Most money managers, even those who consider themselves hands-on, “kick the tires” types, usually start with a computerized quantitative screen of their entire stock universe to narrow down potential investment candidates. Not Bryan Hinmon. “If we started from a quantitative place, we’d end up in the same place as everyone else,” the manager of the MFAM Global Opportunities fund says. “We’re interested in running portfolios that have a chance of outperformance.”
Hinmon’s logic makes sense: If you want to beat the market and competitors, you have to discover the unique qualitative advantages in companies that a quant screen or a factor-based fund can’t detect. MFAM Global Opportunities (FOOLX) has benefited by this approach. Over the past five years, its 8.6% annualized return has beaten 88% of its peers in Morningstar’s World Large Stock fund category; over the past decade, 92%.
But how do you find companies in a universe of thousands of stocks, without using screens? Hinmon’s solution is his diverse staff—six analysts and co-manager Anthony Arsta, who don’t all come from the financial world. “My team has educational backgrounds in pharmacology, mechanical engineering, education, law, banking, computer science, and then finance,” he says. “The intersection and interaction of those backgrounds really lead us to a place where we achieve unique insights.”
Hinmon employs a concentrated strategy; the $487 million fund owns 40 to 50 stocks and holds them for several years. The eight team members are required to generate eight new ideas a year. That enables them to dig deeply into their research.
Hinmon, who is also chief investment officer of Motley Fool Asset Management, or MFAM, has a more conventional résumé. He began his career in 2003 as an analyst for three separate money-management businesses run out of the same office in Naples, Fla. One was a wealth management firm where some client portfolios had holdings for 20 or 25 years; another was a private-equity firm that often invested in small businesses. This taught Hinmon that “the numbers don’t always tell you everything. You’re making bets on people and on strategy.” He ran a hedge fund during the financial crisis, from 2007 until 2010, where he learned the distinction between poorly run companies and those with “management teams that think and act for the long term even when there’s chaos surrounding them.”
Hinmon joined Motley Food Asset Management in 2010, just after the financial website launched its asset management arm. Global Opportunities was its first fund, launched in June 2009; Hinmon joined the fund’s management team in 2015. MFAM now oversees $1 billion million in two mutual funds and two exchange-traded funds.
Hinmon looks for strong companies that can withstand the next crisis. “We define quality across four pillars, the first being management, corporate culture, and incentives,” he says. The other three pillars are a business’ economics, competitive advantage, and trajectory: “Will this be a better or worse business in 10 years, and why?”
Before any company can enter the portfolio, its analyst must write a report scoring the company on each of the four pillars from one to five. Everyone else comes up with their own quality scores for the stock. The team then debates whether the company should be added to the portfolio; Hinmon and Arsta make the final call.
Hinmon’s most recent addition, in April, is laser manufacturer nLIGHT (LASR), which one of his analysts has been following for 10 years. The company manufactures everything that goes into its high-powered lasers and has only one competitor, IPG Photonics —which the fund also owns. IPG (IPGP) and nLIGHT have managed to reduce the costs of owning, operating, and maintaining their lasers, which are far more precise than low-end lasers. Adoption of their lasers by industrial manufacturers has been rapid.
nLIGHT checks off all of the fund’s boxes for quality. Its long-term trajectory is perhaps its strongest feature. It’s a small company with a market value of $480 million, but Hinmon’s team expects its fiber-optic lasers to permanently take market share from traditional carbon-dioxide ones. Hinmon says its gross profit margins can expand from 35% to 50%. And the company is still run by its three founders, all with engineering backgrounds. The stock has fallen sharply during the U.S. trade war, as one of its end markets is China, but Hinmon sees that as a buying opportunity.
Hinmon is a thematic investor, looking for long-term industry trends and then investigating every company in a favorite industry. He likes online retail, so the obvious choice, Amazon.com (AMZN), is the fund’s biggest holding. He says it has plenty of room to grow, despite its immense size. But he also owns Argentina’s MercadoLibre (MELI), which is “viewed as the Amazon of Latin America,” he says. “That sells the company short because it not only has a thriving e-commerce business, but like PayPal (PYPL) it also has invested quite a bit in electronic payments. And Latin America is a market that it has already successfully defended against Amazon.”
One important theme for Hinmon is the evolution of workplaces, so that intangible assets such as human or intellectual capital—meaning people—have become more valuable than physical assets such as real estate. He’s a big fan of software companies, which make up 14% of the fund’s portfolio, especially ones that facilitate a digital workplace. One favorite is Atlassian (TEAM). The Australian company originally designed its Jira software to allow software engineers to collaborate in code development, but has since expanded to manage workflow for all departments within an organization.
Bringing disparate people together to collaborate is certainly something that Hinmon knows all about.
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