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The Oracle of Manitoba

By: Kasia Moreno
Posted: 1/5/2012 1:57:00 PM
Referenced Stocks: ASR;MA;SNY;TRI

Moreno LogoThe web is littered with lists, boasts from every corner, each claiming to be the penultimate collection of tips, tricks, lessons, and laws. Smart investment is driven by experience and data, and you often have to navigate through the digital debris to find good advice. But mistakes are just as instructive. Smart people are never entirely immune to bad judgment. So we are offering a new monthly series—My Best, My Worst, My Next—which offers three personal anecdotes from world-class investors. We hope to guide you towards success, warn you away from failure, and provide an advanced peek at the future.

In his book The Warren Buffetts Next Door: The World's Greatest Investors You've Never Heard Of, Matt Schifrin, Forbes investing editor, profiles Randolph  McDuff, a former broker and now individual investor based in Canada. "The Oracle of Manitoba" is the title of the chapter about McDuff, whose large cap international portfolio on has had an annual return of 18.33% since inception in August 2000.

 MY BEST: Mastering the Brave Cashless World

McDuff's best investment has resulted from the global trend toward cashless payment systems. This trend has benefited both MasterCard (MA) and Visa(V), the world's largest publicly traded payment processing companies, which serve as conduits between cashless payments such as mobile, debit or "pay by wave" contactless transactions by consumers or businesses on one side, and banks on the other side.

With 2011 revenues of $9 billion and a market cap of $66 billion, Visa is perceived as a bluer chip than MasterCard, with 2011 forecast revenues of $7 billion and a market cap of $47 billion. In the U.S., Visa generates roughly 2.3 times more gross domestic volume (GDV) than MasterCard.

But McDuff believes that by 2020 MasterCard will surpass Visa in worldwide revenues. That's because MasterCard is growing its business outside the U.S. at a faster clip than Visa. In the most recent quarter ended Sept. 30, 2011, MasterCard reported $573 billion of international GDV, a total increase of 28.8% over the corresponding quarter of 2010. For the same period Visa reported international GDV of $453 billion, up by 27.2% over 2010.

McDuff believes that Mastercard's recent international contract wins and an expanded branding affiliation with China Unionpay, the country's government-backed bank card consortium, will result in an acceleration of MasterCard's international business.


 MY WORST: Avoiding Wealth Hazards

McDuff's portfolio management style has no place for shopping sprees or selling binges: His annual portfolio turnover is less than 10% a year, which includes the reinvestment of dividends. McDuff believes in the wisdom of "Trading Is Hazardous to Your Wealth," a study published in 2000 by University of California, Berkeley, professors Terrance Odean and Brad Barber. Based on a research sample of over 66,000 accounts, the study concluded that those who trade most earn an annual return of 11.4%, while the market returns 17.9%.

McDuff doesn't like companies he invests in to go on shopping sprees either. He names two stocks as his worst, and he sold them both after they acquired other companies. One was The Thomson Corporation, a Canadian operator of accounting and legal databases. McDuff purchased shares of Thomson in August 2006 for $41. In May of 2007, Thomson announced its acquisition of   Reuters Group PLC, a British news agency and financial market data provider, a deal which took a year to close.

Thomson Reuters (TRI) saw the merger as a way to ride the global trend of the information economy. But McDuff saw a reliable business getting involved with a media company whose variable returns couldn't be stabilized. He sold shares in March 2011 for an average price of $39. The basic loss was 3.8%, but after taking into account the opportunity cost and time value of money, McDuff figures it turned out to be about a 10% loss overall.

McDuff also sold European drugmaker Sanofi Aventis (SNY) after the company gobbled up U.S.-based Genzyme for $20 billion earlier this year. The price Sanofi paid for Genzyme was, according to McDuff, a valuation mistake. "Companies that tend to grow through acquisitions run the same risks that individual investors do of falling prey to hype, and therefore to overpaying," says McDuff.


 MY NEXT: Bon Voyage

McDuff believes that publicly held airports worldwide are a good bet, considering the rise in international travel, which tends to outpace discretionary income. The World Tourist Organization forecasts that on average tourist arrivals will grow by 4.1% annually worldwide, reaching 1.6 billion in 2020.

Among McDuff's top picks to ride this global trend is Grupo Aeroportuario del Sureste, S.A.B. de C.V. (ASR), a Mexican airport operator whose operations include the airports in Cancun and Cozumel. The company's  total passenger traffic for October 2011 increased by 10.6% compared with October 2010.

McDuff also sees opportunity in Chinese airports, including the Hainan Meilan International Airport Co. Ltd. (357-HK), located in Haikou, the capital city of Hainan, China's top tourism province. The total passenger traffic at Hainan Meilan International went up by 39% in October 2011, compared with October 2010. Beijing Capital Airport (694-HK), the operator of the Beijing Airport, already the world's second-busiest airport by passenger traffic, is also McDuff's pick.

The improving U.S. economy should lead to the increase of international travel by Americans, further helping airports worldwide.