SECTOR — GENERAL INVESTING
TWST: Could you please start with an introduction to the Global Contrarian Fund. Why is it called Contrarian? And tell us a little bit about your process — where and how you begin to find companies across the whole globe.

Mr. Madsen: We’ve been managing the Global Contrarian for five years now at Grandeur Peak. The whole focus of the fund is on quality value. What we mean by that is we’re looking for high-quality companies with a competitive advantage, a good management team, and high returns on capital. We want to find those opportunities, but we don’t want to pay full price for those companies.
The Fund integrates seamlessly with the investment process we’ve always run at Grandeur Peak, which is trying to find high-quality companies across the globe. We spend a lot of time working through our geography and sector teams, trying to find quality companies. And while many of our funds have a growth bias, the Global Contrarian Fund is focused on finding some of those opportunities that trade at a cheaper valuation, but maybe don’t have as much growth embedded in them.
The reason we call it the Global Contrarian strategy is that we’re very willing to own high-quality companies that are challenged over the short term, but that have bright, long-term futures.

TWST: Is there such a thing as the global investment environment? Different countries are obviously so different. That said, how are things going globally for your fund currently? Is it a very troubled environment with the war in the Middle East and conflict in the Ukraine?

Mr. Madsen: Well, when we say global, what that really means is our opportunity set is any market via a developed market, the U.S. stock market, or an emerging market. We’re willing to own companies in any part of that opportunity set. We build our portfolio company by company based on finding the best quality companies we can and owning them at a time where we think the risk/reward is attractive.
Obviously, the global landscape right now is complicated, but we think you can actually simplify that by owning really good companies and management teams that are able to adapt to all these different factors in the global economy.

TWST: Can you give us a closer look at the fund’s composition with a view to the dynamics in your heaviest and lightest weighted geographies?

Mr. Madsen: Sure. From a geographic perspective, our largest allocation is actually to the U.S., but what’s interesting is if you compare the Global Contrarian Fund to the global small-cap benchmarks, we’re actually significantly underweight the U.S. We typically will have 20% to 25% of our portfolio allocated to the U.S., whereas the benchmark might be much closer to 50% or 55%.
We think that owning a 20% to 25% weight in the U.S. properly reflects the global opportunity set that we have in front of us. There are a lot of publicly traded companies in markets outside the U.S., and we tend to think that these international markets are less efficient and give us more opportunities to buy companies at a discount to their intrinsic value.
We like markets such as Japan. We’re overweight other developed markets such as Europe, and we tend to have an overweight position in Emerging Markets as a whole.

TWST: Give us a close-up of why you like companies in Japan or Europe, in that their economies are said to be rather weak compared to the U.S.

Mr. Madsen: We like investing in Japan because there are so many companies to choose from in that country, in terms of small market cap companies. We think at the core, the corporate governance there is improving over time. Companies are becoming more shareholderfriendly and they’re more apt to return cash flow to shareholders.
And then we just find that while the demographics in Japan aren’t great, those demographics mean that companies really have to find ways to improve and become more efficient over time. We’ve found a lot of small-cap companies that play into that trend and will continue to grow and benefit from it over the long term.

TWST: Is the Japan market very uncorrelated, or not at all correlated, to the U.S. Market?

Mr. Madsen: I really couldn’t comment on what the correlation between the two markets would be. Again, we just find that on a company-by-company basis, there’s a really attractive risk/reward there.

TWST: Can you give us a look at a few of your favorite names in the U.S. and from Japan, and why you like them?

Mr. Madsen: One idea that we really liked in Japan is a company called Rise Consulting (TYO:9168). Rise Consulting is following a business model that we know and like. We’ve seen similar companies do well over time, and so we think they’re following a playbook that will lead them to success. Rise is a consulting company focused on both strategic consulting and helping companies digitize and improve their internal efficiency. The company is growing quickly and we think it trades for a really attractive valuation.
Another company that we like is Gremz (OTCMKTS:GRMZF). Gremz is a company focused on helping companies become more energy efficient. So they go into small and medium enterprises, mostly manufacturing companies, and consult with them on how they can become more energy efficient and how they can procure electricity at better prices.
Given recent spikes the Japanese market has experienced in power costs, companies are very apt to listen to their value proposition. And we like the company’s track record and think that they’ll continue to benefit from a trend towards energy efficiency and more green energy.

TWST: And they just serve Japan? They’re not in the U.S.

Mr. Madsen: Yes. They’re only in Japan.

TWST: What about in the U.S.? What do you like here?

Mr. Madsen: One company we like in the U.S. is Alamo Group (NYSE:ALG). Alamo Group makes specialized tools such as weed equipment or snow plows. The company is in a niche where they have a strong competitive position. They’re larger than most of the companies that they compete against.
We think the management team is very good from a capital allocation standpoint. And while the company’s growth prospects are modest, we think that they’ll be able to provide a really attractive return to shareholders via some growth, returning free cash flow to shareholders and by continuing to do some acquisitions, M&A, over time.
The stock trades at a really low multiple compared to other industrial companies with the same quality characteristics in the U.S.

TWST: Any others that you like?

Mr. Madsen: One other position that we’ve taken is in Five Below (NASDAQ:FIVE), which is a discount retailer. The company has been hurt by a combination of both slowing macro factors related to consumers in the U.S. and some self-inflicted mistakes. But we think the business model is a terrific business model and they have a product offering that really resonates with young consumers.
We believe that the troubles that they’re going through will be worked out over the medium term and that the market will eventually be willing to again pay a growth multiple for the company, whereas today the company is trading at a high-teens forward p/e ratio.

“We like investing in Japan because there are so many companies to choose from in that country, in terms of small market cap companies. We think at the core, the corporate governance there is improving over time. Companies are becoming more shareholder-friendly and they’re more apt to return cash flow to shareholders.”

TWST: Any names in Europe you would like to tell us about?

Mr. Madsen: In Europe, one of our favorite ideas remains Petershill Partners (OTCMKTS:PHLLF). This is a company that owns minority stakes in private equity — PE — and alternative investment managers.
Not too long ago, the market really liked PE firms as an investment, and in the last couple of years, they’ve abandoned some of these PE ideas because the fundraising environment has been tougher. We still think that private equity is a great business model. And we believe that there is a lot of room for high-quality private equity firms to grow over time.
We think Petershill owns a portfolio of some of the best private equity managers. We get to buy that portfolio at a significant discount to what a third-party firm appraised it to be worth.

TWST: Have there been any significant global trends and themes that have impacted the fund? Does the war in the Ukraine or tensions in the Middle East impact the Fund?

Mr. Madsen: The one thing that I would share is the trend to nearshoring. And there are really two factors at play. One, companies went through a period during COVID where supply chains were stretched, and two, there have been more and more tariffs placed on goods from abroad.
And so, companies have been more and more apt to try and build manufacturing capacity closer to their domestic markets, whether that’s semiconductors or just basic goods. And that has meant that countries outside of China have really benefited — countries like Vietnam or Mexico. And so, we’ve been hunting for investment opportunities in geographies like that.
India has been another geography that has benefited from supply chains moving away from China. But unfortunately, as an investment manager who is focused on owning companies with attractive valuations, the Indian stock market as a whole has really become quite expensive and it’s hard to find opportunities there that are attractively valued.

TWST: What worries you now as you look at the market going forward? Do you see the upcoming election outcome in the U.S. as being an impactful dynamic to any of your stocks?

Mr. Madsen: I think it’s really tough. What I would say is we haven’t made a lot of adjustments in the portfolio based specifically on a view of how the November election is going to turn out. We think there’s a lot of a gray area between what candidates say leading up to the election and what they’re actually able to implement once they’re in office.
The best hedge in terms of dealing with new policies that may come out is just to own good companies and good management teams that can deal with those complications. I don’t think we’ve done anything specific and I don’t think that that much is really going to change.

TWST: As you look into the coming year, what are your biggest worries? And currently, what keeps you up at night?

Mr. Madsen: Well, what I do worry about is whether or not the investment thesis we have surrounding each one of our companies in the portfolio, if that investment thesis will hold up over time. And really the biggest factor there is, have we got it right in formulating that investment thesis or have we made mistakes as we’ve been evaluating the companies before we put them in the portfolio?
And so really, I’m worried more about my own mistakes that I potentially might be making versus any external factors which are inevitably going to come and are difficult to predict.

TWST: Is there anything else you would like investors to know about the Contrarian Fund?

Mr. Madsen: Yes. I think one other aspect to think about is when we’re constructing a quality portfolio of what we think are good investment ideas from a sector standpoint, we end up actually allocating to sectors that people traditionally think of as more growth sectors. So we have overweight positions in technology, we have overweight positions in health care, and we’re underweight traditional value sectors such as materials, utilities, and real estate.
We find that companies with good competitive advantages typically reside in sectors that people think of as being growth sectors.
The Grandeur Peak Global Contrarian Fund is looking for high-quality companies which are currently out of favor or trading at prices which we believe are below their long-term potential. We build the portfolio from the bottom up and can find interesting investment opportunities in all sectors and geographies.

TWST: Thank you. (VSB)