ASTON/Pictet International – A Top-Performing Non-U.S. Core/Blend Fund by Robert Huebscher
The ASTON/Pictet International Fund builds a diversified portfolio of companies based outside of the U.S. through bottom up fundamental analysis. The focus is on growth in cash flow, and value creation with the aim of buying stocks at a price below a conservative estimate of intrinsic value.
As of June 30, 2016 the fund had an annualized return of -2.74%, which is 167 basis points ahead of its benchmark, the MSCI EAFE index, and 112 basis points ahead of the foreign large blend peer-group average. Year-to-date, as at 7/31/2016, the fund return has been 3.43%, 301 basis points ahead of the MSCI EAFE index and 236 basis points ahead of the foreign large-blend peer group average.
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Benjamin Beneche is a senior investment manager at Pictet Asset Management, and has been a co-portfolio manager of the Fund since its April 2014 inception. He joined the firm in 2008 and is in the EAFE Equities team with a specific focus on Japanese Equities. Ben began his career as a graduate within Pictet Asset Management Equities then as a junior investment manager on the Global Equities fund with an emphasis on the energy sector.
ASTON/Pictet International Fund
I spoke with Ben on September 1.
You are a senior investment manager for the ASTON/Pictet International Fund (APCTX), which was started in April 2014. What is the mandate of your fund?
The mandate of the fund, in its simplest form, is to invest in 70 to 90 companies, primarily listed in developed markets outside of the United States, with the aim of outperforming the broader equity indices over the medium-to-long term, over the course of a market cycle.
Although macroeconomic factors can clearly impact the fundamentals of the businesses that we own, we believe it’s pretty difficult to forecast broader economic trends. We focus nearly all of our energy identifying the best individual investment opportunities. As a result of that approach, regional, sector or market-cap exposures are very much a byproduct of where we see value at any given point in time. Another byproduct of that approach is quite a high divergence from the benchmark. Our active share stands at around 87%. The turnover of new portfolio positions, in terms of new names, is around 25% or a four-year average holding period.
That last point is very important. It reflects our view that day-to-day market movements and gyrations have very little bearing on the intrinsic value of the businesses in which we invest. Although I don’t particularly like the classification, the approach that we have typically puts us in a “core” or “GARP” peer group. Those classifications tend to be backward-looking, consensus-based approaches to value and growth; instead, we have more of a modern perspective on value investing. We look for businesses that can create value and deliver sustainable and growing cash returns to shareholders over the longer term.
The fund uses bottom-up fundamental analysis. What is the process for determining the intrinsic value of the companies you own?
Our first step is always to understand the business model entirely: how a company generates revenues; how those revenues can grow predictably over the long-term; what’s the cost base and the operating leverage within the business; do they have a sustainable competitive advantage; do we trust the management who is in place?
Those are just some of the questions that we look to answer to determine if a business can create value, or stated otherwise, if it can deliver high returns on capital over time. Only once those questions are answered do we look into determining the intrinsic value of the business from a quantitative perspective. Although we don’t believe that there’s a panacea, when it comes to business valuation, our approach has one very significant defining feature – a clear focus on cash generation rather than earnings.
There are two main reasons we focus on cash flow. Cash is hard to manipulate from an accounting perspective, and secondly, it focuses our minds more acutely on any investment decisions made by management on working capital. Both of those things are very important in the day-to-day management of the economics of the business, and tend to be overlooked because of the primacy of the income statement in a lot of the analysis we see from the sell side, and more broadly as well.
There are various ways to distill that cash flow. Our approach is to think of what we call a normalized free-cash flow. That’s the amount of the cash that can be generated in the normal state of affairs, adjusting for cyclicality and any other temporary factors. On that we’re going to require a real cash-on-cash return in the range of 5%-10%. That depends on the quality of the business and the long-term growth rate of the business. It’s not a perfect science. There’s no magic formula when it comes to investing. But our approach does a good job of squaring the difference between attempting to forecast the future, which is inherently quite difficult to predict, and not ignoring the future prospects of the business.
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