Grandeur Peak Global Opportunities (GPGOX), August 2013 update

By David Snowball

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED IN February 2012. YOU CAN FIND THAT PROFILE HERE.

Objective and Strategy

Global Opportunities pursues long-term capital growth by investing in a portfolio of global equities with a strong bias towards small- and micro-cap companies. Investments may include companies based in the U.S., developed foreign countries, and emerging/frontier markets. The portfolio has flexibility to adjust its investment mix by market cap, country, and sector in order to invest where the best global opportunities exist.  The managers expect to move towards 100-150 holdings (currently just over 200).

Adviser

Grandeur Peak Global Advisors is a small- and micro-cap focused global equities investment firm, founded in mid-2011, and comprised of a very experienced and collaborative investment team that worked together for years managing some of the Wasatch funds.  They advise three Grandeur Peak funds and one “pooled investment vehicle.”  The adviser passed $1 billion in assets under management in July, 2013.

Managers

Robert Gardiner and Blake Walker.   Robert Gardiner is co-founder, CEO and Director of Research for Grandeur Peak Global.  Prior to founding Grandeur Peak, he managed or co-managed Wasatch Microcap (WMICX), Small Cap Value (WMCVX) and Microcap Value (WAMVX, in which I own shares).  In 2007, he took a sort of sabbatical from active management, but continued as Director of Research.  During that sabbatical, he reached a couple conclusions: (1) global microcap investing was the world’s most interesting sector, and (2) he wanted to get back to managing a fund.  He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global small/micro-cap fund.  From inception in late 2008 to July 2011 (the point of his departure), WAGOX turned a $10,000 investment into $23,500, while an investment in its average peer would have led to a $17,000 portfolio.  Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

Blake Walker is co-founder of and Chief Investment Officer for Grandeur Peak. Mr. Walker was a portfolio manager for two funds at Wasatch Advisors. Mr. Walker joined the research team at Wasatch Advisors in 2001 and launched his first fund, the Wasatch International Opportunities Fund (WAIOX) in 2005. He teamed up with Mr. Gardiner in 2008 to launch the Wasatch Global Opportunities (WAGOX).

Strategy capacity and closure

Grandeur Peak specializes in global small and micro-cap investing.  Their estimate, given current conditions, is that they could profitably manage about $3 billion in assets.  They could imagine running seven distinct small- to micro-cap funds and tend to close all of them (likely a soft close) when the firm’s assets under management reach about $2 billion.  The adviser has target closure levels for each current and planned fund.

Management’s stake in the fund

As of 4/30/2012, Mr. Gardiner had invested over $1 million in each of his funds, Mr. Walker had between $100,000 and 500,000 in each.  President Eric Huefner makes an argument that I find persuasive: “We are all highly vested in the success of the funds and the firm. Every person took a significant pay cut (or passed up a significantly higher paying opportunity) to be here.”   The fund’s trustees are shared with 24 other funds; none of those trustees are invested with the fund.

Opening date

October 17, 2011.

Minimum investment

The fund closed to new investors on May 1, 2013.  It remains open for additional investments by existing shareholders.

Expense ratio

1.88% on $425 million in assets (as of July, 2013). 

Comments

As part of a long-established plan, Global Opportunities closed to new investors in May, 2013.  That’s great news for the fund’s investors and, with the near-simultaneous launch of Grandeur Peak Global Reach (GPROX/GPRIX), not terrible news for the rest of us.

There are three matters of particular note:

  1. This is a choice, not an echo.  Grandeur Peak Global Opportunities goes where virtually no one else does: tiny companies across the globe.  Most “global” funds invest in huge, global corporations.  Of roughly 280 global stock funds, 90% have average market caps over $10 billion with the average being $27 billion.  Only eight, or just 3%, are small cap funds.  GPGOX has the lowest average market capitalization of any global fund (as of July, 2013). While their peers’ large cap emphasis dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.
  2. This has been a tremendously rewarding choice. While these are intrinsically risky investments, they also offer the potential for huge rewards.  The managers invest exclusively in what they deem to be high-quality companies, measured by factors such as the strength of the management team, the firm’s return on capital and debt burden, and the presence of a sustainable competitive advantage.  Together the managers have 35 years of experience in small cap investing and have done consistently excellent work.  From inception through June 30, 2013, GPGOX returned 23.5% per year while its peers have returned about 14.5%.  In dollar terms, a $10,000 investment at inception would have grown to $14,300 here, but only $12,500 in their average peer.
  3. The portfolio is evolving.  While Global Opportunities is described in the prospectus as being non-diversified, the managers have never chosen to construct such a portfolio.  The fund typically holds more than 200 names spread over a couple dozen countries.  With the launch of its sibling Global Reach, the managers will begin slimming down the Global Opportunities portfolio.  They imagine holding closer to 100-150 names in the future here versus 300 or more in Global Reach. 

Eric Huefner, Grandeur Peak’s president, isn’t exactly sure how the evolution will change Global Opportunities long-term risk/return profile.  “There will be a higher bar” for getting into the portfolio going forward, which means fewer but larger individual positions, in the stocks where the managers have the greatest confidence.  A hundred or so 10-25 bps positions will be eliminated; after the transition period, the absolute minimum position size will be 35 bps and the targeted minimum will be 50 bps.  That will eliminate a number of intriguing but higher risk stocks, the fund’s so-called “long tail.”  While more-concentrated portfolios are generally perceived to be more volatile, here the concentration is achieved by eliminating a bunch of the portfolio’s most-volatile stocks.

Bottom Line

If you’re a shareholder here, you have reason to be smug and to stay put.  If you’re not a shareholder here and you regret that fact, consider Global Reach as a more diversified application of the same strategy.

Website

Grandeur Peak Global Opportunities. The website also hosts a nice white paper on the case for global small cap investing (2012), as well as a pretty thorough introduction to Grandeur Peak and their approach (2013).

2013 Q3 Report

Commentary

© Mutual Fund Observer, 2013. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.
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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.