He and Benzinho follow a growth-at-a-reasonable-price approach, with a quality bias. “‘Quality’ is probably a word that’s overused in our industry,” Benzinho says. “We think about quality as looking at the sustainability of returns and the ability of companies to protect those returns and still generate decent returns through difficult economic times. And we focus on cash metrics such as free cash flow generation because we think cash returns provide a stronger perspective on the true quality of a business.”
As bottom-up investors, the two managers evaluate companies on merit and don’t position the portfolio to be overweight in a particular sector or country. They also put a big emphasis on risk management.
“We sit down with our chief investment officer to go over our risk exposures and risk management,” Ling says. “The semiannual risk review meeting is very important because, as bottom-up investors, it’s very helpful to understand the risks we’re taking with our exposures.”
Benzinho adds, “We strongly believe that avoiding blowups is the first step in being able to outperform over the long term. We spend a lot of time thinking about what might go wrong, and we think about a business’s ability to withstand macro shocks and to emerge stronger on the other side. That means we avoid businesses with a lot of financial leverage.”
He adds that the fund has held up well on a relative basis during market drawdowns. According to Morningstar, the fund exceeds the upside capture ratio of its category peers while having a downside capture ratio and maximum drawdown percentage lower than the category average.
Of course, the duo don’t hit the mark every time. “We want to make sure we’re honest with ourselves and not be too emotional when a stock goes against us,” Ling explains. “We’ll sell the stock on the day when the thesis is broken.”
Key Themes
Despite operating on different continents in different time zones, Ling and Benzinho say they have a very close working relationship and make all of their investment decisions together.
“We speak daily via email and phone, and we’ve adjusted our working hours to maximize our overlap during the day,” Benzinho says. “Daniel stays up a bit later, and I wake up early so we have plenty of overlap, and that enables us to join meetings with management teams.”
He notes that in pre-Covid days he and Ling spent an average of about a week per month traveling to visit companies and attend conferences. But the pandemic has changed that dynamic. It has also changed the long-term growth rates and returns on a number of businesses the portfolio managers look at.
“Some businesses are benefiting from the acceleration of trends that were happening prior to Covid, such as digital manufacturing and energy efficiency,” Ling says. “We’ve also found there are a lot of companies that have advantages post-Covid.”