The $1.5-billion Capital International Global Equity Fund, for which Carl Kawaja is one of three managers who operate independently of each other, holds a very high number of stocks. Almost 200, in fact.
Investors might well think that a fund that holds so many names, and with multiple managers, would be hard pressed to do better than an index fund or closet indexer.
Yet this fund’s research-intensive approach has produced impressive results. The fund won top honours in its category at the Morningstar Canadian Investment Awards in 2012.
“Sometimes people say, ‘Gosh, you own a lot of everything, so how do you manage to do better than the benchmark?'” says Kawaja. “I think the answer to that — and why we own a lot of everything — is that the portfolio managers can express the courage of their convictions and we think that produces the best results.”
During Kawaja’s decade on the fund, Capital International Global Equity
Fund has a 10-year annualized return of 6.4%, compared with the median return of 4.4% among funds in the global equity category, as of Feb. 28. Over the three-year period, the fund has a 9.9%% return versus 6.9% for the category median.
Kawaja, who is based in San Francisco, is a director of Los Angeles-based Capital International Inc., a privately owned firm, and Capital International Asset Management (Canada). A trio of portfolio managers — Kawaja, Dina Perry and Galen Hoskin — contribute to the fund and are responsible for approximately 50 stocks each. As well, a team of up to 38 analysts is actively responsible for about a quarter of the assets.
The broadly diversified fund is consciously constructed to meld a variety of expertise and styles among the managers and offers them a “tremendous amount of flexibility.” For example, Kawaja might have a very large position in Japan, based on investment opportunities, but Hoskin might be very concentrated in the opposite direction. “So the decisions of one person can offset the decisions of another,” says Kawaja.
The managers consider themselves generalists with different expertise and interests. For example, Kawaja’s experience and interest includes consumer products, technology and health care, among others. Perry brings strong macroeconomic views and expertise in cyclical companies. Hoskin draws on hands-on experience in Hong Kong-based companies and in emerging markets. The analysts are generally sector specialists, focusing on about three industries each.
“I think the strength of our system is getting a million little things right every year,” says Kawaja. Some firms may say they have a way of looking at the discount model, or have a value or growth model for identifying undervalued situations. “We don’t have any rules like that that we apply across the board.”
Extensive, hands-on research is considered essential. For example, “every 18 months, I fly from here to the moon and back,” says Kawaja. Well, not quite that far, though Kawaja estimates that he travels up to 150,000 miles a year. “It’s a blessing, honestly, that we get to go and visit these companies,” he says.
The firm’s compensation system, based on performance rather than asset size, promotes results and long tenure. A “very significant” portion of a manager’s compensation is based on how they perform on an eight-year basis. “A lot of people say they’re long term,” says Kawaja, “but I feel like we put our money where our mouth is.”
In pursuing the best interests of fund investors, Kawaja tends to favour companies where he feels the issues “are clear.” If there are multiple issues to consider, and “there’s just too much to think about, it kind of makes my head hurt,” says Kawaja, “so I generally like to avoid those.” Some of those issues might include fundamental changes, a new CEO, litigation issues, weak sales in Asia, among many others.
Instead, Kawaja likes to focus on companies with a new product where the earnings “may go up a ton” and the stock will probably do very well. So the research is focused on determining the potential of the product. “So, much as other people, I like good businesses with great prospects.”
The overall philosophy is to invest in predominantly large-cap companies, typically global companies, which have different opportunity sets.
Kawaja, 48, holds a bachelor’s degree in history from Brown University in Rhode Island from which he graduated in 1986. One year after graduation, he moved from New York to Canada as an equity analyst at Lévesque Beaubien Inc. in Montreal for two years.
In 1989, he returned to the U.S. to pursue further studies, graduating with an MBA from Columbia Business School in 1991, the year he joined Capital. Previously, Kawaja was a security analyst for Gabelli & Co. in New York.
Kawaja believes that market challenges, such as those in Europe, create opportunities to invest in great companies that have become undervalued. “There will still be banks in Europe five years from now,” says Kawaja. “People are still going to buy eggs and eat breakfast and have a drink at night. And when people get a little too concerned or panicked in some of those markets, we’ve tried to step in and take advantage.”