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Betting on the mega-caps

Ashburton’s Kathy Davey on picking quality multinationals that won’t keep you awake at night, being proactive during the pandemic, and anticipating where the world is going.

RYK VAN NIEKERK: Welcome to this market commentator podcast. It’s my weekly podcast where I speak to leading investment professionals. My name is Ryk van Niekerk and my guest today is Kathy Davey. She is an investment manager at Ashburton. She’s a member of the Ashburton global equity team. She has been in the business for nearly 15 years and started her career at Bear Stearns in the UK in 2007. She joined Ashburton in 2013 and currently manages the Ashburton Global Leaders Equity Fund.

Kathy, thank you so much for joining me. You must be quite happy to be involved with the international team, because international markets have performed really well, especially since March, and the local market is a bit of a dog. Is there a bit of rivalry between the managers of the local funds and the international funds at Ashburton?

KATHY DAVEY: Well, I must say I do feel lucky. I do feel the pressure has been a little bit more on the SA team and the stress that we’ve had, especially locally. Global just continues to do well and surprise us to the upside a lot. But there’s a lot of reasons and a lot of support so that we think the market will continue to carry on going. It’s been a great time of learning and I think it’s a great space to be in.

Quality mega-caps

RYK VAN NIEKERK: But there are so many uncertainties currently. I think the only certainty is that we don’t know what the uncertainties are, what all of them are. But what I found interesting about the fund you manage is the mandate. On the fund fact sheet it states the following: The Global Leaders Equity Fund aims to achieve long-term capital growth over the economic cycle by investing in transferable securities issued by leading companies listed globally. A very interesting definition. Does this limit you in any way to invest in any business?

KATHY DAVEY: What we look for specifically for the Global Leaders Fund is we like to look for companies that we view as being quality mega-cap. When we talk about quality, we’re looking out for stocks that have strong balance sheets. So we’re going to be looking at the levels of debt, of course, sustainable business models. And we’re looking for companies that are producing returns in excess of the cost of capital, so basically just stocks that don’t keep you awake at night. In terms of mega cap, we generally have our own definition for that in terms of looking for companies that have a market cap of, on average, about US$100 billion. So very, very large companies, companies that can really withstand what we’ve gone through recently because they are stronger, because they’ve got good balance sheets, and actually can often take advantage of what’s happened when their smaller, weaker competitors struggle a lot more.

So that’s what we’re looking for. We tend to look for more defensive-type stops, so some sort of overweight consumer staples, companies which have performed very well, earning profits. That’s the sort of fund you are looking at. We are really looking at companies that we see growing into the future … that are large enough to sustain a lot of financial stress.

US tech stocks

RYK VAN NIEKERK: You say “conservative companies”. But a third of your portfolio is invested in information technology. Microsoft is the largest holding, 8.5% of the fund. Alphabet, which owns Google, at 8% is second. Aren’t you concerned about evaluations of some of these big IT stocks in the US?

KATHY DAVEY: That’s quite interesting because we certainly are. It’s a huge conversation that we do have in our investment meetings. Of course, these technology companies are growing, but in the same respect a lot of their share-price appreciation has been based on massive reratings. So when we look at our Global Leaders Fund, we invest in companies that offer growth at a reasonable price. So we are not going to chase these expensive technology stocks.

When you look at Alphabet, they actually trade on about a 20 times forward PE. So they’re not expensive at all. And we do expect attractive growth.

I think they haven’t rallied with the rest of the sector. There are a couple of reasons for that, one being because they are obviously heavily exposed to advertising, and in particular travel advertising, which is about 12%. And then of course also there has been a lot of talk about antitrust regulation in the US. These are possibly the reasons we haven’t seen a massive rerating in Google. However, we are very positive about this company in the future, and very comfortable to hold at these levels. So that’s one of our big tech exposures.

And then, looking at Microsoft, also not a crazy valuation. It’s just come into the 30 times forward PEs. So, you know, it’s not sitting at some of these other companies that are hitting 50 and 60 times. We think you can still get double-digit growth from the company. Really, this company is feeding into a lot of where the world is going in terms of digital transformation and software as a service. They’ve transformed their business so well. So you are very positive, also a great acquisition.

What I’m basically saying is we want that tech exposure, but we’re not going to pay any price for it. And we do worry that some of the other companies that have seen these massive reratings will come back, or we want to be able to know that we can get some share price appreciation in the stocks that we buy.

Trump vs Biden

RYK VAN NIEKERK: And those two companies, Microsoft and Alphabet, also have phenomenally strong balance sheets. I think they have cash which they don’t really know what to do with. But the US market is interesting. We will see a presidential election soon, and that may throw the cat among the pigeons. What are you views on the US markets and what the presidential election can do to these markets?

KATHY DAVEY: I think at the moment the polls and the betting in shops are looking for a [Joe] Biden win, which I guess would be our best-case scenario. I do think possibly [Donald] Trump support isn’t that visible, because it’s not perhaps as popular to be an outward-spoken Trump supporter as opposed to being a Biden supporter. But Trump does bring a lot of benefits in terms of the strength of the market.

And of course, Biden would mean increased taxes for companies, which naturally means lower evaluations for the equity market.

In terms of both wins, let’s say, if it is a Biden win, it wouldn’t shift our portfolio dramatically, but we probably would make a few changes around the edges. So we expect to see more – we are overweight healthcare at the moment; we probably would cut that overweight back a little bit because Biden is more [about] regulation.

We do expect to see more fiscal spending if Biden does win. And, in that regard, we would look to invest in more companies that would benefit from increased fiscal spending. So those are the sort of changes we would make.

In terms of growth versus value, we still think growth will continue to be supported as an investment style.

The reason why is that the Fed [US Federal Reserve] has made it very clear that they are going to be keeping interest rates low until at least 2023.

Either way, whether it’s Biden or Trump, you should see equity markets continuously supported by low interest rates. So I think if either Biden or Trump win, we will still see interest rates being kept very low – and that’s because the Fed has made it clear that they are willing to tolerate high levels of inflation and still keep interest rates low until about 2023. So that will continue to be a positive for equity markets as a whole.

So really, as I say, just to sum up, yes, we would have to make a few changes around the edges in terms of a Biden win. It’s perhaps not as positive for equity markets as a Trump win would be. However, we could shift into more positive sectors that would possibly benefit from things like fiscal spending.

RYK VAN NIEKERK: Kathy, how big is your exposure to the US market?

KATHY DAVEY: It’s about 50% of our fund. However, a lot of the companies that we are invested in, in the US, will have exposure to other countries; so that exposure would be brought down to about 35 to 40% local revenue exposure, because of course we are investing in multinational companies that are deriving revenues from other regions.

Interestingly enough, we’ve talked quite a bit about the US, but we’ve seen massive rallies, particularly in the tech sector in the US market. And what it has meant is that we are starting to look for more opportunities in tech stocks in the Asian market – tech stocks that are also offering good growth, but haven’t actually participated in this rally that we’ve seen in US-based tech stocks as much. So we are talking about the likes of Alibaba, for one. We have an investment in Samsung for another. We really think these stocks still offer good valuations and good growth. So that’s kind of where we’ve been shifting a bit more away from US into the Asian market.

Fund composition 

RYK VAN NIEKERK: I am looking at an article you wrote which was published in June this year, and the composition of the fund really looks a lot different. You’ve got the Kerry Group at the top, which I believe is in nutritional products. Has the fund changed significantly over the past few months?

KATHY DAVEY: Let’s perhaps start from the beginning of the year. When we started at 2020, we were relatively positive. We saw growth increasing within the States. We were starting to see some good progress in terms of US-China trade talks. And then of course Coronavirus hit. When it did hit, we had to move the portfolio to be more defensive, and what we did is we increased our exposure to consumer staples, which tend to do much better over recessionary times. And we basically removed stocks that we did think would battle over the period. And then of course, we very quickly moved to a period where things started improving very quickly. And so what we had to do then is move. We don’t like high turnover in our portfolio, and in any year it shouldn’t be more than 20%.

However, in times like this, you do need to be a bit proactive. And so, when the markets did recover, in order to participate in that recovery we needed to increase our exposure to higher beta stocks – so introducing basically a bit more cyclicality, those companies that would benefit from improving economies.

Then, basically a couple of months ago we started introducing more consumer discretionary stocks, as I said, like Alibaba, but we also invested in a luxury retailer called Kering Group, which basically owns Gucci.

They are quite strong in China and are really benefiting from the recovery that we’ve seen there.

And then, of course, as I mentioned, Samsung and another construction company called CRH which we also put into the portfolio just to be able to keep up with the market in our trending time. Consumer staples are a great sector to have at all times. However, we did need to move our exposure depending on where we saw the markets going,

RYK VAN NIEKERK: How many companies do you own, or how many shares are in the portfolio?

KATHY DAVEY: We’ve got 25 at the moment, and that is the maximum that we can go to. So basically it’s a very concentrated portfolio.

RYK VAN NIEKERK: The portfolio has done well over the last six months, it has grown by nearly 14%. The benchmark, which is the global large-cap Blend Equity Index, I would assume rose 9.6%. Are you happy with the performance and the result of these changes you’ve made?

KATHY DAVEY: We have been very happy with our performance.

The way our portfolio is designed is that you should have lower draw-downs when the market is falling – and that’s the trait that the fund did exhibit when markets were falling. We fell less than the market.

And then, of course, the fund should recover from the market, and then the fund should recover with the market – and that’s what we’ve seen too. So we’ve been very, very positive and happy with the performance. We think we’ve been in the right stocks. But of course we continually evaluate where we have exposure and, specifically, if we feel like rand exposure to stocks that have become more expensive and where we can switch into places in the market where we haven’t seen such strong rallies.

RYK VAN NIEKERK: Kathy, thank you so much for your time and insights today. That was Kathy Davey. She’s an investment manager at Ashburton Global Equities.

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Wow, so 20x PE is cheap, and 30x PE is not expensive for Microsoft. I must have missed the memo that we no longer need to care about valuation or cash flow. Growth is still going to bite people when there isn’t any.

I see from their fact sheet that they are charging a total investment fee of 1.93%. So you need at least a 6.5% return to beat current cash.

… while their ASHBURTON GLOBAL 1200 EQUITY ETF returned 15.97% since inception with a fee cost of only .65%

So who needs expensive managers?

Didn’t the ASHBURTON GLOBAL 1200 EQUITY ETF reduce its fee further to below 0.50%?

Just mentioning

so they said in 2000…PE not expensive…and 10 years later Nasdaq still struggled to breakeven

For the life of me: what information advantage do you have in terms of investing in Microsoft and Alphabet? You might as well sit at home, do nothing, and invest in an index fund. Expect market related returns. Nothing more.

Aye, I have a feeling that with QE it is just about following the trend – there is no technical real analysis, earnings or value assessment. Why bother when you can still pick up a fee for doing very little.

End of comments.





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