Page 19 - DIY Magazine June 2018

THE US ECONOMY IS ON A STRONG FOOTING TO OUTPERFORM OTHER MARKETS
The aim is to create a portfolio of undervalued companies which enjoy a sustainable competitive advantage and operate in structurally growing end markets.
The majority of the portfolio is tied to the following
five long-term secular trends, which the team believe to be underappreciated by the wider market; the transformational effect of the internet, healthcare innovation, paperless payments, energy efficiency and emerging market growth.
Take healthcare innovation, which is important given
the America’s ageing demographic – the country’s population aged 65-and-over reached 50 million for the first time in 2016 and is expected to continue growing as the ‘baby boomers’ reach retirement.
Considering this, we look for companies that aim to provide solutions to the challenges brought on by an ageing population. For example, California-based contact lens manufacturer The Cooper Companies is a stock we like because one of its revenue drivers stems from the growth in multifocal lenses, which are widely amenable to an ageing population.
Given the relative expensiveness of US equities, we have sold more than we have bought in recent months. The additions we have made to the portfolio come from a diverse range of sectors but importantly all share a common feature: a sustainable competitive advantage, which allows for reinvestment at a high rate of return.
Some of our recent additions include luxury cosmetics manufacturer Estee Lauder, computer gaming company Electronic Arts, freight hauling railroad Union Pacific and software giant Microsoft, which is a rarity in the tech sector for its 2% dividend.
EMERGING MARKET PROXIES
Our North American exposure is well diversified
across sectors with technology (c. 24%) and financials (c. 21%) afforded the largest allocations. That said,
the financials exposure is potentially misleading as most of us think of banks and insurers when we say financials, but much of our exposure to the financial sector consists of electronic payment institutions like MasterCard and American Express, and conglomerates like Warren Buffett’s Berkshire Hathaway, for example. These companies are positively involved in the long- term socioeconomic trends, particularly the transition to paperless payments.
The trends we refer to are not specific to the US or North America, but the region is typically at the forefront of innovation – perhaps only rivalled now by Asia’s growing technology sector. One of the key trends that guide our stock selection is emerging market growth. This is most easily demonstrated in the chart below, which shows that although North American stocks account for the largest geographical weighting (27.7%), the companies in the portfolio generate most of their revenues from emerging markets (30.9%).
We could invest directly in to emerging markets – and we do, albeit with only 2.4% of the portfolio – but I like to invest in companies listed in developed markets because they typically have higher quality accounting, audits, governance and lower leverage on the balance sheet. We look for firms in developed markets that have strong business operations in emerging markets, where consumer spending is expanding at a rate only possible with a growing middle class.
The Bankers portfolio will continue to look globally for quality companies with strong drivers in place for future earnings growth but will continue to maintain a strict discipline in terms of the share prices we are willing to pay.
19 DIY Investor Magazine | Jun 2018