Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Fund spy: Top funds look to global heavyweight brands

Glenn Freeman  |  21 Nov 2019Text size  Decrease  Increase  |  
Email to Friend

Luxury goods company LVMH, confectioner Nestle, payments company Visa and consumer goods firm Reckitt Benckiser each hold positions in three of these well-regarded global equity funds.

The following global strategies earn Morningstar Australasia's Gold Medal analyst rating:

These funds have quite high exposures to North America, with the exception of Platinum, which has instead favoured Asian companies. This largely explains its weaker performance in more recent years. The Magellan, MFS and Capital Group strategies hold 78 per cent, 64.5 per cent and 58 per cent weightings to North America as of 30 June this year.

Platinum International's Asian exposure accounted for the disappointing performance the fund delivered in 2018, which Morningstar analyst Matthew Wilkinson says was "a year to forget".

Around one-quarter of its top 20 portfolio holdings are Chinese companies, including Ping An Insurance, China Overseas Land & Investment and multinational conglomerate Tencent.

Japanese firms such as housing products maker Lixil Group and Sumitomo Metal Mining and Korean conglomerate Samsung also feature in the broader mix of companies.

In 2018, the fund returned negative 8.4 per cent, versus 1.52 per cent from its MSCI World Ex Australia benchmark.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

"Much of the Chinese exposure was hurt during the first nine months due to economic slowdown there, trade war tensions, and rising US interest rates," Wilkinson says.

But he notes the strategy has endured its share of bumps before. Since the fund started in 1995, it has returned 12 per cent versus the index's 7 per cent.

Wilkinson views the recent underperformance as "transient" and remains confident Platinum's “uncommon insights” will deliver over the long term.

stock holdings global equity funds

Magellan adds Alibaba

Until recently, neither the MFS nor Magellan funds held any Asia-based companies in their portfolios. But that changed last month, when Magellan adopted a 5.5 per cent exposure to Chinese internet behemoth Alibaba.

But its investment team has played many of the strengths of the China growth story in other ways.

LVMH Moet Hennessy Louis Vuitton's stable of household-name luxury brands – which may soon also include jewellery house Tiffany & Co – makes it one of the world's biggest luxury goods empires. The group's profitability is driven by increasing wealth and incomes globally; and China, the largest emerging market, plays an big role in its success.

Morningstar equity analyst Jelena Sokolova notes LVMH's flagship brand Louis Vuitton accounts for around 39 per cent and 60 per cent of revenue and profits, respectively.

However, she expects softer revenue growth from the company in the medium term, albeit a still healthy 5 per cent from 9 per cent historically – due largely to LV's brand maturity and moderating growth in China.

The Magellan Global Fund has delivered stellar returns since it kicked off in 2007, returning 16 per cent annually over 10 years and 15.7 per cent over five years – versus 12.6 and 13 per cent from its benchmark, the MSCI World Ex Australia Index.

The fund was historically known for a tilt to consumer categories and avoidance of commodities – though this has evolved in the past five or six years. During this time, the portfolio has taken substantial holdings in technology firms – including category leaders like Facebook and Google-owner Alphabet.

But veteran stockpicker and Magellan co-founder Hamish Douglass recently told Morningstar that China is the "opportunity of the next 20 years".

He pointed to Magellan's exposure to Alibaba and large positions in businesses whose future will be driven by Chinese consumers. LVMH, cosmetics firm Estee Lauder and Starbucks are other names he mentioned in this context.

The fund's top 10 holdings also include electronic payments companies Visa and Mastercard – with weightings of 5.8 per cent and 4.3 per cent, respectively. Microsoft was its top position of just under 8 per cent as of the end of June this year.

The fund has traditionally concentrated on buying firms in developed markets – almost 80 per cent are US-based with some in Switzerland, Germany, UK and France.

"[The Chinese consumer exposed] parts of their businesses are growing at 20 per cent to 30 per cent a year at the moment,” Douglass said last month.

"And at Starbucks…we estimate maybe 40 per cent of the total growth of the company in the next decade is going to come from the rollout of their China business."

Old but still gold

Another top holding in the fund is Visa, with a 5.8 per cent weighting as of 30 June 2019.
Morningstar regards Visa as a wide-moat stock, and it is unique in being a long-time established market leader that still has strong growth prospects.

Founded in the US in the 1950s, Visa maintains market share of around 50 per cent in developed markets of North America, Europe and also in emerging economies in Africa, the Middle East and Asia.

China is also a large part of the growth story for wide-moat Swiss multinational food company Nestle SA. Population growth, urbanisation, and economic growth are key drivers in the emerging markets from which Nestle sources a large proportion of its sales and revenue.

Morningstar equity analyst Ioannis Pontikis regards it as a wide moat company because of its massive portfolio of brands, including a number of consumer staples. Nestle is the largest food company in the world and sells in 189 countries with products spanning beverages, dairy products, nutrition, healthcare and petcare. "A global market position that is tough for new entrants to match," says Pontikis.

Nestle is a top 20 holding at Capital Group New Perspective, one of Morningstar's favourite global equities strategies. Its 1.2 per cent weighting in a portfolio that includes almost 300 names as of 31 October 2019 is notable, as is the strategy's LVMH exposure of 0.75 per cent – its 30th largest position.

Outliving adversity

Capital Group New Perspective has a long track record stretching as far back as the early 1970s. As such, it's survived through multiple market cycles.

This underpins Morningstar manager research analyst Michael Malseed's confidence in the fund's ability to weather the ongoing uncertainty over international trade tariffs – particularly between the US and China.

"It has lived through multiple market cycles and encountered various protectionist measures, such as the proliferation of export restraints in the auto industry of the 1980s,” Malseed says.

The Capital Group New Perspective strategy buys both companies that are chasing growth and those that focus on generating value.

The fund's 0.8 per cent weighting to electric car maker Tesla is one example here – a value stock in which the fund has increased its holding in recent years.

"The portfolio’s growth tilt has become more pronounced in recent years and that could present a headwind if value stocks come back into favour, as they did in the early 2000s," says Malseed.

But he remains confident portfolio manager team Robert Lovelace and his team of analysts – including those skilled at contrarian calls and fishing out value picks – can dig up opportunities regardless.

Tipped to outperform

This strategy has delivered similarly impressive performance to that of the Magellan and Capital Group funds, but has "atypical country and sector weightings", says Morningstar analyst Tim Wong.

He highlights the fund as a solid choice as a core part of an investment portfolio, but suggests its stock selection tends to favour consumer and healthcare companies. This should see the MFS strategy outperform in tougher equity markets such as the one many commentators suggest we are currently approaching.

The MFS fund is one of the few active strategies appearing in the top 10 in fund flows for the June 2019 quarter – something Morningstar attributes to its talented stock pickers, robust process and low cost.

Top 10 investment trusts by quarterly flows

top 10 Aust trusts

Source: Morningstar 

The fund's holdings include a large number of European names. These are mostly multinational companies, including LVMH, a top 10 position with a 2.6 per cent portfolio weighting, and Nestle, where it holds a 2.8 per cent weighting as of the end of September.

It also has a 2 per cent exposure to Reckitt Benckiser, another mature company that Morningstar views as holding a wide moat of competitive advantage.

The consumer heavyweight in its current form emerged in 1999 when British and Dutch firms Reckitt & Colman Plc and Benckiser NV merged – but both entity's histories stretch back to the 1800s.

Some of the Reckitt Benckiser’s most recognisable brands include Dettol, Durex, Mortein, Lysol, Nurofen and Strepsils.

 

 

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend