Despite strong stock selection overall, there was a well-publicized exception within the portfolio. After having held Home Capital (TSX:HCG) the previous 15 years, a period in which the company consistently generated wealth for shareholders, a combination of regulatory enforcement, management changes, and, most crucially, acute funding risk caused a hefty reversal in Home Capital’s stock price. We exited the name when those funding risks became apparent as we ultimately lost confidence in the viability of the company’s business model. At Mawer, we define risk as the permanent impairment of capital, and in this case, the capital we had allocated to Home Capital was permanently impaired. We regret that we did not move faster and are disappointed with the outcome: it stings. But we are comforted by the fact that Home Capital did not command an overbearing position size within the portfolio; despite a negative reversal in the stock, a well-diversified portfolio provided a great deal of ballast.
From Mawer Canadian Equity Fund (Trades, Portfolio)s second quarter 2017 investment newsletter.
