For a closer look at this global equities-focused firm, which recently became affiliated with Natixis Investment Managers, we interviewed Co-CEOs Paul Black and Kurt Winrich. Here, they share insight on WCM’s distinct investment approach, including a combined focus on competitive advantages (moats) and complementary cultures, and their roadmap for success.
Q. First off, tell us how WCM got its start and evolved into what it is today.
Black: The firm was founded in 1976 by Kurt’s father, who we now refer to – lovingly – as the “non-benevolent dictator”. At that time, he controlled the organization and held most, if not all, of the shares. From 1976 to 1998, assets could never grow above $300 million, despite being part of a popular separately managed accounts program in the United States.
But in 1998, everything changed.
Winrich: My father had retired, and we had completed a buyout. It was finally our firm, and Paul and I took over. We made each other a promise that we would build a different culture – one that would not only attract great people, but also keep them. To us, that meant flatten the hierarchy and closely align employee incentives with portfolio objectives.
Most importantly, we gave our employees skin-in-the-game by allowing them to own stock in the company. Ultimately, this change had a huge impact on the firm’s future, with both staff and assets growing consistently over the last decade plus. Today, WCM is a firm of highly talented and motivated investment professionals, and we currently have $33 billion assets under management (as of 2/28/2019).
Q. When did you broaden your client base from high net worth to mainstream investors?
Black: In 2004, we launched our first international (non-US) equities fund. Through the years, we’ve expanded our fund lineup to include global, emerging markets and small-cap international growth strategies.
Q. Have the lessons you’ve learned along the way shaped how WCM invests today?
Winrich: Absolutely. One lesson is connected to the fact that it’s actually rare for managers to have a long-term, identifiable and repeatable investment edge. To illustrate, ask any growth equity manager what they look for in a great investment, and you’ll have almost unanimous agreement on three characteristics. Number one, it has to be a high-quality company. Two, it has to have a wide moat – that is, a durable competitive advantage over other companies in the same industry. And three, it has to trade at an attractive price – that is, at a discount to intrinsic value. Right off the bat, though, you’ve got to wonder how you can expect to outperform if you’re doing the same thing as everybody else (remember that unanimous agreement thing?). But even more important, it’s become clear to us that these characteristics alone are not enough – and we learned that the hard way.
Take Nokia in 2006–2007. It was the textbook example of the high-quality company with a wide economic moat that traded at a discount to intrinsic value. Yet, less than 10 years later, the company was sold to Microsoft for a fraction of the value it reached at its peak. Learning from our experiences, we now think about competitive advantage very differently. Yes, a wide moat is good, but what’s more important is the direction it’s moving. Is it still growing? Or is it eroding? We want companies whose moat is growing. An eroding moat is actually a destroyer of capital.
Black: Another lesson came from seeing the positive ways WCM changed after our late-nineties buyout and realizing how important company culture was to the success of a business. Naturally, we figured that if culture was so crucial in turning our prospects around, it was probably pretty important for all businesses, particularly in sustaining and growing a competitive advantage. Think about it: How is a company whose culture is weak or unhealthy – where hardly any employee gives their best and most are looking for an exit – going to be able to grow or even maintain a competitive advantage in their industry? A company’s culture, values and incentive structure will encourage the behaviors that push the competitive advantage forward, in our opinion.
Q. You actually have a culture analyst. Can you explain the role this person plays?
Winrich: We are convinced the only way to truly understand a culture is to hear from those who have lived it. To tease out the “cultural DNA” of a company, we perform extensive culture-focused interviews with former employees, C-suite executives, and anyone else who can give us insight.
Black: Our dedicated culture analyst works closely with our research analysts and portfolio managers to evaluate culture within the context of a company’s broader thesis. We see numerous benefits to this role. Analyzing culture is very different from the rest of fundamental analysis, so it’s extremely helpful to have someone who is participating in the research process solely through that lens.
Q. How do you build your portfolios?
Black: We are predominantly large-cap global growth managers running concentrated portfolios of 30–35 stocks. However, we also have variants of this across international, emerging markets and small-cap strategies.
When people think about concentrated global growth strategies, it’s often assumed they must be quite volatile, especially in difficult market conditions. In fact, this conventional wisdom has not proved to be accurate for WCM. In difficult markets, we have found that by avoiding companies with deteriorating moats, we’ve avoided many potential landmines. Conversely, by favoring companies with growing moats, our portfolio holds more companies likely to capitalize on opportunity in tough times. What’s more, by focusing on companies with good culture, you increase your chances that a growing moat keeps growing longer than the market expects, through good times and bad.
Q. Can you explain the importance of your long-term investment view?
Black: We are unapologetically long-term investors. One way that shows up is our low turnover. Moreover, a large amount of our turnover is not name turnover, but is position-size management – trimming and adding to positions – what we call our buy-and-manage approach to portfolio construction. Typically, we begin with portfolio position sizes of 2%–4%. If the position size grows, we’ll either trim because it gets larger than we like – around 6%–7% – or because there’s some compelling opportunity to recycle into existing ideas with more room to run.
Ultimately, when we think about investments, we think in decades. This is the same approach we have towards the way we run our firm. It’s a much easier proposition to succeed in investing, or business, when you think long term – and there’s a lot less competition because most people don’t. Low turnover wins, we believe.
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