Q: What is the history of the fund?

The AllianzGI International Growth Fund was established in 2015, but the international growth strategy exists since 2013. We decided to launch an international strategy given the success of our European Growth Fund and the assets we gathered over time. We manage the European Growth Fund since 2003 and I joined the team in 2005 with a focus on structural growth. 

The fund has assets under management of about $20 million and there are about $22 million under management in the international growth strategy.

Q: Is it global or purely international?

It’s an international fund that invests across all regions except the U.S., but we do invest in Canada. The biggest part of the International Growth Fund is Europe; our expertise is here, but we also look for the best ideas elsewhere. Approximately 50% of the fund is invested in Europe and 7% in Japan. 

The rest of the portfolio is across Asia; we have some holdings in Mexico and Brazil, one position in South Africa and several holdings in China, especially in the Internet tech space. We have big underweights in other areas.

Q: What are the underlying principles of your investment philosophy?

We focus on long-term structural growth and try to avoid the cyclical growth component. We like the emerging middle class in Asia, for example, as well as other structural drivers. We avoid the cyclical GDP growth component, which is related to short-term growth.

We have a pure bottom-up stock-picking process; there are no macro calls and no technical allocation. We take a fundamental view on the companies we own. We don’t play with derivatives and we are benchmark agnostic. Either we like a company and we invest in it, or we don’t like it and don’t invest in it. It is a truly stock picking, fundamental research focused fund.

We don’t think of the companies as stocks. Instead, we assess if we want to be an owner in this business for the next 10 or 20 years. The fund is based on long-term thinking and high-conviction fundamental stock picking. The turnover is usually below 20%, even lower in new names. For example, this year we only sold three stocks and bought two. 

Q: What are some of the important factors in the evaluation of companies?

We are a growth fund, so it is important to see long-term, structural growth drivers. However, the sustainability of the business model and the quality of the business are even more important, because we are long-term owners.

We look for high-quality businesses that can generate high returns and cash. Our focus is mainly on cash generation, not earnings. Obviously, a company that generates a lot of returns also attracts a lot of completion. In order to defend its return and its business model in the long term, it needs high barriers to entry.

A company with a sustainable business model and high barriers to entry may compound or grow its earnings over the next 10 years by 10% or 15%. Although these numbers may not be impressive, the power of compounding makes a huge difference. Earnings or cash flow growth of 15% a year means a company that doubles its earnings or cash in five years and quadruples them in 10 years.

We believe that the power of compounding is completely underestimated by the market. There is too much short-term noise, and Wall Street focuses just on the next quarterly earnings or if the numbers are missed by a cent. I think that the earnings per share number really distorts the importance of the business.

We have a very different approach, because there are great businesses out there, with great managements and culture, and these businesses are able to compound their earnings over long time periods. If the business can quadruple its earnings or cash flows in 10 years, valuation is not a huge driver. The most important factor is the combination between structural growth and sustainability. For a business to grow for a long time, it needs a sustainable business model, high barriers to entry and good pricing power. 

Q: What differentiates you from your peers?

A main differentiator is the focus on the power of compounding and the long-term view. We actually don’t care about quarterly results. Of course, the aggregates must be good in the long term, but we don’t care about the next quarter EPS. While Wall Street and the market focus too much on the short term, we look for long-term factors and use of the power of compounding. 

Another differentiator is our focus on the management quality, its culture, execution and capital allocation. We think that these factors are underappreciated because they are not tangible; you cannot touch or grade them easily. However, if you are holding the company for 10 years, they make a huge difference.

The key is not only to buy good companies, but also companies with great management teams and with people who are open, honest, and have intrinsic motivation. Such teams are not incentivized only by money, but also by creating something sustainable for the long term. We put a lot of emphasis on spotting companies that have good culture and execution.

We are focused on cash generation and on what the company does with free cash. A management team that isn’t focused on value creation may do a stupid acquisition, while a great management team, which cares for the shareholders and has a long-term view, could make a wise capital allocation decision. 

For this strategy to work, we need a really long-time horizon, while most funds have a holding period of less than a year. Our fund doesn’t make much difference over the short term, because we focus on long-term drivers. 

Q: Would you describe you investment process? How do you generate ideas?

There’s no quantitative process or screening. Because we have strict quality measures, our investable universe is actually not that huge.  There are thousands of listed companies, but since our goal is to invest in the best ones, we can cut off 80% to 90% of the market very quickly. The result is a watch list, where we concentrate our efforts.

The idea generation comes from the team and from the global buy-side analysts on our platform, who are also screening the markets. They are sector specialists, located across the globe in London, Frankfurt, North America, Hong Kong, Tokyo, and Taiwan. They are not part of the team, but they are part of the Allianz investment platform. The key element is that they understand our philosophy, our thinking, how we see the world, as well as our long-term view. They do provide us with many ideas. We have a Facebook like IT tool, called Chatter, which makes communication across the globe quite easy.

So, ideas can come from our team and the Allianz research platform. Another source is our meetings with managements and industry experts. We travel a lot; we attend over 1,000 company meetings per year; we go to conferences and visit companies. Sometimes we may look at one company, but in the research process, we may see that one of their competitors or suppliers or customers is in a stronger position in the value chain. Then we may switch gear and start working on the other company. 

We have a list of opportunities, which we constantly research. Even if we find some short-term problems, we may still proceed with buying the company if we know it well and have high conviction. Sometimes we follow a company for years without buying it, but in this period we meet with the management several times and learn a lot about its business. That’s how we build the conviction and the advantage of knowing the company well.

When we visit the companies, we meet not only the top managers, but also plant or sector managers. That allows us to understand the culture, to dig deeper, and to understand the DNA of the company. So these meetings are also a great source for ideas.

Q: How is your research process organized? How does an idea become a holding?

The research is done within the team. We discuss the ideas with our buy-side analysts, who are sector specialists. Then it’s up to one team member to write an investment case if he wants to promote an idea to a “buy”. The investment case is then heavily discussed in the team. If we like the company and have known it for a long time, we may quickly agree to buy it. 

If we have some issues or if we don’t entirely understand the company, we would do more research and probably buy it later. We may monitor a company for several years before buying it. It is our principle that we cannot buy a company if we don’t understand it. There are companies that are on our watch list but, unfortunately, are not offered a great price. In these cases we would wait for the valuation to come down.

There are thousands of opportunities and we certainly miss some of them, but it is more important to focus on the high-conviction ones that we really understand. If there are short-term issues and the share price goes down because of some noise in the market, then we are the first with the conviction to buy more and add to our position. 

Q: How long does it usually take to build the conviction to invest in a name?

That’s also related to how we differentiate from our peers. It can take years to build a conviction. If you invest for 10 or 5 years, you listen to the quarterly calls and meeting the management regularly; you know their words and their actions. Usually, these companies are rather conservative; they don’t tell you any great story before they have executed. You get to know their thinking, their execution and their issues. Each business has some issues, but the question is how you handle these issues and if you can openly discuss, tackle and solve them. So they need to be open.

This type of knowledge you get only if you follow the company for years. The beauty is that the knowledge is compounded as well, but that’s also underappreciated by the market. If you are buying 200 companies every year, there isn’t a lot of time to compound your knowledge about each company. 

The problem in the financial industry is that many people earn money in the short term and focus on trading volumes, but sometimes they miss the big picture and the long-term development of the company. Everybody admires Warren Buffet and many managers say they use his strategy, but their turnover shows a different reality.

Of course, we have learnt and developed over time. We started with bigger focus on the barriers to entry and then we saw that structure makes a huge difference. I believe that a good manager has to learn over time, has to read a lot, to have patience and the right investment temperament. I don’t think that daily action for the sake of action is the best approach.

Q: What drives your portfolio construction process in terms of allocation?

We are benchmark agnostic, so the allocation is driven by conviction only. Obviously, we need to be measured against the benchmark and we need to beat it over the long term, but we would never own a company in a country just because that country is in the benchmark. If we like the company for the long term we buy it, but if we don’t like it we don’t buy it. It is that simple.

Typically, we have 60 to 80 holdings. The size of the individual positions is determined by the market cap of the company and by our conviction in the management. Small-cap companies usually have lower weightings than large caps. Our bigger focus on Europe and the developed markets is largely due to the better and more developed corporate governance there. That’s important to us.

As we don’t do any tactical cash allocation, we never hold cash. Overall, the allocation is a relative game. If we want to buy something new, we have to sell something else because we don’t own cash. That also strengthens the portfolio over time.

We are not allowed to own more than 10% of an individual name and we are not allowed to have an overweight or underweight of more than 15% compared to the sector, but we can differ more on an industry level. Usually, our positions don’t go up to 10% but are in the 4% to 5% range.

Q: How do you define and manage risk?

We think about risk in two dimensions. On the one hand, we have the risk management of Allianz Global Investors, which is monitoring everything. We get all the reports and we also have regular monthly and quarterly meetings to make sure that risk is aggregated and managed. That’s the industry norm.

At the individual stock level, risk is coming from the companies we own. When we buy higher-quality companies, we have less risk. I believe that we reduce risk through buying high-quality, cash generative companies with strong management teams and balance sheets. The market underestimates the company level risk compared to relative, benchmark related risk. 

We don’t focus too much on macro factors, because we don’t think that we can correctly predict all the different macro drivers. By focusing on what we know best, namely, picking great companies and knowing them well, we are better prepared for difficult times. 

Actually, we perform better in poor markets because of the balance sheet strength of the underlying companies. Crises usually come quickly and the companies with weak balance sheets are not prepared to survive them. In fact, our companies have higher value creation in weak times than in great times, when credit is cheaper. So, we usually outperform in good times, but the outperformance is greater in weak macroeconomic conditions.