CI International Equity Fund: Hunting Compounders Abroad

Transcript

Welcome, this is Richard Jenkins, of Black Creek investment Management, providing you with the latest insights in international investing. Just as a reminder, our international fund, is primarily used to diversify client's portfolios away from Canadian and American equity markets. Now, when those markets are booming, most people don't seek diversification, but the beginning of this year, 2025, has highlighted that you never know when investors' opinions or desires change. And we have seen a substantial rise in the currencies internationally, and also in increased allocation of investors' money outside of North America. We can all speculate on why this has been caused, maybe it's a change in interest rates, maybe it's a change in outlook for growth, or maybe it's a response to tariffs emanating from the US administration. Frankly, we don't know, and we don't particularly care, because at Black Creek, we're trying to find businesses that are winning with their customer, and by winning with their customer can continue to grow and reinvest those cash flows regardless of whether interest rates are rising, currencies are moving around, tariffs are up, tariffs are down. Whatever the circumstances may be.

Now, just a little highlight on what we're seeing economically. We are seeing a post pandemic world, many analysts and economists talk about normalization. Well, the big price spikes have started to normalize. Consumer demand is consequently changing because of those price spikes, and interest rates have risen from outrageously low levels to levels that we think are average. They're not high, but they're average. As a reminder in the international space, interest rates got so low that they were actually negative in some equity markets. These markets caused great distortions and valuations, and outlooks for growth, and that is, of course, normalizing. Finally, the political upheaval we're seeing is everywhere. But having been in the investment business for now going on 38 years, political upheaval is the norm. It's not something new. We've had elections recently in Japan, Germany, and we're going to see them coming up in France, and we've also had elections in the UK. So these things are not anything new. They do lead into slightly changing directions, but at the end of the day, the laws of economics have not been suspended. And that's what we focus on, just as a reminder, the overall strategy for Black Creek is to study companies around the world, to find businesses that are winning with their customer. Winning with their customer means they're gaining market share of these companies, the products are in favour, and therefore, these companies have greater resources, cash flows, to reinvest, to grow further in the future.

Secondly, we try to find these companies at what we think is a discount to their long term intrinsic value. Now, what does that mean? It means that either the company, the sector they operate in, or the country are out of favour. Fortunately for us, this happens regularly in international markets. Top down, macro investors, decide that they don't like a country or a sector, and they sell them off sharply. Without looking through to the N company’s long term demand and its potential. Let me give you some examples from our portfolio. I'll give you two that we've acquired in the last 12 months. One company is a company called Trip.com. Trip.com is a leader in digital internet booking of travel related trips excursions, etc., emanating primarily from China, Hong Kong, into the region in Asia. Now, they're also the leader in inbound tourism, and I'd like to talk about the long term drivers for the growth of both of these.

Firstly, demographics in China, as we all know, are leading to an ageing population. And as people age, they usually have their homes. They usually have all the food that they can handle, maybe need to lose a little bit weight, like myself. But also at the end of the day, they're looking for excursions or chances to see things that they always wanted to go to. And a big difference in China, which is ageing dramatically, is that the parents and grandparents only had one child to take care of. Therefore, they will have greater amounts of money to spend to travel. Now, firstly, they're going to do it in their own country, and we're seeing that with very strong growth in bookings by Trip.com for both rail, air, and domestic packages. But there are also venturing out to nearby countries. So whether that's Japan, Korea, sometimes it might be to South Asia, to a warmer climate, maybe they go into Thailand or Malaysia, or even so far is going to Australia, etc. So we're seeing strong demand in that regards. Now, the other thing that Trip.com has is a 25% holding in the leading player in a similar business in India. And India, while 20 years behind in development, is also seeing a rapid growth in tourism. So the question for us is, this is a very good business with nice high margins, high returns on operating capital. So why was it cheap? In our estimation. And the reason for that was very simple. Post COVID, the boom that we've seen in travel has not happened from China yet. The reason for that is China is working through two problems economically. One is in the press. They're the target of tariffs, and they're everybody's worried for their job. Pretty understandable. In time, this will wane and work itself up. The second one is that there is a property slowed down, and in fact, a reduction in property prices, and this negative wealth effect affects people's thinking, and therefore pushes them more to value, oriented investments or value oriented purchases. That's what we're seeing in the package demand. So the package demand for Trip.com services is quite strong, but at the load of medium end. Super rich people, they're going to take care of themselves and go in whatever flights and trips they want to do, but it's that medium to upper end, which is not recovered as of yet, and we think it will. So that's Trip.com. The second business we bought is a company in Germany, and this company is in the biotech field. It's called Evotec. Now, biotechnology has seen a big slowdown because there's a worry to date about changes to the reimbursement for R&D, research and development, emanating from governments who are constrained by budget, primarily the US and the UK. Evotec is a leader in two areas. The first area is the continuous manufacturing of biological drugs. Biological drugs, just think of everything from vaccines to cancer drugs, etc. are difficult to manufacture, and therefore, they're made in large vats in a biological process. Evotec has figured out a way to make things in smaller batches continuously. So that means more flexibility and much, much lower costs. Clients have signed up for them, and they built two massive new facilities, which are fully sold out and are coming on stream. But the reason the company is weak or the share price is weak, is a second business. EvoTec is a leader in outsourced R&D. And as I said earlier, the cutbacks to funding a budgets from the National Institute of Health in America and in the UK as well, has hit that demand in the short run. But at the end of the day, outsourcing your R&D to a PhD level scientist is cheaper if you can't keep them on your staff full time. So they're adjusting their size of their company. Yes, there's a downturn in the short run, but we believe in the long run, the future's quite bold for this company. So the balance sheet is in net cash, and so we're expecting a big upturn over the next three years in this business. But that gives you an example of how Black Creek operates. We're looking for leading companies when there's a short term problem.

Now, the flip side, and I'll finish with this, is we've sold two businesses recently, which have been long term investments for us. Firstly, BAE, which is a great company operating the defence sector, but as we all know, defence spending is expected to rise dramatically. And that's why the stock went up enormously over the last three years. Hence, we've sold it. And then the last company was sold was Heidelberg materials, a leader in cement, and the share price has gone up almost 300% in the last five years, on the back of an outlook for increased government spending, for infrastructure. Again, we bought them when they were out of favour. They'd come back into favour heavily, and we moved on to new investments. These are examples of companies in the global space that you would not find in the Canadian or American circumstance. And therefore, that's why you look for an international fund. I thank you for your time and your attention, and remember to get through difficult times, the answer from a Black Creek perspective is winning companies that are taking market share at prices that do not discount that winning opportunity. Thank you.