With $16.7 billion in assets, Hexavest has spent the last 10 years growing its client list, and now counts 188 institutions in primarily developed countries around the world as clients. As it has for several quarters, Hexavest counts Microsoft (MSFT -0.66%) as its second-largest individual holding, as measured by its percentage relative to Hexavest's entire portfolio. At 3.25% of its overall assets under management, Microsoft trails only ExxonMobil's 3.27% portfolio weighting.
What does Hexavest find so attractive about Microsoft? A review of its investment philosophy makes it clear why Microsoft occupies such a prominent position in Hexavest's global portfolio. Like many investors, institutional or individual, finding relative value compared to peers, indices, or any suitable benchmark, is the goal. Based on the key metrics hedge fund manager Hexavest subscribes to, Microsoft fits the bill nicely.
Start from the top
Hexavest isn't alone in beginning its analysis using a top-down methodology. As the name implies, a top-down investment philosophy takes a macro-economic perspective, and then works down from there. Discovering "excesses" in the overall economy or particular markets can help investors sift through over-valued sectors and stocks. Top-down can also be a successful way of finding stocks, like Microsoft, who haven't, as of yet, caught up with its peers from a share price perspective.
After years of meandering aimlessly, Microsoft's stock certainly hasn't suffered from "excess" for quite some time, nor was it earlier this year as CEO Satya Nadella initiated his "mobile-first, cloud-first" transition. However, fiscal year 2015 Q1 results released on Oct. 23 demonstrated that Hexavest's aggressive investment in Microsoft -- it holds 4,604,851 shares as of Sept. 30, 2014 -- was justified and is paying off, as it is for individual investors who got on board the Microsoft train.
To its credit, Hexavest also saw an opportunity a couple of quarters back in Microsoft's mobile nemesis Apple (AAPL -0.81%). Even accounting for Apple's 7-for-1 stock split in early June, Hexavest added to its Apple holdings, and it now accounts for 2.94% of Hexavest's overall portfolio. During that same period, Hexavest continued to see value in Microsoft, too, adding over 100,000 more shares.
The old and the new
For those of us that have been around a while, fundamental analysis tends to be the primary determinate of what is, or isn't, a suitable investment. A strong balance sheet, positive cash flow, relative value compared to peers, the prospects for future growth, and a host of other "traditional" means of measuring a stock's worth is what fundamental analysis is all about. In those regards, Microsoft was beginning to show signs of life going back a couple of quarters, but remained a good value while investor's seemed to take a "wait-and-see" approach.
But significant strides are being made, with triple-digit growth in cloud revenues -- again -- and Microsoft's $908 million Surface revenues last quarter, compared to $400 million in fiscal year 2014's Q1, are the tell-tale signs Microsoft fans have been waiting for. It was always going to take time to make its transition to new, cutting-edge technologies like mobile and cloud computing, and Microsoft certainly isn't done yet -- which translates to more growth opportunities going forward. Is it any wonder -- after adding its quantitative analysis on top of its fundamentals review -- Hexavest added to its already substantial Microsoft holdings the past two quarters?
Final Foolish thoughts
Portfolio managers are certainly not infallible, which most anyone who's invested in a retirement plan with mutual fund options knows first-hand. But what makes Hexavest and fund managers like them different than some individual investors is they tend to exercise discipline, particularly value-oriented managers. Buying Microsoft stock, and adding to its holdings even as it was mired in obscurity, is a lesson all long-term investors should take to heart.
For those who already did and took the Microsoft stock plunge, you're finally reaping your rewards. For those that haven't, no, you're not too late. Nadella and team have a long way to go before they've turned the cloud and mobile corner for good, but the ride from here to there should prove profitable for Microsoft shareholders.
