Investing in quality businesses that have built ‘moats’ was a common theme among three global equity fund managers who spoke at this year’s New Model Adviser® conference earlier this month.
Alex Illingworth, manager of the Artemis Global Select fund, set his sights on new areas of secular growth, while building capital protection into the portfolio. ‘I don’t believe stodgy income stocks that have done fantastically well for everybody in the last decade are likely to protect capital so well in the future,’ he said.
The key, said Illingworth, is delivering excess returns but with lower volatility. He explained: ‘Not losing all the performance in the most difficult periods of the market is critical to delivering real wealth creation over long periods of time.’
Illingworth seeks clusters of sustainable growth around the globe. These are companies in industries with maintainable barriers to entry. ‘Such companies have built moats around their business that can be widened over time,’ he said. ‘We want to compound the cashflows from these companies.’
One such industry is Japanese robotics. It has created a collaborative code across the sector, enabling companies to build strong moats around their products. The fund’s strongest performer in the past two years is Daifuku, a global leader in warehouse automation for e-commerce.
Illingworth also tries to avoid the pitfalls of ‘known unknowns’, such as the UK’s current political upheaval. However, the dynamism of US technology businesses has led the manager to allocate 41% of the fund’s stock across the pond.
Passing up pressure
Pieter Fourie, Citywire AA-rated lead manager of the Sanlam Private Wealth Global High Quality fund, also emphasises business quality and the power of the ‘economic moat’. The fund’s ethos is to remain benchmark agnostic and avoid value traps and market speculation, looking five to eight years ahead.
‘We don’t have macro analysts or economists. We don’t try to predict anything. Instead, we focus all our time on our stocks,’ said Fourie. ‘We don’t want to end up with a business that the screens say is growing but where longer term competitive forces could change quickly.’
These approaches led Illingworth and Fourie to largely avoid banks, automotives and energy firms, where competitive pressures are high.
Fourie highlights Johnson & Johnson as an example of a ‘compounding machine’, maintaining compound dividend growth of 3.7% a year over 40 years. This means a $10,000 (£7,200) investment 40 years ago would now generate a $55,629 annual dividend payout. And the total return is 240 times the original investment.
Andrew Hall, Citywire + rated manager of the Invesco Perpetual Global Opportunities fund, is focusing on 30 to 40 stocks that ‘march to their own drum beat’. His fund combines 96% active share with 30% turnover. Hall suggests the best investments are ‘contrarian, challenging and uncomfortable’.
The fund bought Volkswagen stock at the height of the diesel crisis, for instance, anticipating the crisis would force the company to put shareholders’ interests at its core. It therefore capitalised on the historically low share price.
‘The cosy consensus, which feels a very comfortable place to be, is often the riskiest place to be,’ said Hall. ‘Our fear is that the cosy consensus is owning high-quality, low volatility, intrinsically stable businesses. We have no problem owning those companies, except when valuations get too expensive. At the moment there are too many price insensitive buyers.
‘Energy has the widest valuation dispersion. Sectors with the widest valuation spreads are normally a fruitful hunting ground.’
The fund is most heavily exposed to energy, automotives and retail. This contrasts with conventional investment strategies based on ‘high-quality, low volatility’ companies.