DWS Global Thematic Fund
global > Multi-Cap > Growth
Aug 08, 2008
Feb 21, 2013
Q: How would you describe your investment philosophy?
A : The cornerstone of our philosophy is that we look for situations with enormous structural tailwinds, but we don’t try to time them. We look for a high degree of probability and for situations that will materialize over the next two to five years. Every investment we make targets at least 50% to 100% growth. We don’t bat for an upside of 20%, and we are happy to wait for the expected outcome, because our fund is about wealth creation, not about quarterly performance and benchmarking.
So, if our research indicates that a situation will occur, we are less concerned when that will happen. In other words, before we invest, we know that the question is not if, but when. We have 12 sub-strategies based on the “not if, but when” notion. One such strategy is looking for existing disequilibria, where something is no longer sustainable and will change.
Q: Does that mean that you believe that the macro-economic dynamics or the industry environment would eventually overwhelm and affect any company?
A : Actually, it could be anything, not the industry or the macro environment. I think that the industry and the macro environment imply a very conventional asset allocation approach. For us, it is the set of circumstances that jointly determine a future outcome.
Q: Would you describe the 12 specific strategies?
A : The first one is Disequilibria, which looks at instability and disruptiveness. The second strategy is Distressed Company, which is a rather straightforward approach for investing in distressed companies, which can either disappear or become more expensive. The Global Agribusiness is the third theme. The fourth one, Asymmetric Negotiators, is about companies that own the assets or resources they sell and don’t have to negotiate on the price.
The next strategy is Talent & Ingenuity, which is about companies with high intellectual protocol, high growth margin, and high patent application. The Supply Chain Dominance theme looks for companies in the emerging markets that take over margin and market share from developed market companies. That’s been happening over the past seven years, and is going to continue.
The Security strategy refers to the physical, biological, data, and wealth preservation security. These are four drivers of the “not if, but when” notion, because budgets and security are going through the roof over the next five years and margins are holding up nicely. The Market Hedge theme represents assets that help us to protect the portfolio in times of market correction. Under Public/Private Partnerships, we invest in natural monopolies, where the government determines the rate of return, and where there is limited or no downside to stock prices, combined with a signifi cant upside.
The New Annuities theme invests in companies with visible cash fl ow yields. In the regime Change, we look for investment assets that are subject to change once the regime changes. Under the Large Units theme, we look for under installed and under penetration situations.
The common factor for all the themes is the basic premise of “not if, but when.” That’s how we look at the world. We clearly view the world as one place, not as separate countries or regions.
Q: Would you explain your research process from the point of idea generation to making the investment?
A : My research process is called “Collecting and Connecting.” I travel the world on an ongoing basis and meet about 600 different managements every year. I maintain a rolodex of over 2,000 names globally, which allows me to talk to people from the government, the private sector, generalists, teachers, professors, economists, legislators and, of course, CEOs and CFOs.
As you collect information, once in a while you can clearly see something with the basic hallmark of “not if but when.” It may be something that is mispriced on a three-year basis for very structured reasons, or something that is just not sustainable.
This is the type of data that we try to validate. We discuss it in the team, write white papers, and once we feel sure about it, we start considering how to quantitatively screen for stocks that apply to that framework. Often we value stocks and we do models, just as every other asset manager does, before we start the portfolio construction.
The research process is a journey of collecting and connecting, where you never know where the information impulse comes from. Sitting at your desk waiting for the brokers to call you, is a recipe for doing everything late, for doing what everyone has already done. It’s a good idea to occasionally disassociate from Wall Street, to take fi ve steps back, and to decide not to be polluted by the daily gossip and chatter. I want to determine my own research mission and I expect the same from my analysts.
Q: Could you give us some historic examples that illustrate that approach?
A : About three years ago we researched the global agribusiness theme. We traveled the world from Brazil to the U.S., Europe, the Middle East, and Asia, to investigate what would happen if world diets, especially among the poorer people, change and become higher valued added. What would be the impact on the price of grains?
After five months of research, it became clear to us that this is one of the “not if, but when” situations. Food consumption would increase, while there were signifi cant bottlenecks in logistics, transportation, seeds, fertilizers, irrigation, and the entire supply chain. That was more than three years ago, and today the food security, sovereignty, and crisis are everywhere in the press.
In another example, we look at one of the largest Indian Banks. This is a company with market cap of $20 billion, but its market share has reached almost 30% of the private credit sector in a country with over a billion people. That’s very healthy growth that makes the $20 billion market cap look ridiculously low. It is not if, but when this company will reach market cap of about $100 billion.
Within the agribusiness theme, we have invested in the world’s largest shipping container line. Our research indicated that it’s almost impossible to get new permits to build container ports in the world. At the same time, the company has one of the fi nest, largest, most connected networks for container terminals. Its assets are under-monetized assets because of the currently compressed metrics on ROE and bottom-line growth. That makes the stock very interesting.
Because we believe in the upsurge of trade, we expect the company to have signifi cant pricing power over the next two or three years. These assets date back 30 or 50 years and whoever owns them today, just has to click on the switch and money will fl ow. This expectation is fueled by the research that we’ve done on trade fl ows, both agricultural and commodities, between developed and emerging markets.
Q: What do you do when you forecast or expectations do not work out? How long would you wait before you reverse your decision?
A : I shamelessly change my mind. I believe that ability is very important and that’s why this portfolio only has one portfolio manager. We don’t need committees or people who need to stick to their opinions to feel respected. When the information changes I change my mind. When the information turns out to be wrong, we act accordingly.
But because of all the research behind the “not if, but when” scenarios, there is a lot of validation. We have thoroughly considered it to make sure that we’re not wrong. Much like navigators in the seas, we check our landmarks as frequently as possible to see whether we are on track. The market doesn’t have a compass and there’s no clear path. So, the only thing we can see is whether the signals we get are still the signals we expect, but we cannot know how they would pop up.
Q: How do you approach the portfolio construction process? How many holdings do you have?
A : In this team, the portfolio construction is a hard science. You will never hear the discussion, “let’s add 15 basis points” or “let’s go and buy X% of this.” Everything we buy and sell is the finetuned result of our risk-adjusted upside. The holdings vary between 90 and 120. At any given day, the portfolio reflects the best opportunity, which is set on a statistical basis and using non-normal distributions.
The portfolio construction is a science and I spend about half of my time on risk management. Our turnover is reasonably high because we constantly recharge the asymmetry of individual positions. It doesn’t mean we buy and sell new names, but that the weight change is commensurate with the expected exogenous risk-adjusted return. The exogenous factor means that we don’t make a bet on factors such as DRAM, Crude Oil, VIX, EMBI, FX trade terms, soft commodities and hard commodities. We don’t feel that it is useful to bet money on these factors.
As the specific securities are exposed to those factors, which have reached statistical exhaustion of two to three standard deviations, the individual valuations will get credited or penalized depending on the factors. In other words, we have a built-in mean reversion engine within the portfolio construction, and we will never have a portfolio that’s running on one exogenous factor.
Also, I’m a big believer in diversification. I think that the concentrated portfolios result in too much idiosyncratic risk that you cannot measure. There’s always the risk of unethical corporate management or some unforeseen risks, so diversification is very important.
Q: Do you have certain limits for your holdings?
A : Typically, we don’t have positions of more than 3%, but it is not a rule that is carved in stone. It’s just very unlikely for a position to provide the upside that justifies, on a risk-adjusted basis, 3% percent of the capital, compared to all the other opportunities. It is a budgeting exercise, but is more complicated because it’s an exponential function, not a linear one. It has to be discounted back to the risk adjusted upside. The big positions will be in stocks that we expect to go up 70% to 100%, and we will buy more as they go down, if we don’t find better opportunities somewhere else.
Q: Since you are a global investor, how do you handle the currency volatility?
A : We are very diversified in terms of currencies as well. We don’t really have a directional currency, and we don’t take views on currencies. I believe that the currency markets are efficient and that has been proven for a long time. The performance depends more on the specific investments than on the currencies fluctuations. For example, if you have invested in exporters, the currency problems may be very helpful.
Overall, our guiding principle is to walk away if we perceive risks that we don’t understand. The world is a big enough place; we invest in more than 55 countries; and we don’t need to take risks that we don’t understand. All the 12 strategies are strategies that we fully understand and where we feel that we have an ultimate edge. We don’t have to dabble around, figuring out the situation with the regional banks or the utilities in Europe.
When you run global money, I believe that it’s more important to understand what you own than what you don’t own. The narrower you get into international, regional, or a sector, the more artificial the mandate becomes. But if you have the world as your opportunity set, it’s much more important to understand what you own.