Manager Insight

Research tool evokes Moneyball of baseball fame.
By Michael Ryval | 11/05/17

Time-tested methodologies have long been a staple at Mawer Investment Management Ltd., enabling the Calgary-based company to earn numerous awards. But changing times and advances in technology led Mawer to establish its research lab in early 2015 to enhance the stock-picking process in managing $40 billion in assets.

About the Author
Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

Take, for instance, the Mawer tool dubbed Moneyball, evoking the by-the-numbers approach of Billy Beane, general manager of baseball's Oakland As. Beane's use of statistical analysis to turn around the losing American League team was first popularized in Moneyball the book, by Michael Lewis, and subsequently the movie of the same name, starring Brad Pitt.

In analyzing its fund holdings, the Mawer team breaks the investment process into three steps, says Justin Anderson, an equity analyst on the four-person research-lab team who joined Mawer in 2014.

First, they monitor the screening process to determine if it is adding value. The second step involves checking the due-diligence process, which includes discounted-cash-flow analysis, among other tools. Finally, after a stock is first purchased, they check to see how the stock performs in subsequent trading activity.

"Moneyball (at Mawer) is all about assessing each of these three buckets -- and statistically testing where the alpha is being generated," says Anderson, a 10-year industry veteran who has several university degrees including an master's in aeronautical engineering from MIT.

For instance, in checking the trading bucket, the research team aggregates all the shares they bought into a mock portfolio, and put all the shares they sold into a second hypothetical portfolio. Then they statistically test how the two portfolios performed, to determine if their trading has added value.

One example of an individual acquisition is  Suncor Energy Inc. (SU), held in the $2.7-billion Mawer Canadian Equity. It was acquired instead of another energy company and consequently contributed more to performance than the stock that wasn't picked. "But the main question is, if we take all the trades -- and not just one -- does the buy portfolio outperform the sell portfolio? One of the challenges of investing is that you can never know if an individual stock was a good move," says Anderson. "To use a poker analogy, you can have a good hand and still lose. Although it doesn't mean you made the wrong decision. But the only way to understand these processes is to look at them on a statistical level. And the evidence points increasingly to the due-diligence bucket."

The creation of the research lab was motivated by an unlikely source in the form of Ed Thorp, a California-based retired math professor turned blackjack card-counter and roulette player who kept reinventing himself to stay one step ahead of the game (and in 1966 authored Beat the Dealer). Thorp eventually gave it up and became an equity-arbitrage player. "He was always looking for the next opportunity. As soon as the market got too efficient in one area, he moved on to the next area. He was always looking for that edge," says Anderson.

First, to use the poker analogy, says Anderson, money managers want to play "at the right table" to find good opportunities. "You don't want to sit with a bunch of sharks but with weaker players. Second, you want to play a good game -- by having a good process and a disciplined strategy."

Anderson adds that the strategy is still very simple. "Look for attractive businesses run by good managers and buy the stocks at reasonable prices. What is changing is how we go about finding those companies."

An initiative given the name Productivity is another device in the research lab's tool kit. With advances in so-called machine learning, the team has analyzed recommendations from 16,000 sell-side analysts around the world. Tests of their successes, and failures, have determined that only 4%, or roughly 480 analysts, have statistically outperformed randomness. "It's all about getting an edge. So we focus more of our attention on talking to these top (stock) pickers," says Anderson. "This is our way of getting greater exposure to better ideas."

A case in point is PrairieSky Royalty Ltd. (PSK), which owns mineral rights in Western Canada and collects royalties from leases. One of the key questions in the research lab's analysis was determining the Canadian oil and gas industry's competitiveness versus its U.S. counterpart. "We looked at the recycle ratio in the so-called reserve reports of all the companies in North America and concluded that the Canadian oil and gas industry is still competitive with the U.S. -- and PrairieSky should do okay," says Anderson. While the team also looked at the quality of PrairieSky's management and did a discounted-cash-flow (DCF) analysis, the reserve analysis was a key piece in the buy decision. The stock, which is held in Mawer Canadian Equity, was up about 33% since its acquisition in late 2016.

In a similar vein, the team used a screening tool known as autoDCF to analyze  Tencent Holdings Ltd. (TCEHY), a social-media firm that is regarded as the Facebook of China. "It came out well on the autoDCF because its growth was so high. But if you looked at the price-earnings ratio by itself, which is a common screen, it would look much worse because the P/E is very high," says Anderson. First acquired in late 2015, the stock is up about 66% and held in the five-star rated Mawer International Equity.

With fund-industry competition having intensified over the years, Anderson maintains that the research lab is the way of meeting competitors head-on. "For us, it's all about sticking to the basics. But then we will focus on getting an edge by using the new tools available from technology."

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