Saturday, November 18th, 2017

Cundill Value Fund update

I recently had the opportunity to privately talk with Lawrence Chin, co-manager of the Mackenzie Cundill Value Fund.

Lawrence noted that the fund has under performed the group average recently due to its exposure to some energy and materials companies and lack of exposure to large high tech companies, combined with the fact the market has been favouring growth type companies that are relatively more expensive compared to value type companies the fund typically invests in.  Equity markets have demonstrated that they move in cycles, during which investors seem to favour growth or value investment styles over different periods of time and the fund’s present position is particularly good since the historical relationship between these growth and value styles seems to be shifting back towards value.

According to Investopedia, book value per common share is a measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. In simple terms it would be the amount of money that a holder of a common share would get if a company were to liquidate. As deep value investors, the Cundill team uses book value as a measure of how cheap or expensive a company share is. The fund has a price to book ratio of 0.7x when compared to the average global equity fund at 2.2x. This mean that if the companies owned in the fund were liquidated (closed down and assets sold) then the process should yield $1 where the fund holds shares valued at 70 cents.  In other words, the 70 cents would be turned into a dollar.

The Cundill Value Fund is very distinct among global equity funds.  The managers pursue their own ideas and avoid following the crowd.  When comparing funds, I consider the correlation between a fund and the broad market index as well as correlation with other funds. The historical correlation of the Cundill value Fund with the market is 0.6 (correlation based on monthly returns over 41 years to December 31, 2015), indicating it behaves quite differently at important times in market cycles.

Active share measures the differences in holdings between a fund and its index. The higher a fund’s active share number, the more it departs from its index based on the selection of businesses in its portfolio. The Cundill Value Fund has an active share of 98% (active share as of October 31, 2015.), evidence of the willingness of the managers to follow their own reasoning and be different from the rest.

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