FAANG risks and picking the new consumer staple

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Connor Young: Hello. I'm Connor Young with Morningstar. I'm here today with Rupal Bhansali, manager of Ariel International Fund and Ariel Global Fund.

Rupal, thanks for joining me.

Rupal Bhansali: Happy to be here.

Young: So, you found several opportunities in the telecommunication services industry. Can you tell us what makes that an attractive part of the market?

Bhansali: Sure. It's actually the largest overweight in both strategies. And it's because we think telecoms is the new consumer staple. Most telecom companies that we own in the portfolios derive the bulk of their revenues either from wireless mobile phone services, or from the internet, broadband Wi-Fi connections. And as you can tell from your own lifestyle and anybody who's listening, we cannot afford to do without these two services, whether it's the paying the smartphone bill every month, or paying your internet connection bill every month. And consumer staples are businesses where you have reliable demand and that's kind of why I think telecoms is the new consumer staple.

In terms of the valuations, it's especially attractive relative to, say, your food and beverage sector or your classic consumer staples, which trade on 20 times earnings plus, and hardly support a dividend yield today of about 2%. Telecoms, on the other hand, are about 10 times earnings, 12 times earnings, and they give you a dividend yield of about 4 to 5 per cent. So, I think that's the attractive portion of the market and that's why we are so overweight.

Young: Great. You've also created an acronym, the MANG stocks. Can you tell us about those?

Bhansali: Sure. It's obviously a play on the word FAANG, which as you know, is a very crowded trade in our minds. And at Ariel, we are known to be contrarians. Our non-consensus point of view is that the market is very bullish and underestimating the risks of FAANG, whether it's Facebook and Google facing the regulatory risks that they're facing, or it's Netflix facing the competition risk from Disney+ that's coming along. And we think that these risks are underestimated in those stocks.

On the other hand, MANG - which stands for Michelin for the M; Ahold, which is a grocery food retailer for the A; NTT DoCoMo, which is the wireless phone company in Japan; and GlaxoSmithKline, the respiratory pharmaceutical franchise based in the UK - these companies are very out of favor, very undervalued, and give you much more bang for your buck. As a value investor, that's where the puck is going to skew. Roughly speaking, most of these companies are franchise-quality businesses, leaders in their respective marketplaces, very out-of-favor of stocks, undervalued on roughly low-teen multiples, somewhere between 8.5 times to 12 times, and dividend yields in a world which has almost negative yields internationally especially and all of these are international stocks, you're clipping coupons of between 3.5 to 5 per cent. So, very attractive in terms of their business prospects, but also equally attractive in terms of valuation prospects, and that's always a recipe to make money.

Young: Rupal, thank you for your insights.

Bhansali: Sure.

Young: For Morningstar, I'm Connor Young. Thank you for watching.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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