Mawer PM is foreign equity manager of the year

By Melissa Shin | November 27, 2013 | Last updated on November 17, 2023
5 min read

Paul Moroz has scored a hat trick.

It’s the third year in a row that Mawer Investment Management’s deputy CIO has won a Morningstar Canadian Investment Award: in 2011 and 2012, he was named best Global Small/Mid Cap Equity Fund. And this year, he’s the Foreign Equity Fund Manager of the Year. His firm also won the Analyst’s Choice award, and scooped up seven Canadian Investment Awards.

Last time I spoke to Moroz was 2011, prior to his first win. A few things have changed since: Mawer launched a global balanced fund in July 2013, which is put together on a stock-by-stock basis, rather than according to geographic allocations. The firm also opened a Singapore research office this past summer so it could have on-the-ground access to Asian companies.

But aside from those developments, Moroz still has the same philosophy: the more snooze-worthy his holdings, the better. “We have some tremendously boring companies,” he says. He looks for names that earn high return on capital and produce predictable returns.

Read: Mawer managers in for the long haul

And he knows what he won’t invest in. “One of the worst businesses is the used car business,” he says. “It has very high capital requirements. All the money you’re making goes back into the company in order to grow,” because to buy the next car, you’ve got to use the proceeds from the last car you sold.

“Compare that to an asset-light model, like the wealth management industry,” he says. “You could take on another client without spending any capital. Not only do you grow, you get to keep the cash flow and earnings.”

Read: ‘Top Fund Manager’ shares secrets

Before accepting his award last night, Moroz shared his stock picks.

In 2011, we talked about Retail Food Group, which is a franchisor that’s like the Australian Tim Hortons. How’s it doing?

We still hold it. In 2010, it was $2.50 a share, and now it’s nearing $4.50 a share. It’s continued to acquire brands: it bought Esquires, a coffee chain, and Crust Gourmet Pizza. And it’s very asset light. They’re not spending tons on refurbishing. So they’ve been able to pay dividends. We’re still looking at a 4.5% yield.

Read: Tim Hortons adds dark roast, heats up competition

In 2011, the yield was 6%. What’s changed?

The entire stock market’s dividend yield has fallen. QE has lowered bond yields, so bond substitutes [such as dividend stocks] have seen good price appreciation. The absolute payout has increased over time, but the percentage yield is lower because it hasn’t kept up with stock price increases.

Read: Go global for dividend growth

RFG’s stock price has also risen because of the dynamics of the Australian market, which are tied to China. The Chinese have lowered their GDP target and shifted emphasis to the domestic economy. That’s put pressure on China-related stocks – iron ore, commodities. If you’re getting lousy performance there, [you may buy] RFG because it isn’t related to the Chinese effect.

What else has changed with RFG?

The Australian retail environment has been difficult. They have a two-speed economy. RFG used to have most of its outlets in malls, but they’ve shifted some stores outside because of weaker traffic metrics and the pressure of rents.

Same-store sales have been annuity-like. They haven’t been growing too much, but RFG created a program to put more emphasis on reinvigorating all brands’ sales and marketing. That’s started to bear fruit in terms of performance of existing brands.

We have pared back the weight of RFG. We haven’t outright sold the stock, because we think we can get close to 10% over time. We’d sell if valuations or risk changed. RFG has traditionally raised money to make acquisitions, keeping debt and equity balanced out. If they were to do a big acquisition and the financial leverage dynamics changed, the risk of the investment wouldn’t make sense.

Read: Portfolio manager unfazed by closing of Sears flagship

Even if macroeconomic factors changed (e.g., tapering), it doesn’t change our thesis.

[RFG levies] what’s like a tax on people eating coffee and donuts, so it’ll be around for a long time.

What else do you own?

Out of Germany, we own BMW. The car industry is tough. But we have a luxury brand that [levies] a tax on the segment of the population that wants to align itself with that kind of product.

BMW exports a fair amount into China, which is a pro in terms of getting some back-door exposure into that economy. But that can turn around on you if China slows. That’s true for the entire German economy.

We focus less on Canada because of the narrowness of the market. But we owned Montreal-based Paladin Labs, a specialty pharma situation. Our choice to buy was completely about the business model and entrepreneur, and had nothing to do with where the company was based. Most pharma companies do a lot of R&D. That’s costly, and some drugs don’t work. But Paladin does sales and distribution; it licences a drug and distributes it across Canada. It’s asset light and has done a tremendous job compounding capital on a risk-adjusted basis. In 2011, the CEO was in a bike accident, which prompted them to sell the business. Earlier this month, they announced a deal with U.S.-based Endo, which acquired the stock at a 20% premium.

Read: Investing in biotech—It’s a science

In Africa, we have a small investment in South Africa-based Litha, a public company that has the same specialty pharma model as Paladin. They have vaccine, drug distribution and medical device businesses. Paladin made an investment in Litha, which turned us on to the idea of buying. South Africa has its own risks, and the rand is struggling. If the U.S. economy and interest rates become stronger, we’ll be mindful of that because we could have more depreciation of the rand.

And you’ve told me you don’t hedge currencies.

We’re still of that mindset. We’re cognizant of the risks associated with a given currency, and we diversify. Over time it washes out and we have no expenses associated with hedging.

What are your country risk controls for the global equity funds?

For global small cap, we have no limit. We monitor our country exposure, but we don’t have a risk control. For our global equity, which is all-cap, we have some risk controls around country because we’re getting into broader names. We limit each country other than the U.S. to 25% of the portfolio; U.S. at no more than 75%; and emerging markets are limited at 20%.

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Melissa Shin

Melissa is the editorial director of and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at You may also call or text 416-847-8038 to provide a confidential tip.