Global Franchise Fund: High-quality companies at a rare discount

Quality often comes at a price; however, due to the recent shift in investor sentiment to ‘value’ based on the belief of a post-COVID economic bounce, Global Franchise is trading at the biggest discount to global equities in a decade.

May 4, 2021

5 minutes

Quality often comes at a price; however, due to the recent shift in investor sentiment to ‘value’ based on the belief of a post-COVID economic bounce, Global Franchise is trading at the biggest discount to global equities in a decade.
  • We look for high-quality companies with strong brands, dominant market positions in growing industries that are less exposed to the economic cycle. They should be backed by solid balance sheets that facilitate the generation of sustainable cash flows which compound over the long term.
  • Such quality often comes at a price; however, due to the recent shift in investor sentiment to ‘value’ based on the belief of a post-COVID economic bounce, Global Franchise is trading at the biggest discount to global equities in a decade, despite generating superior returns on capital.


Source: FactSet, Ninety One, 31 March 2021. *Index: MSCI AC World NDR (pre Oct-11, MSCI World NDR). The portfolio may change significantly over a short period of time. The above reflects the portfolio characteristics reweighted excluding cash and cash equivalents. Based on the I Acc share class. Inception date: 10 April 2007.

What happens now?
  • We believe that high-quality companies are currently at the bottom of their alpha cycle. Historically, Global Franchise has outperformed following periods of relative underperformance.
  • We have noted from mid-January that fundamentals started to re-assert themselves as earnings season provided a much needed shift of emphasis back on actual company results over sentiment and expectation.
  • A number of portfolio companies have delivered strong results – ahead of estimates – and have been correspondingly rewarded by the market.

Global Franchise cumulative alpha

Past performance is not a reliable indicator of future results, losses may be made.
Source: Morningstar, 31 March 2021. All performance, unless otherwise stated is net of fees (A Acc share class, NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD. The Fund is actively managed. Any index is shown for illustrative purposes only. The most recent month-end performance and positional data can be obtained on our website. Highest and lowest returns achieved during a Rolling 12 month period since inception: February 2010: 54.4% and February 2009: -38.7%.
1. 10 April 2007; 2. Index: MSCI AC World NDR (pre Oct-11, MSCI World NDR).
For further information on indices please see the Important information section.

What about inflation?
  • A sustained period of inflation is not certain; the base effects of early 2020’s severe price declines will wash out from May; if inflation does stay higher, input costs may rise, forcing companies to pass price increases on to consumers, impacting demand.
  • Similarly, as yield curves steepen further, financial conditions tighten. Corporate borrowing rates tend to increase, as can consumer borrowing costs. Possible tax rises to pay back the COVID-deficits may also dampen inflation.
  • More cyclical shares have already experienced a significant re-rating and are now beginning to price in quite robust fundamentals, as well as significantly higher bond yields.


Source: Ninety One, Bloomberg as of 12 April 2021. Charts show growing disconnect between both cyclical equities and commodities versus the US 10-year Treasury yield.

How is Global Franchise positioned going forward?
  • Looking beyond short-term sentiment, we do not believe the environment has changed the fundamentals of the companies we own.
  • If we do see more prolonged inflationary pressures:
    • We are comfortable that the businesses we own have significant pricing power given their strong competitive positions.
    • Intangible assets do not require significant incremental capital, unlike capital intensive businesses (e.g. maintenance)
    • Our quality companies have very low levels of debt, putting them in a stronger position relative to the broader market if financing costs increase.
  • We believe Global Franchise portfolio companies can continue to generate attractive returns, making our approach well suited to both current conditions and for uncertain times ahead.
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General risks

The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made.

Specific risks

Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.

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The value of this investment, and any income generated from it, can go down as well as up and will be affected by changes in interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. The Fund’s investment objective will not necessarily be achieved and there is no guarantee that these investments will make profits; losses may be made. This Fund may not be appropriate for investors who plan to withdraw their money within the short to medium term. Performance shown is that of the Fund and individual investor’s performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This is not a buy, sell or hold recommendation for any particular security. It is not an invitation to make an investment nor does it constitute an offer for sale. Before making an investment, please read the Prospectus and Key Investor Information Document, which sets out the fund specific risks and is available from Ninety One SA. The portfolio may change significantly over a short period of time. The Fund is traded at the ruling price and can engage in borrowing and scrip lending and may be closed in order to be managed in accordance with the mandate. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. The Fund is a sub-fund of the Ninety One Global Strategy Fund, which is a UCITS organised as a Sociétéd’Investissement à Capital Variable under the law of Luxembourg. For further information on the Fund including application forms and a schedule of fees and commissions, please contact Ninety One SA. Fund prices and English language copies of the Prospectus, Report & Accounts and Articles of Incorporation and local language copies of the Key Investor Information Documents may be obtained from our website and free of charge from the following country specific contacts: Luxembourg – Ninety One Global Strategy Fund, 49 avenue J.F. Kennedy, L-1855 Luxembourg. In South Africa, Ninety One SA is an authorised financial services provider. The sub-funds offered for public sale in South Africa are approved under the South African Collective Investment Schemes Control Act.

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Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.

If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.