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How do two money managers in Naples scout the globe for stocks?
After all, giant mutual fund companies and brokerage firms form armies of analysts to do this kind of labor-intensive work.
Michael Morris and John Suddeth say they've been able to combine technology with travel to identify, select and manage about 60 stocks of companies around the world. They've been able to do this with relatively low management fees that range from 0.5% to 1% of managed assets depending on the size of the portfolio.
The well-known Naples money managers started Naples Global Advisors earlier this year and already manage $125 million, mostly for high-net-worth individuals (the minimum to invest is $1 million). They previously formed Naples Capital Advisors, which they sold to TIB Bank in 2007.
“We are not afraid to go outside our borders,” says Morris, 52, the firm's president and CEO. Just as U.S. companies have ventured abroad, high-net-worth clients today don't limit their investments to domestic stocks.
Indeed, investors unsatisfied with equity performance in the U.S. this year have ventured into emerging markets to seek better returns. “They're open to the idea that we don't have a monopoly on opportunities,” Morris says.
Trading costs and back-office functions by custodians including Charles Schwab and Fidelity give the firm's staff of five the time it takes to devote to investing and customizing portfolios for clients. All this wouldn't have been possible 15 years ago, Morris acknowledges.
Morris' and Suddeth's investment strategy is somewhat unique because they'll scout the world for stocks of any size, from tiny companies to giant conglomerates. Their investment style is more value-oriented, favoring less expensive stocks relative to their price-to-earnings and price-to-book ratios. They seek companies with higher profit margins, low debt and growing dividends.
To do that, they filter the Bloomberg database to screen 18,000 stocks using these criteria. The screen usually generates a list of about 120 companies, from which they've picked about 60. To reduce risk, no stock accounts for more than 1% or 2% of the firm's portfolio. Holdings range from giant multinational companies such as McDonalds to Rotork, a small British manufacturer of valve controls.
Once he's identified suitable investment prospects, Suddeth, 48, the firm's chief investment officer, visits them. “I'm going to Colombia next month,” he says. “It's like putting a soccer team together.”
It pays to travel to visit with companies and check out the business environment in foreign countries because sometimes opportunities aren't what they appear from numbers alone. For example, Suddeth traveled to India last year because companies clearly stand to benefit from the demographic boom there. “It's been the trendy thing to invest in India,” he says.
But what Suddeth discovered in India is that investors are overpaying for stocks of companies there because of problems such as the lack of infrastructure to keep up with growth. His conclusion: “It deserves to trade at a discount.”
As with many value screens, stocks such as utilities often crop up. But utilities in emerging markets offer compelling growth stories besides their plump dividends and low prices. For example, Brazilian water-and-sewer utility Sabesp is growing faster than its U.S. counterparts.
That strategy worked well for Morris and Suddeth when they led Naples Capital Advisors, their predecessor company. They routinely beat benchmarks such as the Standard & Poor's 500-stock index of the largest U.S. companies and the MSCI All Country World Index. For example, in 2010, Suddeth's composite returns rose 17.9% compared with 15.1% for the S&P 500 and 12.6% for the ACWI index.
For stock performance, Suddeth aims for 8% plus inflation annually. The firm also invests in bonds, but selects only top-rated fixed-income securities.
Naples Global Advisors now manages $125 million for about 75 high-net-worth families. Morris says he's confident he can add $50 million in new assets a year in large part because clients seek face-to-face discussions with their money manager. What's more, Suddeth's compelling investment stories from his own research and travel are big draws. “They eat it up,” Morris says.
Besides the custodial services, Naples Global Advisors uses the Charles Schwab and Fidelity trading platforms. Fidelity's international stock-trading system makes it easy to trade foreign stocks at a reasonable cost, Morris says. “We want to live and work here,” Morris says. “It can be done.”
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