One fund manager that has smashed its benchmark over ten years

John Garrett

MA Financial Group

"Long term, culture is enormous in terms of one business doing better than another." Paul Black, WCM Investment Management

Culture counts. And sometimes it’s the most important competitive advantage a business has. And unlike other forms of competitive advantage, it can be almost impossible to replicate.

One fund manager that places a specific focus on culture is US investment firm WCM Investment Management (WCM). And it’s paid dividends. The fund manager has significantly outperformed its benchmark MSCI All-Country index for more than ten years, in fact by more than 5% pa.

"Seemingly small annual return differences, compounded over long periods of time, will result in significant differences in the amount of money at the end of the period. There can be a very large payoff from selecting a manager and a strategy that provide value above the index return over the long run." William Browne

WCM was founded in 1976 and are based in Laguna Beach, California. Kurt Winrich and Paul Black are the two co-CEOs and their firm manages in excess of A$40bn in global equities.

At WCM, they look for good corporate cultures; cultures which are aligned with a business’ competitive advantage. The other key requirement for a portfolio holding is that the business has a competitive advantage that is improving. Or in the parlance of Warren Buffett, ‘the moat is widening’. It’s critical to a business’ longevity and success.

Widening the moat... that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence." Warren Buffett

The good news for Australian investors is they can access this high-quality manager on the ASX via an Australian Listed Investment Company with the code, WQG. And even better, access the WCM portfolio at a discount of more than 15% to the cost of replicating the portfolio by buying the underlying shares.

WCM’s portfolio is very well diversified. Far more so than the ASX200 index. While financial and resource stocks represent over 50% of the ASX200, they represent c20% of WCM’s portfolio. In contrast, Technology and Healthcare represent c40% of the WCM portfolio versus c10% for the ASX200. This reflects WCM’s desire to find businesses in sectors with tailwinds. Businesses for example, that benefit from the long-lasting global trends such as e-commerce, the emerging global middle-class and ageing populations.

“One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds.” Warren Buffett

The other key attribute of the WCM process is a key focus on downside protection. Since inception in 2008 the WCM portfolio has captured, on average, just 59% of the downside of its benchmark index. In other words, historically when the index has fallen, WCM’s portfolio has declined by c40% less. In the long term, outperformance comes from beating the market in the bad times.

"When things get really rocky, our companies and our portfolio tend to hold up much better. So people don't lose as much money. That to us, is the name of the game. The less you lose in difficult times, the less you have to make in very, very good times. If you can lose less, over the long run you're going to do really well." Paul Black, WCM Investment Management

A comparison with WCM’s global equity fund peers demonstrates the management team’s ability to think and act differently (low correlation with peers), manage risk (low relative maximum drawdowns) and outperform over time (high relative outperformance). Following the latest weekly NTA update, 26 July 2019, WQG trades at a 16% discount to its NTA backing per share, an incredible mispricing for a global fund manager with a differentiated approach to investing and a track record the envy of its peers.

Having spent over two decades studying the world’s greatest investment managers and successful global companies, I’ve realised the importance of both culture and sustainable competitive advantages to investment returns. I’ve found few investment managers of the calibre of WCM.

Adding WQG to your portfolio of investments provides the opportunity to own a portfolio of high-quality global businesses, diversify exposure towards growing industries and reduce the ‘home-bias’ prevalent in most Australian’s equity portfolios. Over time, I’d expect the portfolio can continue to outperform, with the additional benefit, of narrowing the current discount to NTA as the market comes to appreciate and seek access to the investing acumen of its manager.

Disclaimer: A Moelis Australia Asset Management managed fund owns shares in WQG.

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John  Garrett
Managing Director
MA Financial Group

John runs MA Financial Group's listed equities funds business. He has over 20 years’ experience at both UBS and Moelis advising institution investors and hedge funds. John is the author of

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