Finding quality and value in global equities
AT THE Allan Gray Investment Summit in Sandton this week, global investment experts tended to take a bottom-up approach to stock-picking – in other words, looking at the prospects of specific companies rather than concerning themselves with macro-economic and geopolitical issues.
Kevin Murphy, the co-head of the global value team at international investment manager Schroders, said you can’t have a stock that both attracts good news and is cheap: the more people like a company, the more its share price goes up. He said an investor or fund manager needs to be patient when searching for good companies that other people aren’t looking at.
Mark Laurence, the founding partner of the United Kingdombased asset manager Fundsmith, said only a small fraction of all the shares in the global market pass his firm’s screening criteria.
He said that to find goodquality companies, you often need to look beyond the numbers. For example, United States bio-technology company Stryker produces high-quality artificial joints for hip and knee replacements. The demand for Stryker’s products is expected to rise in line with the ageing populations in developed countries.
Another example, Laurence said, is elevator company Kone. Kone manufactures lifts for highrise buildings, but most of its profits are in the form of a steady income stream from servicing and maintaining those lifts.
PRICING IN RISK
Murphy said Schroders first looks for value before looking at other factors, and these shares may be in countries with high geopolitical risk. He said these risks should be priced into a share, and an investor would need to see enough upside in a share to offset the risks associated with it.
He said this approach requires that you embrace risk through diversification – with smaller investments spread across many different countries, rather than bigger investments in fewer countries.
Murphy said that what matters is the specific company you buy and the price at which you buy it. He cited South Korean car-maker Kia, which provided a 100% return on investment within a year.
Dan Brocklebank, the head of Allan Gray’s offshore arm, Orbis Investments in the UK, sounded a warning about companies whose shares are priced off the high dividends the companies pay to shareholders. This means that profits are going to shareholders rather than towards organic growth, which means there could be “nasty surprises” for investors down the line, he said.