Why focusing on first principles matters for global equities

Paul Moroz, award-winning chief investment officer at Mawer, unpacks firm's 'get-rich-slow' portfolio process

Why focusing on first principles matters for global equities

This article was produced in partnership with Manulife Investment Management.

2022 has conferred its fair share of challenges upon market environments, but as inflation, tightening monetary policies and post-COVID fallout continue to impact asset classes, a resilient, long-term investment philosophy is what’s kept global equity funds at Mawer Investment Management buoyant.

“We’ve been hit like the others,” says Paul Moroz, Chief Investment Officer and Portfolio Manager at Mawer, a sub-advisor for Manulife Investment Management. “Our investment philosophy holds strong, however, because of the earnings quality of our companies. We invest in the money makers.”

Along with his CIO and portfolio management responsibilities, Moroz co-manages Manulife Global Equity Class and Manulife Global Equity Private pool.

Picking the winners

Recognized for their ability to consistently identify quality long-term investments, Mawer’s track record is a function of the fundamentals. “We seek reputable companies that create wealth, are run by honest people, and offer a favourable rate,” Moroz says.

The difficulty, he notes, is in stitching these factors together and executing on them. “It begins with first principles. So much of the work we do is about understanding the competitive advantage that’s rooted in the business model and how a prospect company’s working parts, and incremental margins, can create wealth.”

When distilled, these “first principles” yield portfolio resilience that stacks a client’s investment odds in their favour while guarding against the uncontrollables.  

“Capital allocation is crucial,” explains Moroz. “You want to strike a balance because you don’t want to get caught out with too much in crypto, or too many tech investments, to draw on current examples.”

While a majority of investors may profess themselves to be either part of Team Growth or Team Value, Mawer maintains a skillfully diversified portfolio that tempers both styles, allowing them to better absorb shocks from inevitable corrections.

“The factors that really count, whether we’re dealing with value stocks or growth stocks, are wealth creation, the competitive advantage, the quality of the management teams, and the valuation. Over time, this is how we build wealth for our clients,” says Moroz.

The details are in the data

Even amid the turbulence of the 22nd bear market since 1929, Mawer remains focused on bottom-up calls and has not made any material changes to geographic or sector allocation year-to-date.

“We’re mindful of both diversification and making sure portfolios are resilient as a matter of different themes,” says Moroz. “One of the things we understand very well about our portfolios is the sensitivity to the discount rate of each of the stocks, and we’ve rebuilt our internal system to analyze that metric.”

Based on that understanding, he and others on the global equities team can decide to add a stock with a higher duration or lower duration to the mix based on fundamental characteristics, as long as they don’t upset the balance. “With items like that, we engage in a risk management process,” Moroz says. “We pick up and understand different themes and their ripple effect across the portfolio.”

Spotlighting a top holding

Anchoring Manulife Global Equity Class is Marsh McLennan, a global leader in insurance brokering, risk management and consulting2. “Insurance will always be needed,” says Moroz. “And while insurance brokers place risk, they don’t take the balance sheet risk themselves. They are less capital-intensive, which allows them to weather riskier times.”

Moroz points out that although insurance policies are complex, they are well indexed against inflation. “It’s an interesting business model when you think about a potentially recessionary environment. If you have better earnings quality – you’re sure your revenue is going to be around – naturally you’re better off if you don’t have to shoulder as much risk.”

A broad key concern Moroz does raise, however, is the influence the current environment is having on discount rates for global equities.  “A 7% discount rate versus an 8% discount rate, that 1% change is probably a 15, 16, or 17% change in the value of the stock market, which is quite substantial.”

But while interest rates and discount rates are rising, and assets are worth less, a silver lining can still be found.

“Right now, your reinvestment rate is worth more,” Moroz explains. “Something people often forget is that when interest rates go up, and your discount rate goes up, and stock values are down, it means companies can buy back stock at a better price. So, you can reinvest new money into the market at better prices. And if your investment manager is charging you fees, they’re going to be less.”

Synergistic partnerships

With close to 50 years of investment expertise, Mawer Investment Management enjoys a strategic, subadvisory partnership with Manulife Investment Management.  Mawer’s mandate, a “boring” long-term approach to making money, complements the range of investment solutions and styles that Manulife offers.

Despite volatility and prevailing interest rates, Moroz says Mawer will remain steadfast in its process. “We will run through the end of the cycle, whether that’s 2022 or 2023. The question is whether we’ll see a shallow recession or experience a soft landing. Either way we don’t try to predict conditions but instead invest and diversify through them.”

Moroz says one of the biggest challenges for today’s investor will be in combatting the mental stressors that can accompany the current cycle. “It’s about time in the market, not timing the market,” he says. “Your best bet is to hop aboard the get-rich-slow train and ride the journey out.”

Sponsored by Manulife Investment Management, as of August 2022. 

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