Morningstar Magazine - October/November 2017 - 76

Investors

unwinding of the bank trade that you saw
after the election to add some asset-sensitive
names earlier this year.

Banking on Banks
Let's get into some individual names. Andy, you held
on to United Bankshares UBSI after it recently bought
out PrivateBancorp.

Adams: United Bankshares serves the Washington,
D.C., market. Where we've gone outside the
upper Midwest is when we see better opportunities elsewhere. Banks are very geographically
focused, and the D.C. market is a good place to be
positioned. We like the demographic growth of
that marketplace and the local competitive
environment. The key is having good access to the
management teams. We're well-known in
the upper Midwest, so we have no problem with
access to companies based here. When we
get outside that area, we want to make sure we
can do all the due diligence that we need to
do. With United Bankshares, that's been the case.
San Jose: Glacier Bancorp GBCI has been
a long-term holding. We got involved right in the
middle of the [financial] crisis. Like a lot of
the banks we own, it is in an end market where
there's less big bank competition. In Montana,
Idaho, and Wyoming, they're able to have
a very solid share and a very sticky deposit base.
And we like the management team. They've
created a lot of value, mostly through acquisitions
that have very low integration risk. Their
ability to use their stock, which is a pretty
high-priced currency, to buy smaller banks has
been a very successful strategy over time.
Taylor: We increased our weight in banks about
two years ago. We had been fairly underweight
in our small-cap growth portfolios since before the
financial crisis. We thought the banks had
opaque balance sheets, and that growth would
be slow for much longer than expected. About two
years ago, we started to see net income increase
year over year in the sector, and it was real
growth, not just taking money out of extra reserves.
We identified small banks in geographies where
they had a good market presence. Small and
midsized business customers have not been well

76

Morningstar October/November 2017

served by the consolidation of the larger banks,
so a well-run bank with good commercial
bankers has a good chance to take share and
continue to grow. An example of that for
us is Texas Capital Bancshares TCBI. They're
growing nicely but are still a small percentage of
the share in the Dallas market. They have
much larger consolidated competitors to take
share from and that should serve them well over
a long period of time.

more heavily invested in three years ago.
As growth rates slowed our positions got smaller
as well. But recently we started looking at
higher-quality companies in the industrial space,
recognizing that we had something of an
industrials recession for the past two or more
years. We thought the market didn't appreciate
where WESCO's earnings could go, even
if the economy was just decent-and if it got any
kind of tailwind, how much better it could be.

JB, one of the larger bank holdings in your portfolio

In the past quarter, we saw good things on
the revenue side, but the market was disappointed
that management is going to invest more, which
might hold back margins. We don't think
it's a fundamental change to the story. But an
additional overhang is that any distributor is
assumed to be threatened by Amazon. In WESCO's
case, we don't see that happening.

is a U.K. bank, Metro Bank MTRO:GB. What's the
thesis there?

Taylor: Metro Bank is somewhat of a phenomenon.
In the mid-2000s, we owned Commerce Bank,
based out of New Jersey. Vernon Hill, the current
chairman of Metro Bank, was the CEO of
Commerce. It was a low-cost deposit-gathering
story that grew well from an IPO until they
sold to Toronto-Dominion TD. Over many years the
stock price compounded at 20%-plus.

It's an incredible story. In his 60s, instead
of cashing out and retiring, Hill decided to move
to the U.K. and start over. He thought that
a bank focused on giving retail and small-business
customers great service would play well
there. He started the bank in 2009, and it has been
growing phenomenally, even eight years later.
Last quarter, they grew their deposits 47% and
their noninterest bank deposits 70%. They're simply
taking massive amounts of share. They're
also rated number one in the U.K. for mobile apps
and online access for customers. That market has
been dominated by five or six banks for 100plus years, and they just aren't as nimble as Metro
Bank. We think this is one that could be tucked
away for a long period of time.

Avoiding Amazon
To shift sectors: WESCO International WCC was in
the news with an earnings disappointment [in late July],
and the shares took a significant hit. Is this a
story of being unable to expand margins and of revenue
growth at this point in the cycle? Or is it a story
of Amazon.com AMZN taking share from distributors?

Taylor: WESCO is a very high-quality industrial
distributor. Industrials is a place that we were

San Jose: We own Pool Corp POOL, which is
a distributor of pool equipment, mostly
to contractors. They've put up some great
performance over the years, and in an environment
where Amazon does tend to dominate the
headlines, they had a solid quarter, 7% organic
growth. Their business model is predicated
on being the dominant provider in local regions,
as well as having national scale. Pool Corp's
customers need customer service, quick
turnaround times, and advice on what products
work best in certain situations [which Amazon
can't necessarily provide].

What dogged them in the second quarter was
a slight margin disappointment. People thought
that must mean pressure from Amazon,
and investors were quick to sell the stock
off-even though Amazon's actually a very small
player in the pool-supplies business.
Adams: It seems like in almost every one of our
investment meetings, Amazon gets mentioned.
Amazon is certainly going to be disruptive
in a lot of different areas. On the small-cap side,
however, we don't have too much in Amazon's
path. For example, Tile Shop TTS is a company that
we've been adding to recently. Given simply
the physical properties, the weight of the tiles,
it would be difficult to displace them from
an online standpoint. We believe there are many


http://www.Amazon.com

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