Grandeur Peak Global Reach (GPROX), August 2013

By David Snowball

Objective and Strategy

Global Reach pursues long-term capital growth primarily by investing globally in a small and micro-cap portfolio.  Up to 90% of the fund might normally be invested in microcaps (stocks with market cap under $1 billion at the time of purchase), but they’re also allowed to invest up to 35% in stocks over $5 billion.  The managers seek high quality companies that they place in one of three classifications:

Best-In-Class Growth Companies: fast earnings growth, good management, strong financials.  The strategy is to “find them small and undiscovered; buy and hold” until the market catches on.  In the interim, capture the compounded earnings growth.

Fallen Angels: good growth companies that hit “a bump in the road” and are priced as value stocks.  The strategy is to buy them low and hold through the recovery.

Stalwarts: basically, blue chip mid-cap stocks.  Decent but not great growth, great financials, and the prospect of dividends or stock buy-backs.  The strategy is to buy them at a fair price, but be careful of overpaying since their growth may be decelerating.

Grandeur Peak considers this “our flagship … strategy.”  It is their most broadly diversified and team-based strategy.  Global Reach will typically own 300-500 stocks, somewhere around 1-2% of their investible universe.

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, assisted by three associate managers.   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 small/micro-cap 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).

The associate managers, all Wasatch alumni, are Amy Hu Sunderland, Randy Pearce, and Spencer Stewart.

Strategy capacity and closure

$400-500 million.  Grandeur Peak specializes in global small and micro-cap investing.  Their estimate, given current conditions, is that they could effectively 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

None yet disclosed, but the Grandeur Peak folks tend to invest heavily in their funds.

Opening date

June 19, 2013.

Minimum investment

$2,000, reduced to $1,000 for an account established with an automatic investment plan.

Expense ratio

1.60% on $18 million in assets (as of July, 2013). 

Comments

When Grandeur Peak opened shop in 2011, passion declared that this should be their first fund.  Prudence dictated otherwise.

Prudence prevailed.

I approached this prevail with some combination of curiosity bordering on skepticism.  The fact that Grandeur Peak closed two funds – presumably a signal that they had reached the limit of their ability to productively invest in this style – and then immediately launched a third, near-identical fund, raised questions about whether this was some variety of a marketing ploy.  Some reflection and a long conversation with Eric Huefner, Grandeur Peak’s president, convinced me otherwise. 

To understand my revised conclusion, and the conflict between passion and prudence, it’s important to understand the universe within which Grandeur Peak operates. 

Their investable universe is about 30,000 publicly-traded stocks, most particularly small and microcap, from around the globe, many with little external analyst coverage.  At the moment of launch, Grandeur Peak had six full-time investment professionals on staff.  Fully covering all 30,000 would have been a Herculean task.  Quite beyond that, Grandeur Peak faced the question: “How do we make our business model work?”  Unlike many fund companies, Grandeur Peak chose to focus solely on its mutual funds and not on separately-managed accounts or private partnerships.  Making that model work, especially with a fair amount of overhead, required that they be able to gather attention and assets.  The conclusion that the Grandeur Peak executives reached was that it was more prudent to launch two more-focused, potentially more newsworthy funds as their opening gambit.  Those two funds, Global Opportunities and International Opportunities, performed spectacularly in their two years of operations, having gathered a billion in assets and considerable press attention.

The success of Grandeur Peak’s first two funds allowed them to substantially increase their investment staff to fourteen, including seven senior investment professionals and seven junior ones.  With the greater staff available, they felt now that prudence called them to launch the fund that Mr. Gardiner hoped would be the firm’s flagship and crown jewel.

The structure of the Grandeur Peak funds is intriguing and distinctive.  The plan is for Global Reach to function as a sort of master portfolio, holding all of the stocks that the firm finds, at any given point, to be compelling.  They estimate that that will be somewhere between 300 and 500 names.  Those stocks will be selected based on the same criteria that drove portfolio construction at GPGOX and GPIOX and at the Wasatch funds before them.   Those selection criteria drive Grandeur Peak to seek out high quality small companies with a strong bias toward microcap stocks.  This has traditionally been a distinctive niche and a highly rewarding one.   Of all of the global stock funds in existence, Grandeur Peak has the smallest market cap by far and, in its two years of existence, it has posted some of its category’s strongest returns.

The plan is to offer Global Reach as the flagship portfolio and, for many investors, the most logical place for them to invest with Grandeur Peak.  It will offer the broadest and most diversified take on Gardiner and Walker’s investing skills.  It will be part of an eventual constellation of seven funds.  Global Reach will offer the most complete portfolio.  Each of the remaining funds will offer a way for investors to “tilt” their portfolios.  An investor who has a particular desire for exposure to frontier and emerging markets might choose to invest in Global Reach (which currently has 16% in emerging markets), but then to supplement it with a position in the eventual Emerging Markets Opportunities fund.  But for the vast majority of investors who have no particular justification for tilting their portfolio toward any set of attributes (domestic, value, emerging), the logical core holding is Global Reach. 

Are there reasons for concern?  Two come to mind.

Managing seven funds could, eventually, stretch the managers’ resources.  Cutting against this is the unique relationship of Global Reach to its sister portfolios.  The great bulk of the research effort will manifest itself in the Global Reach portfolio; the remaining funds will remain subsidiary to it.  That is, they will represent slices of the larger portfolio, not distinct burdens in addition to it.

The fund’s expense ratios are structurally, persistently high.  The fund will charge 1.60%, below the 1.88% at GPGOX, but substantially above the 1.20% charged by the average no-load global fund.  The management fee alone is 1.10%.  Cutting against that, of course, is the fact that Mr. Gardiner has for nearly three decades now, more than earned the fees assessed to his investors. It appears that you’re getting more than what you are paying for; while the fee is substantial, it seems to be well-earned.

Bottom Line

This is a very young, but very promising fund.  It is the fund that Grandeur Peak has wanted to launch from Day One, and it is understandably attracting considerable attention, drawing nearly $20 million in its first 30 days of operation.  For investors interested in a portfolio of high-quality, growth-oriented stocks from around the globe, there are few more-attractive opportunities available to them.

Website

Grandeur Peak Global Reach. 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

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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.