approach, we're certainly not genetic clones of one another. We have people with very different skill sets and areas of expertise, whether it's based on geography or a particular industry. So, we have a lot of people able to provide very pointed views on any company we're considering. And since we're all reporting very heavily in our long-term performance, if someone can make you and your decision-making better, there's every incentive to seek that person out. The team members all welcome it when somebody comes and asks them their opinion, and they're more than willing to walk into a colleague's office and offer their opinion. In the investment world, that's almost the definition of synergy.