3 top picks: medical tech, bank and telco

<p><strong>Glenn Freeman</strong>: In this edition of "3 Top Picks" I'm speaking to Amit Lodha from Fidelity International.</p> <p>Amit, thanks for your time.</p> <p><strong>Amit Lodha</strong>: Thanks, Glenn.</p> <p><strong>Freeman</strong>: What's the first company that sort of stands out for you right now as being interesting and being part of your portfolio?</p> <p><strong>Lodha</strong>: So, in my Global Equities portfolio, my largest position is Boston Scientific. This is a medical device manufacturer. It is a company which has touched all of us at some point or the other. It makes everything from stents, which go into your body, into your heart if you get an angioplasty done to duodenoscopes, which if you're getting colonoscopy done. It makes a lot of these medical equipment. It's doing a lot of innovation in this area. Earnings growth, steady earnings growth, 7 per cent, 8 per cent, run by a very strong management team, very good capital allocation. They've made some really interesting acquisitions over the last year or two, which they're well on the way to integrate. Industry structure is very strong. It's really a three-player market. You see very strong growth potential because of demographics. So, as we are aging, demand for cardiac care, demand for colonoscopies, these kinds of medical devices which they make, the demand continues to increase at 8 per cent or 9 per cent. They've got steady margin increases going on. So, I like companies which have good margin increases. They've got 50 basis point margins going up over the next three to five years based on our estimates, and valuations are very interesting. So, Boston Scientific not likely to be the company that you would have expected from me but is one which is my top position at this point of time.</p> <p><strong>Freeman</strong>: Sure. And the second company is what sector and which company you like?</p> <p><strong>Lodha</strong>: Yeah, the second one is Ericsson. So, that's my second largest position. Again, this one might be a bit surprising, but Ericsson is one of those which I came to on the back of a profitable tweet from President Trump is the way I'd call it. This is one which has really gained from the trade wars and the trade issues. So, Ericsson was a company that we were doing a lot of work on historically. If you go back to the 2000s, Ericsson and Nokia were talked off in the same breath as we talked about Apple and Google today. These were the world beating companies at that point of time. The industry changed. Chinese competition came in in a big way, Huawei and ZTE. And so, margins and profitability came down quite a lot. So, the industry structure was pretty poor for Ericsson. But all of that changed in March of 2018, which, if you remember, was the first tweet that we got from President Trump in terms of banning ZTE.</p> <p>Now, that was quite seminal for me when I was looking at that tweet because it changed the industry structure overnight. Overnight, it divided the world between China and ex-China. So, you had an industry where two players were European companies and two players were Chinese companies, and suddenly it went from being a four-player market to maybe a two-and-a-half to three-player market. Huawei, remember, had not been banned at that point of time. It was only ZTE. And to me, it was just surprising at that point of time that the market did not react to that change in industry structure at all. So, the Ericsson stock did not have any reaction to this change. This I thought was an unexploited opportunity.</p> <p>So, I made Ericsson a big position. They've continued to execute well. While I've been in Australia, I've been using your networks and I'd say that they need some real good upgrades on the 5G. They're so slow on the internet. So, I think Ericsson is a business which I think will gain as the upgrades happen. Upgrades are happening on the 5G side. And then, as equipment owners and users like Vodafone and Telstra are stripping away their Huawei and ZTE networks, they're likely to buy more Ericsson. So, I think Ericsson has a good long runway of growth for the next three to five years. Good management team, doing the right things, industry structure has gotten tremendously better, and valuations are quite favorable.</p> <p><strong>Freeman</strong>: What's the third largest just in a nutshell?</p> <p><strong>Lodha</strong>: So, the third position that I'd give you is not one of my larger positions but is one which I've owned for now over nine years of my managing the fund. It's been with me throughout most of my tenure. It's a bank called Kotak Mahindra Bank, which is a bank in India. The interesting thing about this bank is that it is still run by its founder Uday Kotak. This is one which I've known for a long period of time, first as an analyst at Fidelity and then as a fund manager at Fidelity. And really, the interesting thing for me is that, as I said, I follow management teams. This is a management team which has been together since 2004. The top 12 people at Kotak Mahindra have really remained consistent since 2004 when the bank was formed. And if you look at the long-term compounding of this bank, it has compounded at 30 per cent over that timeframe. And that's because the industry opportunity is huge.</p> <p>The unbanked in India, those who don't have financial savings, there's a huge market for a bank like Kotak to address. But you've got a shareholder who is managing your money, because he is the largest shareholder on a very risk-adjusted basis. So, you almost have to go back to the days of JPMorgan and how he used to run the bank because it was his own money to the way Uday Kotak runs the bank, and he's thinking about it from an intergenerational transfer basis, because he's not thinking about the next quarter or the next month or the next year. He's really thinking about making sure that this bank lasts through generations. So, that capital allocation point, which I really focus on, the culture point, which I really focus on, I find it in Kotak Mahindra. And corporate governance, which is very difficult to find when you're investing in emerging markets, I find it in spades in Kotak Mahindra. So, this is another position which has been in the portfolio for quite some time. It's not one of my largest positions at this point of time because the stock has done extremely well even over the last year. So, if the market gives me an opportunity, hopefully, I'll be able to make it a large position. But it's been one in the portfolio for a very long period of time.</p>