Christopher Mack is a portfolio manager on the global equity team at Harding Loevner, an investment management company based in Bridgewater, New Jersey with some $65 billion under management. In addition to portfolio management duties like security selection, portfolio allocation, and investment strategy, Chris is also an analyst in the information technology space. He has been with the firm since 2004 and previously served as a research associate.
Chris is a co-manager of the Harding Loevner Global Equity Fund (HLMGX). Over the 15-year period ending 4/20/18, its annual return has been 10.46%, outperforming its benchmark, the MSCI ACWI ex USA index, by 160 basis points. Over that 15-year period, it ranks in the 15th percentile of its Morningstar peer group.
Chris holds the Chartered Financial Analyst designation and earned a BA in economics and business from Lafayette College
I interviewed Chris last week.
Can you provide some background on Harding Loevner and its approach to investing?
Harding Loevner is a global investment manager founded in 1989 by the investment managers of the Rockefeller Family Office. We've invested in global equities since the beginning. We look at the world as one opportunity set and focus on quality, growing businesses. That's the best way to invest in the long term.
Our process was developed with behavioral finance in mind – to minimize bias and eliminate groupthink in our decision-making as much as possible. We operate with complete internal transparency with all the research recorded and openly shared. We do that so we can engage in a provocative debate and critique one another’s analysis. There’s one key attribute – we require individual accountability and incentivize our team based on the outcomes of their individual decisions. We call it “collaboration without consensus.” The idea is that we want to take advantage of our diverse investment team, both in experience as well as where they lived in their careers, in their lives, and be able to harness that and benefit from cognitive diversity. That's essential to harnessing our best thinking.
Why should investors consider a global allocation?
It’s important to look at the world as one opportunity set, as I mentioned earlier. It's your best defense to be globally diversified, and people oftentimes forget that some of the largest companies in terms of profitability are outside the U.S. in a particular industry. Investing globally allows you to build a diversified portfolio not only by region but by sector as well. Looking at that total opportunity set gives you a lot of flexibility to craft a portfolio which gives you a better chance to achieve higher risk-adjusted returns over time than relying on any particular region.
What’s different about the Harding Loevner’s active approach?
It comes down to our collaboration-without-consensus culture as well as the discipline in adhering to our process. With that combination, we arm ourselves with tools to minimize the biases that often plague human decision making. One such tool, which we use at the portfolio level, is to examine our holding periods to make sure we're not succumbing to the endowment effect, and give more value to something because we own it. Another is our research database, which stores all our research and investment communications. We can look back over time and analyze whether a good portfolio outcome was the result of luck or our skill as investors. That allows you to get better and continuously improve over time. It’s our commitment to our process that’s distinctive.
How do you think about risk and volatility?
We think about them in a couple different ways. First, we try to manage risk when we look at the security or the company itself. We're looking for high-quality, growing businesses that should be able to sustain downturns.
At the portfolio level, we have what we call “codified rules of thumb,” or investment parameters. They’re based on what we have learned from years of investing. For example, it’s not a good idea to have over a quarter of your portfolio in a particular sector, and that's a rule of thumb that we follow. But we're also trying to be more objective by looking at quantitative analysis. With e-commerce companies, for instance, we try to capture the fact that they may be more similar in nature to technology businesses than traditional retailers. That would get through that first rule of thumb. But our quantitative tool, that combination of data and judgment, allows us to make sure that we're not taking unintended risks in our portfolios.
When we look for quality businesses, we consider volatility of returns as part of our fundamental analysis of each stock. It's a good way to manage the volatility of our portfolio as a whole.
What is a growth stock as far as Harding Loevner is concerned?
They are companies that are able to generate growth in revenue as well as earnings and cash flow above GDP and be able to sustain that growth. We include cyclical businesses in that definition, provided they're able to grow through cycles. One example of that is a recent addition to our portfolio – Kubota. It’s a leader in industrial, small-sized engines and that's something where we see durability and growth from stricter environmental regulations, for example, but it has a cyclical nature, for sure.
How do you define quality stocks?
We’re looking for companies that have low leverage. They have low volatility in terms of their returns as well as having above-average profitability. Basically, they're obtaining their profits not by leveraging up their balance sheet. Nestle is one of our highest-quality holdings given its history of high, stable returns.
In a global portfolio such as yours, you have a lot of flexibility. Where are you seeing compelling opportunities?
We are seeing opportunities in healthcare in particular. You might ask about whether regulation could be an issue, and there are concerns about pricing pressure for drugs. But we think at the end of the day that it's a secular growth opportunity. The world is aging and there is a need for more efficient research and development. That's really important – we see opportunities in technological enablers. A company that comes to mind is Waters, for example, in the U.S. It’s a specialist in life sciences equipment and its tools are used to research new drugs. It's good to be invested in the ”picks and shovels” supplier to people hunting for gold, or in this case, companies hunting the next big drug, so that's a good opportunity for us.
One of your holdings is Starbucks. Do you believe its recent troubles in its Philadelphia store will have any long-term impact?
It's definitely a near-term risk that you have this backlash and obviously it's a shame that it handled things the way it did, but it’s taking action to make sure that it’s not a problem in the future and so there is accountability. That's the type of management that we're looking for. I don’t think there will be a long-term impact.
On a longer term view, we do worry about weaker growth in the U.S. Our investment thesis has two parts. One, we're looking for them to be able to grow same-store sales in the U.S., by moving into food and other areas. But we also expect growth in places like China, and the China part of the thesis is working out really well. The U.S. has been a little disappointing to us, so we’re thinking about whether the combination leads to enough growth overall for us.
Do you hedge your currency exposure? If not, why?
No, because currency is notoriously hard to predict. Over the long term it tends to even out, and we think the best defense for currency fluctuations over the long term tends to be a globally diversified portfolio.
What markets are you avoiding?
As bottom-up investors, there's nothing we avoid from a geographical perspective. We look everywhere from the U.S. to frontier markets, but from a sector perspective we will typically avoid low-growth or highly regulated businesses. Utilities and telecom companies are good examples, along with cyclical businesses where we don’t see a secular growth opportunity underpinning them. In the past there was the “super cycle” for metals and mining businesses and the commodities sector. We don't see that happening again, so we've been avoiding metals and mining companies.
How big is your cash position relative to its historical average? How big can it be?
Historically, our portfolio tends to be about 2% to 3% in cash. We think it's best to be fully invested. The cash exposure there is just to give us the flexibility to make the portfolio changes that we need to do. Our maximum is 10%, but very rarely do we go that high. Currently, we are a little over 2%
How does the US equity market stack up on a relative basis versus other global markets?
We are the most underweight relative to the benchmark that we've been probably in the last 15 years or so. We are approximately 40% in the US, which is still a large weighting as an absolute percentage, but it’s underweight relative to the benchmark, which is a little over 50%.
Once we’ve identified companies that meet our key criteria, our investable universe consists of about 400 – but no more than 500 – businesses. That's a pretty narrow lens. But it’s enough to see that the U.S. looks particularly expensive compared with the rest of the world. It’s also not surprising given the nature of the outperformance of the past five or 10 years. We’ve been shifting slowly on a bottom-up basis away from the US, and we see more opportunities in international markets, particularly in emerging markets.
What is your view of the likelihood and severity of a trade war, given the looming possibility of tariffs that could be imposed on China? What is your fund’s exposure?
The risks do appear to be increasing, but when you look underneath that I think what we're seeing is a very public negotiation of trade deals. What’s unusual is we're negotiating trade deals through Twitter. It’s not surprising that it’s introducing more volatility into the market. As you negotiate, you can overreact to what may or may not be possible. I am hopeful that this is just a negotiation and that the parties will realize there's more to gain from cooperating or collaborating on deals to grow the economy rather than the alternative.
If a trade war causes the global economy to slow down or decline, we expect high-quality, growing businesses to be able to thrive even in challenging conditions. Most of the businesses in our portfolio are global in nature, so obviously they will be exposed, and they could be caught in the crossfire. But we do have a subset of holdings that are more isolated to a particular region. Indian banks, for example, are less exposed to this particular risk but overall it's going to be difficult to quantify.
Your CIO, Simon Hallett, has gone on record regarding the value of active management. In today’s world, how do you make the case to investors that active should have a significant place in their portfolios?
You have to look at indexes over time and getting back to this theme of the diversification as a way to manage risk. Think about the various bubbles over time – whether technology, financials, or a single country like Japan. Back in the 1980s, for instance, Japan was 44% of the overall, all-country world index at one point. That did not end well, neither did tech in the 1990s, or financials in the 2000s. Now we’re back to IT. If you are interested in diversifying and protecting yourself on the downside, active management can make sense.
That said, the track record of active managers is pretty infamous at this point. The majority have not outperformed net of fees. You have to look for those skilled managers who are able to deliver value over time, and we think there are a few of those. The key is that you need to look at the data and assess it over a long horizon. That's the way we look at investments. That's the way you should look at investment managers as well.
I recognize that your fund is built with a bottom-up process, without a specific view of macroeconomic factors. But are there any systemic risks that keep you awake at night?
When you have a longer time horizon, there's not many things that keep you awake at night. We tend to look at shocks as opportunities. But there are a few things that are concerning. One is global regulation as a whole – there’s more government intervention taking place. Regulations are hard to predict and could depress returns over time. We’ve already talked about another concern – trade wars.
The best defense against such risks is to be invested in companies that have strong competitive positions and strong balance sheets. We are able to sleep relatively easy. We also worry about valuations, though. That’s probably the biggest concern these days given the strong performance of growth stocks globally over the last several years. The premium we are paying for our type of stocks is near the highest since we’ve been tracking it over the past 10-15 years or so.
Read more articles by Robert Huebscher
Christopher Mack is a portfolio manager on the global equity team at Harding Loevner, an investment management company based in Bridgewater, New Jersey with some $65 billion under management. In addition to portfolio management duties like security selection, portfolio allocation, and investment strategy, Chris is also an analyst in the information technology space. He has been with the firm since 2004 and previously served as a research associate.
