Objective and strategy
The Fund seeks long-term capital appreciation by investing in a compact portfolio of “truly exceptional businesses” linked to the emerging markets, and occasionally to frontier markets. The managers look for companies that have strong financials, sustainable above-average earnings growth, a leadership position in a strong industry, durable competitive advantages, an understandable business model and a rational valuation. They typically hold 30-50 stocks which are “conviction weighted” in the portfolio. Currently three of those are located in frontier markets.
Touchstone Advisors. Touchstone is a Cincinnati-based firm with $21.0 billion in assets, as of December 2014. Touchstone selects and monitors the sub-advisors for their 39 funds. The sub-advisor here is Sands Capital Management of Arlington, VA. As of December 31, 2014, Sands Capital had approximately $47.7 billion in assets under management. Sands also manages two closed funds for Touchstone: Touchstone Sands Capital Select Growth (TSNAX) and Touchstone Sands Capital Institutional Growth (CISGX).
Brian Christiansen, Ashraf Haque and Neil Kansari. The managers have experience as research analysts at Sands and elsewhere. They also have M.B.A.s from first-tier universities (Yale 2009, Harvard 2007 and Darden 2008, respectively). They have not previously managed a mutual fund. In December 2014, the team was designated to run MMI New Stock Market – Sands, a billion dollar emerging markets fund located in Denmark but which trades in London. They are supported by a 38 person research team; the research teams are organized around six global sectors rather than region or asset class.
Strategy capacity and closure
$5 billion estimated capacity for the strategy, based on current market conditions. That might increase as markets evolve.
93. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. TSEMX has an active share of 93 which reflects a very high level of independence from its benchmark MSCI Emerging Markets Index.
Management’s stake in the fund
All three managers are invested in the fund but the extent of the investment won’t be public until publication of the new Statement of Additional Information in May, 2015.
May 12, 2014.
$2,500, reduced to $1,000 for tax-advantaged accounts and $100 for accounts established with an automatic investing plan. Institutional share class has a $500,000 minimum.
1.49%, after waivers, on assets of $65 million (as of January 2015). Institutional shares have an expense ratio of 1.39%.
Touchstone Sands Capital Emerging Markets Growth is a young fund that’s worth watching. It has more going for it than its fine performance in its first ten months on the market.
The fund is managed by Sands Capital Management, using a tested formula. They invest over $47 billion using the same investment discipline. They look for:
- Sustainable above-average earnings growth
- Leaders in growing industries
- The presence of significant competitive advantages
- A clear mission and understandable model
- Financial strength
- Rational valuation
Collectively, they describe this as taking a “business owner’s perspective.” That is, they believe that great businesses will eventually and inevitably see great stock price performance. While a company’s stock price might be unstable, its business operations are likely to be much more stable. As a result, they don’t obsess about short-term price targets or price volatility; they keep focused on whether the underlying company will move ahead for years to come.
And they believe in concentrated and conviction-weighted portfolio. That is, they hold few stocks and put the most money where they have the greatest conviction. They believe that magnifies their returns while helping them to control risk, since they have much less to monitor and adjust than does some guy with a 300 stock portfolio.
The strategy seems to work:
Their Select Growth strategy has returned 12.3% annually since its 1992 launch, while its Russell 1000 Growth benchmark returned 8.9%. The strategy has led its benchmark in every trailing period longer than one year.
Their Global Growth strategy has returned 25% annually since launch in 2008, while its MSCI All Country benchmark has made 13%. The strategy has led its benchmark in every trailing period.
Finally, the Emerging Markets Growth strategy has returned 10.5% annually since launch in late 2012, while the MSCI Emerging Markets Index was actually underwater by 2.4% annually.
Being independent is a risky business. It often means embracing, for its long-term potential, the sorts of investments that others despise for their short-term dislocations. The well-documented travails of Asian gaming and resort firms illustrate the problem: these firms stand to benefit enormously in moving from a focus on tens of thousands of ultra-rich gamblers to a focus on hundreds of millions of middle-class Chinese vacationers who love to shop and gamble. The Chinese government has committed a half trillion dollars to infrastructure projects in support of that aim but, in the short term, their anti-corruption campaign has panicked the rich and sent revenues falling. By worrying more about the business than about the stock price, Sands is moving in as many rush out. Prospective investors need to ask whether they share Sands’ faith in businesses as long-term drivers of stock performance and share their willingness to ride out the storms. If so, they might want to pay a fair amount of attention to this latest extension of a consistently successful investment discipline.