Investing 101

Mackenzie Cundill Value Fund
Consistent growth for 37 years

An investment solution that will let you sleep at night

In 1974 Peter Cundill was 37 and looking for chance to put his value-investing philosophy to work. An opportunity fell his way when the Vancouver-based All Canadian Venture Fund came up for sale after investors started dumping their shares. He purchased the fund and two years later renamed it the Cundill Value Fund. One of his first tasks was to write to his investors explaining his deep value strategy – something that he would adhere to over the next 37 years. “The essential concept,” wrote Cundill “is to buy undervalued, unrecognized, neglected, out of fashion or misunderstood situations where inherent value, margin of safety, and the possibility of sharply changing conditions created new and favourable investment opportunities.” 

Peter Cundill’s stock-selection strategy would prove to be remarkably successful, with the Cundill Value Fund returning 13.8% annually since inception with only five down years.1While investors might wonder if the Value Fund can continue to post strong returns, the results speak for themselves with the fund winning the prestigious Lipper Fund Award two years a row, including in 2011 as the leading global equity fund over the last 10 years. It is also perennially ranked at the top of its peer group, carries a five star rating and with $5.9 billion in assets, it is one of the largest mutual funds in its category in Canada. (Click here to learn more about Mackenzie Cundill Funds.)

Cundill Fund managers search for undervalued stocks

Cundill anchored the Value Fund to an investing strategy set out in the 1930s by New York financier Benjamin Graham (the father of value investing), who believed investors should seek what he termed “a margin of safety” by only buying shares in companies trading at a steep discount to their net asset value.

Graham also believed investors needed to find a trigger or catalyst in the company, such as a management change that could send the shares higher. To be a successful investor for nearly four decades, Cundill, who passed away earlier this year, also had to be patient and stay true to value-investing – something the Cundill investment team strives for today. “After all these years it still comes down to price when we do our analysis,” says Cundill Value Fund Co-Manager Andrew Massie. “When we see cheap value stocks we’re going to try to buy them.”
The Value Fund is concentrated, generally with 25 to 30 equity positions and holds US corporate giants like Microsoft and Dell all the way down to HRT Participacoes em Petroleo SA, a small Brazilian oil explorer Massie recently picked up. Massie is free to search the globe for opportunities, and has investments in more than 10 counties. This go-anywhere, buy-any-company strategy has resulted in a broadly diversified portfolio, with Chesapeake Energy Corp. as the largest holding in the fund. 

Value investors buy when others are selling

Value investors are contrarians, often buying shares that others are dumping. That’s why in early 2009 when stocks sold-off in a steep correction, the Cundill portfolio managers started buying US blue chips and then held as the market rallied.

Now Massie, who is also Senior Vice-President, Investment Management and Co-Team Lead at Cundill Investments, is looking to Europe where recession and the sovereign debt crisis have depressed stock prices. “We have a big file on all sorts of lovely names trading at around 75 cents on the dollar,” says Massie. “If we can get them for 65 cents, you’ll see our European weight go up.”

Cundill portfolio managers also have to move quickly when events like the Japanese earthquake trigger a market selloff. In this case, they immediately analyzed the Value Fund’s Japanese holdings to ensure their original investment strategy was still intact. They then added to their positions in Kirin Holdings Co., a brewing company and Honda Motor Co. Then they drilled deeper looking for more buying opportunities.

How deep-value analysis pays off

Honda is an example of how Cundill’s emphasis on research pays off.  Originally Massie had been analyzing Toyota Motor Corp. after its shares fell in 2010 when it recalled millions of vehicles. At the same time he discovered that shares in Toyota’s arch rival Honda had fallen in tandem, even though it had not been caught up in the recall debacle. They also discovered that Honda’s motorcycle division was doing a brisk trade in emerging markets, something Toyota didn’t have. “Honda’s stock price was trading at a significant discount and it is a great business,” said Massie. “We’re quite excited about the whole story.”

The Cundill investment team also looks at corporate restructuring as a way to unlock value. A case in point is TNT NV, one of Europe’s largest couriers (The Value Fund already holds FedEx). TNT effectively has two divisions – mail and parcels, a split that will be formalized this year – and is likely to put the parcel side up for sale, which should send the stock higher as the cash flows to the bottom line.  FedEx could also benefit if it buys the company. “TNT has airport facilities, and landing spots across Europe,” adds Massie. “Those assets are worth a lot to somebody looking to grow there.”

As a value investor Massie doesn’t invest in sectors and instead looks for specific investments. For example, BP was acquired when its shares plummeted during the Gulf oil spill and ConocoPhillips was added when management started selling assets.  Chesapeake Energy, which is the fund’s largest holding, grew to that size because in addition to the common shares it already owned, Cundill was able to participate in a “bought deal” offering of convertible preferred shares yielding 5.75%. “We’re not betting on the commodity in these energy stocks,” says Massie. “There is a story, theme and catalyst behind each one.”

And as the Value Fund nears it fourth decade, finding a story, a theme and a catalyst that can unlock value still anchors the Cundill investment strategy and remains true to the letter Peter Cundill wrote to his investors 37 years ago.

1: Mackenzie Cundill Value Fund Series A