Quality

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.

GFF-Graph-1-and-2

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
GFF-Graph-3

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.

GFF-Graph-4-and-5

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.

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Indices

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.

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