In an environment of low growth and uncertainty about the future direction of the global economy, investing in high quality, global franchise businesses may be the soundest investment decision.
It is this philosophy which led the RE:CM Global Feeder Fund to be the top performing equity fund across all unit trust funds available to the South African retail investor in 2011. The fund was also the second-best performer among all South African unit trusts for the year. The RE:CM Global Feeder Fund was the only fund in the top five that is not a global bond fund.
Piet Viljoen, executive chairman at RE:CM, says that this was achieved by avoiding emerging markets and other ‘fads’, which many investors favoured over the same period. Viljoen says that the team focused on including strong cash generators in the fund, through powerful brands such as Johnson & Johnson, Microsoft, BP, Vodafone and Berkshire Hathaway.
“A year ago, many investors thought emerging markets were the place to be, due to their strong growth prospects and the developed world’s debt problems. One year later and emerging markets have underperformed even the European markets, while the US market has delivered good returns,” says Viljoen.
More recently, he says, “The fund’s exposure to Europe has almost doubled to just over 10% and we continue to find very attractively priced securities in that geographic area. As always, it takes turmoil to produce bargains, and Europe is enjoying its fair share of turmoil.
“In fact, one of our biggest purchases by value was Coca-Cola Hellenic – the largest independent Coke bottler by revenue globally. It services a range of developed and emerging markets, and happens to be listed in Greece. In short, it’s a global powerhouse available on a free cash flow yield of 10%,” he says.
According to Clyde Rossouw, portfolio manager of the Investec Global Franchise Fund: “Big global brands, which include companies such as Johnson & Johnson, Nestlé, Pfizer, Coca Cola and Philip Morris International, typically enjoy consistent earnings growth and create wealth for their shareholders year after year – even when the wider economy has been struggling.”
Rossouw says high quality global franchise businesses tend to have better balance sheets, better credit ratings and a lower default probability (in terms of their five-year debt) than most governments. “This is particularly pertinent in the current era of heightened sovereign risk and high aggregate levels of public sector debt. Johnson & Johnson, for example, currently has a AAA credit rating, while Japan has a AA sovereign debt rating.”
For instance, SABMiller, the world’s second largest beer brewer, was able to raise debt capital in January 2012 to finance its acquisition of Foster’s in Australia at an interest rate substantialy lower than the interest rate on new debt for Italy, the third largest economy in Europe.
Rossouw also points out that these companies have relatively stable margins and profits, and he believes they are most likely to be able to sustain an earnings recovery.
Furthermore, Rossouw says, valuations remain undemanding. “Many global franchise stocks are currently at multi-decade lows. In contrast to long bonds and high yield credit, they should offer growth in the event of sustained high inflation.”
Excellent financial shape
This view is endorsed by Paul Hansen, STANLIB Retail director, who says investors should not be misled by what they read in daily newspapers or hear on international news broadcasts. “Many companies in the US, Europe, Japan and in emerging markets like Brazil, China and South Africa, are in excellent financial shape, with strong balance sheets, lots of cash and generally good earnings growth, though earnings are expected to be down 7% year-on-year in Europe and to slow into single digits in the US.
“Valuations offshore look attractive (price-to-earnings and price-to-book) especially in what is likely to be an ongoing low interest rate environment,” says Hansen.
As to how to access these top brands, there’s any number of global unit trusts available locally, including the above two. For others, Hansen says you need to open an account with a stockbroker that provides research on these brand-name global companies. “Check if your bank has an offshore stockbroker.
Preferably open an account with a foreign stockbroker who is in a similar time zone, such as the UK or Jersey,” he adds.
Individuals are now eligible for R1 million a year in foreign exchange without tax certification – and a further R4 million a year with certification.