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Sustainable Value Creation
William Blair Global Leaders Fund
Interview with: Andy Flynn, Ken McAtamney

Author: Ticker Magazine
Last Update: Aug 10, 10:58 AM EDT
While many portfolio managers look for high-quality companies, definitions can significantly vary. For Andrew Flynn and Kenneth McAtamney, who are at the helm of the William Blair Global Leaders Fund, high quality means companies driven by strong and sustainable value creation. With a global mandate and a long-term view, the fund looks for companies with clear leadership, internally driven growth, and a sustained competitive advantage.

“It is not difficult to find a lot of great companies out there, but investing in them at a reasonable level of valuation is crucial. The main question is if the operating momentum is stabilizing or improving and what’s a reasonable multiple to pay for that.”
A: We start with growth from both an industry and company standpoint and we take into account disruption and innovation. We perform deep fundamental analysis, and our portfolio managers travel around the world looking for future pockets of growth, evaluating if that growth is sustainable, and trying to identify it at the corporate level.

We incorporate a lot of historical data, which in reality proves fairly predictive of future growth and returns. The main quantifiable metric that we look for is cash flow return on invested capital. We believe that is the best predictor of a company’s ability to sustain its growth into the future.

But we spend most of our time on industry and company analysis, because we have to assess the quality of the management teams, their strategy and ability to execute that strategy, their capital allocation policies, their human resource development, and their relationship with customers and suppliers. We also look at their commitment to innovation and to research and development.

Other important aspects include their relationship with the other stakeholders and the various environmental, social, and governance factors. All these factors need to be vetted from the fundamental research perspective, which underpins everything we do.

Q: Could you cite an example to better illustrate your research process?

A: We spend a lot of time trying to identify companies that have the necessary return characteristics, niche focus, competitive advantage, and strong management team, because these companies can be tomorrow’s global champions. A great example would be Fevertree, a producer of drink mixers based in the United Kingdom that dominates the premium mixer market.

What makes this business interesting is that it is driving dramatic growth in the premium mixer market. Fevertree accounts for 80% to 90% of the category growth. The company was founded by an individual with a history of identifying attractive, underappreciated brands and investing substantially in them. The business is expanding by 70% in the United Kingdom, its original market, plus 17% in Europe. It is just getting started in the United States, which is a big growth opportunity.

From the perspective of returns, this is a company that engages in product development, but also deploys its assets effectively. So while Fevertree may not be a household name, we believe it has the characteristics, return focus, niche development, and management strength to become a global champion one day. We have been involved with the company for several years across a variety of different strategies, so we’ve seen the continued success and the market opportunity, while the company is still relatively early in its corporate lifecycle.

Q: How do you construct your portfolio?

A: Our limits on regional and sector weights range from zero to 2.5 times the benchmark weight. The individual position sizes are restricted to 5% of the portfolio. Our position sizes tend to reflect the company’s market cap. We have fewer but larger positions in large-cap names and a greater number but smaller positions in smaller-cap companies.

Our benchmark is MSCI ACWI IMI Index because of our global opportunity set and our exposure across market caps. However, we don’t pay too much attention to the benchmark, because we want to build the portfolio around our best ideas, regardless of the sector or regional weights.

The diversity of the corporate lifecycle is another strong consideration since it represents a way to diversify the portfolio risk. We have higher-growth companies with more volatile corporate performance and more mature, lower-growth companies, which are highly cash generative, as well companies that are in between. That mix of attributes is one of the ways to ensure diversification and provide some risk management within the portfolio.

Q: How do you define and manage risk?

A: William Blair has done a lot to avoid organizational risks. There is low firm and team risk here, as evidenced by the low turnover of investment professionals and the stability of our organization and investment team. These are critical elements for our clients.

In the portfolio, we manage two primary risks on a day-to-day basis. The first one is the risk of corporate execution or individual security risk. We assess if the company is able to perform and execute as we expect it to. We spend our time evaluating the ability of companies to manage their businesses, including for the best companies out there.

The second risk is aggregate exposure risk, which we take by virtue of our philosophy and style. We assess the risks from macro or investment factor elements that we need to be considerate of. A suite of tools help us evaluate our exposure, both positive and negative, to macro factors and quality. We evaluate the current environment, how expensive high quality is, and whether the market landscape is favorable or not to our exposure to quality.

Not all the risks are necessarily negative; some of them are the risks that we want to take by virtue of our investment philosophy. We do an in-depth job of understanding, quantifying, and measuring the exposures. Then we try to identify how risky these exposures might be and if we are comfortable taking more of them or less.

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