22 BARRON’S September 2, 2019
been following for 10 years. The com-
pany manufactures everything that
goes into its high-powered lasers and
has only one competitor, IPG Photon-
ics —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 trajec-
tory 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. Hin-
mon says its gross profit margins can
expand from 35% to 50%. And the
company is still run by its three found-
ers, 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, look-
ing 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 Ama-
zon of Latin America,” he says. “That
sells the company short because it not
only has a thriving e-commerce busi-
ness, 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 phys-
ical 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.
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 man-
agement team in 2015. MFAM now
oversees $1 billion million in two mu-
tual 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’ eco-
nomics, 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 re-
port scoring the company on each of
the four pillars from one to five. Ev-
eryone else comes up with their own
quality scores for the stock. The team
then debates whether the company
should be added to the portfolio; Hin-
mon and Arsta make the final call.
Hinmon’s most recent addition, in
April, is laser manufacturer nLIGHT
(LASR), which one of his analysts has
MFAM Global Opportunities.............
Note: Holdings as of 6/30; Returns as of 8/26; three- and five-year
returns are annualized.
Sources: Morningstar; Motley Fool Asset Management
Total Return
1-Yr 3-Yr 5-Yr
FOOLX 5.2% 14.8% 8.6%
World Large
Stock Category
-1.5 8.2 5.2
Top 10 Holdings % of Assets
Company / Ticker
Amazon.com / AMZN 5.8%
Mastercard / MA 5.4
Medtronic / MDT 4.4
Atlassian / TEAM 3.8
Starbucks / SBUX 3.5
SoftBank Group / 9984.Japan 3.3
Paycom Software / PAYC 3.2
Watsco / WSO 3.2
MercadoLibre / MELI 3.1
SBA Communications /
SBAC
2.9
Total 38.6
Funds
Using Volatility ETFs for Safety
ByStephenGandel
INVESTORS ARE PILING INTO AN EXCHANGE-TRADED FUND THAT APPEARS TO PROM-
ise protection at a time when stocks, and the economy in general, look to be
theirmostvulnerableinyears.Theproblem:Thefundmayactuallybeoneof
the riskiest investments in the market right now.
The iShares Edge MSCI Min Vol U.S.A. ETF (ticker: USMV) has at-
tractednearly$9.5billionthisyear,secondonlytothebroaderandmuchbet-
terknown VanguardS&P500 (VOO).TheiSharesETFhasswelled42%in
thepasteightmonthsto$32billion,andisnowthelargestofthelow-volatility
ETFs,morethantwicethesizeofitsnextlargestrival,the$12billion Invesco
S&P 500 Low Volatility (SPLV), which has also been attracting assets.
Investor interest in understandable: As volatility increases, investors seek
safety.AndtheiSharesETF’sreturnshavebeenremarkable—up22%in2019,
versus18%fortheS&P500.Therehasalsobeenanumberofstudiessuggesting
thatlowvolatilityfundscanofferbetterreturnsandlowerriskthantraditional
indexfunds;themostfamousisa2014studybyaNewYorkUniversityecono-
mistandstrategistfromhedgefundAQRcalled“BettingAgainstBeta,”theWall
Streettermforhowmuchastockmovesinlockstepwiththerestofthemarket.
Theargumentforwhylowvolatilitystocksoutperformisessentiallyavalue
one.Whenthestockmarketisrising,newinvestorstendtobedrawntothe
stocksthataregoingup.Indexfunds,whicharemostlymarket-capweighed,
alsoownmoreofthebest-performingstocksastheyrise.Basedonthat,low
volatility stocks are often relatively undervalued.
That’s not the case now. The average stock in the iShares ETF trades for
24timestrailing12-monthearnings,versus19fortheS&P500;theETFoverall
tradesata17%premiumtoitsMSCIbenchmark.ArecentstudyfromLeuthold
Groupfoundthatlowvolatilitystocks,relativetotheirhighervolatilitypeers,
are 99% more expensive than they have been over time, going back to 1990.
Anotherproblemisinterestrates.Lowvolatilitystockstendtobeinsectors
that do better when interest rates are falling. The surprise drop in interest
ratesthisyear,forinstance,isprobablywhylow-volETFshavedonesowell
in 2019. Interest rates may not rise anytime soon, given the lack of strength
in the economy, but they probably won’t drop much more, either. That could
temper some enthusiasm for low volatility strategies for a while.
Lastly,theETFitselfisdiversifiedacrosssectors—ratherthanowningthe
stocks with the lowest volatility, as the Invesco ETF does, the iShares ETF
ownsthelowest-volstocksineachsector.Thatleadstogreaterdiversification—
theInvescoETFtendstobeheavilyweightedinutilitiesandrealestate—but
canleadtounexpectedvolatility.Forinstance,iShares’USMVfellmorethan
10%inlastyear’smarketturmoilfrommid-Augustuntiltheendoftheyear;
theS&Pwasupnearly10%inthesameperiod.Evenso,“webelieveadiversi-
fied low vol approach over time will produce market-like returns with lower
risk,” says Holly Framsted, head of U.S. factor ETFs for BlackRock.
ResearchAffiliates,however,hasfoundthatthemoreadjustmentsmadeto
astraightlow-volatilityportfolio,thelesseffectiveitwillbeatmitigatingmar-
ket downturns. Feifei Li, a partner and head of investment strategy at Re-
searchAffiliates,preferstheInvescoETFforthisreason.Itsportfoliohasa
slightlyloweraverageprice/earningratio,23,thantheiShares’24.Thefund
isunlikelytooutperformthemarket—itfacesthesameinterest-rateheadwinds
astheiSharesETF—butit’slikelytodoabetterjobofprotectingyourmoney,
and that’s the reason for buying a low vol ETF in the first place.