By Tom Bradley

David and I met last week with Ian Cormack and Cathy Alsop from Edinburgh Partners (EPL) in Toronto. EPL manages the Steadyhand Global Equity Fund.

The meeting reinforced the depth and experience of the firm (they announced two senior additions to the team the day we met) and the commitment to their central discipline – namely, that time horizon is the key market imperfection. The EPL philosophy and research discipline is based on valuing company earnings five years out. It’s noticeable to me that phrases like ‘underweight’ and ‘overweight’ the benchmark never came up. They are totally focused on looking for undervalued securities.

As we’ve noted previously in the blog and quarterly reports, EPL is not seeing the same wide-spread opportunity in the market that it did 12-16 months ago. Company valuations now more accurately reflect their long-term earnings outlook.

Having said that, EPL’s calculation of the 5-year annualized real return (after inflation) for the fund is still sitting at a healthy 10%. That number, which is an estimate based on their earnings estimates and valuation work, is sure to be wrong, but it is an indication of how compelling the opportunities are. For context, this projection was over 13% a year ago.

After a period of playing ‘defense’ (mid-2007 to the summer of 2008) and then ‘offense’ (fall of 2008 until recently), the fund is now sitting firmly in the middle. There is no specific tilt to cyclical, defensive, growth or value. Recent changes have come out of stock specific opportunities rather than an overall theme.

As for the new holdings, they could only be described as ‘ugly but cheap’. Lately, EPL has been running against the grain on many levels:

• Country – Japan has been the location of many of their new ideas, despite the fact that there is a strong consensus that the Land of the Rising Sun is headed for a third ‘lost decade’. Can you say SLOW GROWTH?
  
• Industries – EPL has bought two construction companies – a home builder in the U.S. (DR Horton) and a building contractor in Japan (Kajima).
  
• Companies – There are warts on the new additions, but perhaps the ugliest is Fujitsu, a money-losing, slow-growing ‘big iron’ computer company that was in the press this week because the former CEO has been linked to organized crime. As Ian pointed out, the warts are well recognized and little or no improvement in operations or valuation have been factored into the stocks.

Overall, the portfolio holds 38 stocks that cover the spectrum of country, industry and beauty. U.S.-based companies account for about 30% of the fund while Japan is now the second on the list at 16%. Technology remains the largest industry weighting at 18%, although that has come down modestly as a result of some sells.